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Monday, 22 September 2008 - Brussels OJ edition

19. Hedge funds and private equity - Transparency of institutional investors (debate)
Video of the speeches

  President. − Now we move to a debate that was organised last month by the European Parliament with extraordinary prescience, anticipating the events of last week, perhaps – unlike others.

The next item is the joint debate on

– the report by Poul Nyrup Rasmussen, on behalf of the Committee on Economic and Monetary Affairs, including recommendations to the Commission on hedge funds and private equity (2007/2238(INI)) (A6-0338/2008), and

– the report by Klaus-Heiner Lehne, on behalf of the Committee on Legal Affairs, including recommendations to the Commission on transparency of institutional investors (2007/2239(INI)) (A6-0296/2008).


  Poul Nyrup Rasmussen, rapporteur. − Mr President, long before this crisis, the European Socialist Group and the European Socialist Party raised concerns over the tendencies on the financial markets for excessive debt, lack of transparency, taking high risks and paying too low prices, and making packages on leveraging which nobody could really understand or act on. We therefore raised our concerns as if looking into a new financial bubble. Nobody could tell when this would be, but we are now at the centre of the storm – the ‘perfect storm’, as somebody called it.

I feel very strongly that the debate this evening and tomorrow will be the most relevant debate in any parliament on financial markets anywhere in Europe or in the United States – debate and decisions in the sense that we are looking forward, trying to make better regulation than we have now and trying to take on a broad responsibility for doing the job as well as we can.

Now is the time to act. We have seen what happened in the US, and, while someone said that it is not as bad in Europe as in the US, I can only say that HBOS, Northern Rock and many other such cases is enough to convince me to act. We have seen the new prognoses for our economies, for our jobs, for our competition and for our investment capability: that is enough for me to act.

That is why I am proud to be telling Parliament today and tomorrow that the PSE Group has made a compromise, following tough negotiations – which is as it should be on such an important matter – with the ALDE and PPE-DE Groups. We now have in front of us a balanced report which demands that the Commission present proposals on legislation and regulation for all financial actors, including hedge funds and private equity. It is high time we did this, and I would remind Parliament that we are now asking for mandatory capital requirements for all financial institutions. We are asking for an aligning of reward packages with longer-term outcomes in order to reflect losses as well as profits. We are asking for full transparency for high-level executives’ and senior managers’ remuneration systems. We are asking for disclosure of leverage/debt exposure, the source and amount of funds raised and identification of shareholders for all investment projects. We are asking for an extension of the directive requiring that employees be informed and consulted during take-overs to include leveraged buy-outs by private equity, and we are asking for measures to ‘avoid unreasonable asset stripping in target companies’. We are asking for actions to avoid excessive debt caused by leveraged buy-out, so that level of leverage is sustainable both for the private equity fund/firm and for the target company.

I would like to ask Mr McCreevy, the Commissioner responsible for this area, to respond very concretely to these proposals. I know that they are new to him, but I insist on a timetable. We have asked for a response before the end of the year, which is three months from now. There may be details to discuss but, Commissioner, you also owe this Parliament a response, because we are not talking about a small minority, but a very broad majority within this Parliament.

I shall end by informing you that, as of four to five days ago, close to 90 000 people had signed a petition addressed to the European Parliament, the United States and world leaders, organised by the global internet movement Avaaz. I am delivering that petition on its behalf to those recipients. It reads: ‘We urge you to take a lead in fixing the fundamental flaws and loopholes which made this global financial crisis possible, including basic problems of debt and risk, incentives and transparency. We need you to work together to protect the public good by framing stronger rules for all parts of the global financial system. Be bold, and we will support you.’

Commissioner, will you be bold, together with us, support us and deliver preliminary answers before the end of the year? I must insist, on behalf of all of us, on a positive response.


  Klaus-Heiner Lehne, rapporteur. (DE) Mr President, ladies and gentlemen, the debate is indeed taking place, if somewhat by chance, at exactly the right time. My report to all intents and purposes addresses the other side of the coin.

Mr Rasmussen has had to deal in particular with the effects on the financial markets and the Committee on Legal Affairs with its expertise naturally concerned itself in particular with the aspects of company law and, where necessary, with the need to change European company law.

