14/10/2009
Buying their way out of regulation: hedge funds, private equity and the UK Conservative Party
By Poul Nyrup Rasmussen
Read the research paper 
on how lobbying by the UK Conservative party and London Mayor against European regulation of hedge funds and private equity funds coincides with a recent surge of massive donations from the industry.
Billions in bailouts, millions of jobs lost, homes repossessed, small businesses gone bust, pension savings disappeared. People have learnt the lessons of the financial crisis the hard way. But just 18 months after the collapse of two Bear Stearns affiliated hedge funds sent shockwaves through the financial system, the hedge fund industry is arguing there’s no need for better regulation. This flies in the face of the evidence and also goes against the consensus achieved in the G20 with Obama’s administration and the EU on the vital need for tougher rules.
Hedge funds are characterized by the same factors that make banks systemic – they use leverage, very high in many cases. Their fabled absolute returns – which made them so attractive to institutional investors - have turned into substantial losses, eradicating many people’s hard-earned pension money. Moreover, their pro-cyclical behaviour has aggravated the crisis through massive “herd behaviour” in sales and aggressive naked short selling.
Additionally, the overleveraging and value extraction of private equity leveraged buy-out funds have weakened firms, leading to an increase in corporate defaults during the crisis, thereby further undermining the economy and jobs.
I want a strong, transparent and competitive financial industry. But the crisis showed that the financial industry was not competitive. It was short-termist, overleveraged, disengaged with the needs of the real economy and pursuing activities which the FSA Chairman Lord Turner and the CEO of Goldman Sachs Lloyd Blankfein now term “socially useless”.
The danger we now have is of “regulatory capture” - as Nobel Prize Winner George Stigler warned in his seminal work Theory of Economic Regulation - whereby the financial industry invests massive resources into “capturing” regulation for its private benefit to the detriment of the end-beneficiaries: the individual citizens and businesses in Europe and across the world who’ve suffered the consequences of this crisis. The first signs are already there: the industry is deploying armies of lobbyists, including London’s Mayor Boris Johnson, 77% of whose mayoral campaign they financed; they have also donated over £3 million to the Tories in the first six months of 2009 – that’s 45% of all individual donations and more than a quarter of public and private donations to the Conservative Party. It’s clear why the Conservatives are the only mainstream political party to be lobbying hard against the principle of regulation.
The UK vs Europe on financial regulation is a false dichotomy. The European directive will give alternative investment funds access to the entire Single Market – the biggest economy in the world. But it will also mean that we won’t have to learn the lessons of this crisis a second time.
