On Hedge funds and private equity
September 22, 2008 12:00 AM
By Sharon Bowles MEP, rapporteur for the opinion of the Economic and Monetary Affairs Committee in European Parliament
Originally published by Sharon Bowles MEP
By Sharon Bowles MEP, rapporteur for the opinion of the Economic and Monetary Affairs Committee in European Parliament
Originally published by Sharon Bowles MEP
Mr President, I would say to the Commissioner that, in the current turmoil, the interconnection between all institutions is plain to see. It is equally plain and logical that regulation has to be targeted at function and not at entities. It would be wrong if one private company had to abide by different rules from others just because it was owned by private equity.
There are two sides to everything. Amid the frequent criticism again this week of short selling, let us not forget the stock lenders. Attention by investors - even supervisors - to the lending policies of pension funds and others is relevant, and not just the activities of share borrowers. We have visited this matter before in the context of voting borrowed shares. 'Two sides' also means that enhancing transparency will only be effective if it is accompanied by due diligence, and not undone again by excessive disclaimers. Finally, voluntary codes do have a role, and reach parts which we cannot regulate. However, they are not just a private matter for the industries concerned, and need exposure, easy access and active review and monitoring.
As Mr Rasmussen said, these reports are balanced, though some may be more inclined to quote from the press from one side of the scales than the other. We have had rumblings about hedge funds and private equity for years but, caught up in the present financial turmoil, it is no longer a rarity to be concerned about debt and leverage. However, this does present us with an opportunity to clear the air and establish a comprehensive review that addresses the exposure issues underlying the present turmoil as well as other risk and debt issues, including those within hedge funds and private equity.
The reports do accept that this must be done on a non-discriminatory and principled basis, paying due regard to proportionality. It also needs to be done in the context of international developments and, above all, it must be smart. Now, whilst debt and its proper management is one issue that appears everywhere at the moment, another is that of compensation packages and conflict of interest. Clearly, for market stability, steps have to be taken to ensure that rewards match longer-term horizons. I agree that that principle should extend to all areas. This is not to endorse the notion that all private equity and venture capital has asset stripping as its motivation: that is certainly not the best way to turn around a failing company into a profitable, saleable one. Indeed, national laws to prevent asset stripping already exist, but they have rarely been used. So I am not convinced that a European measure would in fact be any progress.
Coming again to the matter of regulation versus voluntary codes, many of the voluntary codes are only just getting under way, and for the main part these should be given time to operate. They are also easier to update, but as I said earlier, they are not a private matter, and public confidence does come into the equation. So I am pleased that my suggestion of a one-stop website as a register of voluntary codes with relevant links to compliance postings has been accepted by colleagues as a potentially useful tool, and I hope the Commissioner will follow that up.
When it comes to transparency, it is also important to recognise that the public investors and supervisors need different levels of information, and that information has to be fit for purpose. Even within the context of professional investors, burying information in what I would call 'legal spam' is unacceptable. Supervisors should have all the information that they need, but care has to be taken in those areas where the information should not get into the public domain.
Finally, we have gone into those sensitive areas of securitisation and credit rating agencies. On securitisation, I know the Commissioner likes the retention idea, but that is clearly just one available tool, and I would urge that he be prepared to swap tools and that he should not close the tool box too soon. On rating agencies, there is a need to get a better handle on many matters, but I do warn against fragmentation from a system of internationally accepted ratings. Again, both these areas are an example of where, as I said, we must be smart: we must be smart ahead of trying to be vindictive.
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