We are all shaken by the events of recent days. The public, politicians and – I say this very clearly – the honest economy as well. The problem we see in practice at the moment is that profits are being privatised, but losses are being nationalised. It has almost become a joke in this saga that Mr Paulson, the US Finance Minister, who was himself once head of Goldman Sachs, now finds himself in the situation of having to take USD 700 billion in taxpayers’ money in order to eliminate and smooth out the havoc his own sector of industry has wreaked. It is really sad.

There are more and more examples of the fact that in the public perception, the image of the conventional family enterprise taking care of its employees with its own liability, which it itself guarantees, is on the decline, while on the other hand, the impression continues to grow of us being partly governed at least in the economic sector by ineffectual top managers, by employees who are highly paid but who no longer bear any responsibility.

I think that the emerging impression of our system of market economy is appalling and that it is politically necessary for us to take the appropriate steps to restore order and thus actually remove this appalling impression.

The fact is that it affects not only the major investors, but now also small investors. It affects every taxpayer and all those who are dependent on government funds because more and more billions in public money have to be used to repair the damage.

I admit – and the debate has clearly shown this, and it is also indisputable – that one aspect we initially had to address in particular – namely the hedge funds and private equity sector – is not a cause of the problems we are currently having to tackle. Here too, however – and the debate in the House has clearly shown this, as have the hearings on both committees – there are obviously definite shortcomings in the areas of harmonisation and regulation.

It has rightly been stated that these sectors are also regulated by national regulations, some stronger, some weaker, according to the nations’ different traditions and according to which financial market regulations prevail there. At the same time, however, it has also become clear that we need further harmonisation and adjustment at European level in order to ensure that these sectors, which have now reached absolutely critical dimensions, also do not represent any risk for the financial markets.

I would like to respond to just a few key words, which have already been addressed in the draft report – which incidentally had already been resolved in the Committee on Legal Affairs in June when nobody was talking about this crisis in which we currently find ourselves. I am thinking of the terms ‘stock lending’ and ‘short selling’. We now hear that a range of important financial market regulators have banned this, and for good reason. We did ask at the time, and are asking now, as well, that this at least be examined. Consequences have to be drawn from this and legislative proposals must also be made if need be. One of these is the issue of better identification of shareholders, issues of transparency, of the tightening of the regulations on transparency in view of the fact that enterprises as well as the managers of these enterprises ought to know to whom they actually belong in order that they, too, are able to act responsibly towards those who own them.

It also entails reasonable checks being made on certain risks when credit is granted to ensure that sensible, necessary consequences can also be drawn in order that giant levers cannot be moved by relatively small means, which ultimately create an impact that gets completely out of control and brings adversity in its wake for the general public and for others.

Incidentally, one piece of advice: in the meantime numerous proposals have been developed in the industry for practical codes, for voluntary regulation on how one should behave. The mere fact that these regulations have been developed, even if they are still only voluntary at present, thus accounts for the fact that the industry itself evidently accepts the need for some regulation. Hence it is entirely reasonable to take a look at, and think about, whether we are able to take action here as well.

Asset flipping is another matter to which we must attend. Company law must tackle this issue because I am convinced that enterprises should not be able to be plundered. We are expecting a concrete proposal from the Commission. This is a report in accordance with Article 192, to which the Commission must respond. We hope it will do so soon.


  Charlie McCreevy, Member of the Commission. Mr President, I would like to thank the Committee on Economic and Monetary Affairs and the Committee on Legal Affairs and in particular their rapporteurs, Mr Rasmussen and Mr Lehne, for the work done in the preparation of these two reports.

Few would have predicted one year ago that the situation in financial markets would be as serious as it is today. And the effects of the crisis will continue to be felt for some time. It started with reckless selling of mortgages in the United States, promoted by banks and others who did not care about lending standards because they could offload the loans to others through securitisation.

Credit-rating agencies then gave respectability to these high-risk products by assigning low credit-default risk to them. Financial institutions around the world bought up these products without, it seems, doing any serious risk assessment of their own.

In the light of events over the past year, it has been incredible to see how little understanding senior managers of financial institutions had of the risk they were taking on board. No doubt the size of the profits that were rolling in blunted serious risk analysis. Supervisors seemed to have no better idea of the risk in these hugely complex products. Things were so sliced up, diced up and repackaged that no one knew where the real risk was. One observer referred some months ago to this unfolding crisis as like watching a train crash in slow motion. Last week the crisis went into hyper speed.

The concerted actions of the world’s major central banks and the announcement of the support measures by the United States authorities have restored some calm to the markets. We must welcome this given the extreme situation faced by regulators. I also welcome that the United States authorities have shown recognition of the need to address in their proposals similar assets held by some non-US financial institutions.

One thing we can be thankful for in Europe is that we have not seen the same scale of destruction as has happened in the United States. Although banks in the EU have been suffering from a similar lack of confidence in lending to each other, there has not been anything on the same scale as experienced in the United States. But no one is out of the woods yet. There are difficult trading conditions ahead. The downturn in economies will have its effects. Vigilance and transparency are key if confidence is to be restored in markets. At EU level we must continue to improve our supervisory arrangements for cross-border supervisory financial institutions. There is a window of opportunity that must not be missed.

All of this leads me to believe we are going to have a different financial services sector when this is all over and we will have a different regulatory framework as well. If moral hazard cannot be shown to work then the taxpayer cannot be expected to pick up the bill for the excess and irresponsible risk-taking of private institutions.

The ultimate shape of whatever new regulatory approach will be adopted will be designed over the coming period as the lessons from this crisis and the appropriate responses become clearer. We need to continue to work closely with other regulatory authorities and to the extent possible dovetail our responses.

As many of you will be aware, we have already been taking action. For a year now the Commission has been working on a detailed road map agreed by the Council of Finance Ministers and endorsed by the European Council. We have been refining our response as the turmoil unfolds.

We have already taken measures to improve convergence and cooperation between supervisors. A new memorandum of understanding was agreed by EU supervisory authorities, finance ministers and central banks setting out common principles including the establishment of cross-border stability groups. This is now being implemented. We have been reviewing enhancements of deposit guarantee schemes. A special group which will report by the end of this year has been set up to look at the pro-cyclicality effects of current instruments including Basel 2 and IFRS. In close cooperation with the Financial Stability Forum, the IASB has set up an advisory panel on fair valuation. Work on off-balance-sheet items is also under way in the IASB. Industry has come forward with valuable data which improves transparency for regulators of the securitisation market. The Commission is pressing industry to refine this information so that transparency for regulators is improved.

In the light of these activities, and others I will refer to, it should come as no surprise to Members when I say that I can welcome many of the points set out in Mr Rasmussen’s report. What is important is that we are able to identify the key measures we should take now and get them implemented.

As I said earlier, the market turmoil exposed failings in the risk management of large financial institutions. It also highlighted a number of areas of regulatory weakness. It is on these areas that regulatory attention must now be focused. Mr Rasmussen has flagged in his report many of the most pressing areas: conflicts of interest in credit-rating agencies, the need for improvement in the valuation of illiquid assets and the misalignment of incentives in the ‘originate and distribute’ model.

Over the past year I have kept Members informed, both in plenary and particularly the Committee on Economic and Monetary Affairs, of the work we have been doing on improving capital requirements in banks, as well as my ideas for regulating credit-rating agencies. We all agree, I believe, on the need for a strengthening of capital requirements and an obligation for transparency and due diligence in regards to structured products. We have been working on changes to the Capital Requirements Directive, which will improve the management of large exposures, improve quality of capital through harmonising treatment of hybrid capital. We have also been looking at strengthening the supervision of cross-banking groups.

In the next few weeks I will be proposing to the Commission two separate regulatory measures to deal with these and other issues: firstly, an amendment to the Capital Requirements Directive and, secondly, a regulation on credit-rating agencies. I look forward to the support of the European Parliament for these proposals which are very much in line with what you call for in this report.

Hedge funds and private equity feature in both reports. We have had some interesting exchanges over the years about the roles of hedge funds and private equity. One thing I believe we can agree on is that they were not the cause of the current turmoil. It has turned out that it was the regulated sector that had been allowed to run amok with little understood securitisation vehicles.

I do not believe it is necessary at this stage to tar hedge funds and private equity with the same brush as we use for the regulated sector. The issues relating to the current turmoil are different. Let us not forget that these funds are regulated in Member States. Hedge funds and private equity managers are authorised and supervised entities throughout Europe. They are subject to the same market-abuse disciplines as other participants in financial markets. They are bound by similar transparency and consultation obligations when investing in public companies. Exposure of the banking sector to hedge funds and private equity is subject to the Capital Requirements Directive.

But this does not mean that we are turning a blind eye to hedge funds and private equity. As these business models evolve and their role in financial markets changes, regulators around the world need to remain vigilant. The industries themselves must assume all the responsibilities that accompany a prominent role in European and global financial markets. Several recent market initiatives indicate that this message is understood. Our role should be to monitor closely these and other developments in the market and be ready to respond if and when necessary.

I welcome the constructive suggestions for supporting the functioning of the single market. I would just like to mention at this stage that there is considerable work under way in the Commission on private placement and venture capital.

I agree with Mr Lehne that a sufficient degree of transparency is an essential condition for investor confidence. It is, therefore, indispensable if we want financial markets to function effectively.

The report sets out a list of transparency rules that apply today to the different players in the financial markets in the EU. To my mind, what is important is that the market is provided with a sufficient degree of clear information that is useful. We need to find the balance between the need for confidentiality of the proprietary information of investment vehicles against the legitimate needs of investors, counterparties, regulators and investee firms.

I am, therefore, pleased that the report puts an emphasis on the need to analyse the impact of the existing EU provisions and of additional Member States’ rules in this field before one embarks on introducing any new legislation.

The Commission has already been very active in this field. We have held extensive consultations in the context of our shareholders’ rights initiative, where we looked at a number of issues that are touched upon in the report – stock lending, for example, and the question of the identification of shareholders.

Furthermore, we have recently published a call for tender for an outside study that will look at the implementation, in Member States, of the Transparency Directive. This study should be available next year and will form the basis for a general evaluation of the Directive, including the notification thresholds.

As Members will recall, the Commission adopted, in spring of this year, a communication setting out its policy approach to sovereign wealth funds. We had come to the conclusion that these measures were appropriate but also sufficient to address the issues that currently are being discussed. This approach was endorsed by the European Council; I see, though, that the Committee on Legal Affairs does not entirely share this assessment.

I shall make some brief remarks in this area. Firstly, we should acknowledge that hedge funds and private equity in many senses are not unique – other institutional investors have similar objectives and nowadays use similar techniques. If in that situation we imposed special obligations on hedge funds and private equity, this would result in discrimination of these categories of investors.

Secondly, we should not make the mistake to perceive all activities of hedge funds as a threat to the market but we should also be aware of the positive effects that their activities have. Let me be clear, the EU economy is going to need massive investment in the time ahead: without sovereign wealth funds, private equity and the like, Europe’s recovery from today’s turmoil will be all the slower.

Thirdly, I agree that certain techniques, such as stock lending and the use of derivatives, do pose challenges to established models of governance. This is an area we, in conjunction with national supervisors, will be giving close attention to in the time ahead.

In conclusion, these two reports will be significant contributions to our ongoing reflection. I commend Members for these reports. The Commission will examine your recommendations and report back to you as envisaged in the framework agreement. We remain fully committed to responding to this crisis with the measures necessary to restore confidence and stability.


  Sharon Bowles, rapporteur for the opinion of the Committee on Economic and Monetary Affairs. − 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.


  Harald Ettl, draftsman of the opinion of the Committee on Employment and Social Affairs. (DE) Mr President, 2007 has continued to be brandished as a possible continuation of the mortgagee crisis. We have been trying to lay this to rest. In June 2007 we should have been hearing even more alarm bells ringing, at least when two hedge funds managed by the New York investment bank Bear Stearns went astray because they were involved on a grand scale in bonds secured by real estate. This was only the beginning of the whole affair! It has become clearer and clearer how these kinds of financial service businesses have been developing with such a low level of transparency. On the one hand a few have been making large profits – in high-risk sectors, of course – while on the other hand we are dealing today with a classic nationalisation of losses. It is not just US economic journalists and economists who are describing this situation in precisely this way. We in the EU as well, in the European Parliament, are changing our perspective willy-nilly, but rather late in the day. It would also be preferable for the Commission to stand out on this.

Both reports – the Rasmussen report and the Lehne report – demonstrate the urgent need for action. By now at least it must be clear to all the political players that the market is not able to regulate itself entirely. The Commission should now also be aware of this. Hedge funds and private equities are already some of the largest employers, but according to many judicial systems, they no longer appear so and are therefore, of course, relieved of their obligations as employers. This is not acceptable; the lack of transparency is too great! In the meantime, thousands of jobs have been put at risk by the financial crisis.

Regulation, supervision, transparency, employee participation and information in the pension funds sector, which are heavily involved in hedge funds and private equities, are vital.

It is important to the Committee on Employment and Social Affairs that employees are not asked to pay out twice, Commissioner: once due to the financial crisis per se and once due to risk-sharing by pension funds. In order for this not to happen, Directive 2003/41/EC should at least ensure that employees must be kept informed directly or indirectly by trustees about the type and risk of the investment of their pensions and they must be given a voice in decisions. This is just one of many facets that we have highlighted in our reports and opinions.

Commissioner, you are now being asked to do something. I know we can talk about a lot of things, but you are duty-bound to assist. The legislative period is not yet over. I should like to draw your attention to this.


  Kurt Joachim Lauk, on behalf of the PPE-DE Group. (DE) Mr President, ladies and gentlemen, this report was originally aimed at hedge funds and private equity, but now covers the entire financial system, which has completely collapsed.

The present crisis is the hideous aftermath of a credit mania, specifically of the excessive expansion of debt. The Federal Reserve kept interest rates too low for too long and thereby essentially provided a credit subsidy.

We have drawn up the report on the basis of the current situation and together with our fellow Members from the Group of the Alliance of Liberals and Democrats for Europe, we have reached an agreement with Mr Rasmussen, which encompasses the entire financial system. We are grateful that this has gone through virtually unanimously in the Committee on Economic Affairs.

We can no longer rely on US standards and the setting of standards in the international financial system. We must create our own new, European options and we have proposed adopting a whole range of items and ending discussions on them.

As a start we must include all the financial institutions working with leverage in the particular risk assessment. We then say that in the global financial system, risk-adjusted capital requirement must have the same status for all players. We should also be stipulating requirements for promoters of packages and syndicating packages, whereby they retain a chunk beyond these packages. The rating agencies – Mr Rasmussen and Mr Lehne have already pointed this out – must close the gaps in information and disclose conflicts of interest.

We should consider whether or not we get the rating agencies to assume liability for their rating along the lines of the financial auditors. We must then also consider whether or not derivatives should be traded compulsorily on the Stock Exchange – possibly with the exception of interest rate swaps. We are also asking that the banks’ governing boards ensure that bankers’ bonuses take account not only of good performances, but also of any losses that may eventually occur. This therefore means that incentives for bankers apply in the good and the bad times and not just in the good times.

Greed was and is a bad advisor on financial strategies. In recent years we in the ECB have had a reliable partner, who all in all has reacted grosso modo in a rather more reasonable and balanced manner than the Federal Reserve. This we can say with hindsight. In the euro area we are also in urgent need of European banking supervision for the euro area because we cannot carry on living with national supervision alone. This means that all in all we are assuming that institutions, or even voluntary associations, are being set up in Europe so that the subjects we are addressing can be better understood in order to prevent the next crisis of this magnitude.


  Ieke van den Burg, on behalf of the PSE Group. Mr President, I would say to Mr Lauk that he may support the report that Mr Dăianu and I drafted on European supervision, but there was a lack of support for it from the EPP.

Allow me also to say something in response to the Commissioner, which is that I find it unbelievable that he has not reacted to the core issues of the report. He merely told us that the Commission is closely monitoring and closely following developments, and then said that hedge funds and private equity also have much positive influence, and that we should reflect on that.

It is like hearing that a hurricane or tsunami is coming and being told that we should reflect on the positive aspects of water and wind! It is ridiculous.

(NL) I shall continue in Dutch, as I wish to focus on two issues with particular relevance to Mr Lehne’s report. One of these – which Mr Lehne himself has already mentioned – is stock lending and short selling. This is of course a classic example of the Commission’s recent failure to keep abreast of things. We raised the issue of the need to take action regarding stock lending, the lending and borrowing of shares, long ago, as this was being misused in hedge fund campaigns against companies. Now, at long last, financial market supervisors – a number of individual supervisors in individual countries – have done so. This is not a coordinated European action; initiatives such as this have once more had to come from the national level. We could have been one step ahead of this and perhaps also have prevented some defaults, some bank or insurance company collapses, had we had adequate measures in place for this.

This is also a further illustration of the fact that such things transcend sectors and that sectoral supervision of banks, insurance companies or securities alone is insufficient. We really do need to combine such supervision and ensure that these securities are anticipated on both sides and that such occurrences are prevented.

The other issue is remuneration systems. We have stated in the report that it is very important that these be curbed and that voting on remuneration policy be possible at shareholders’ meetings. I was pleased to note that, during this week’s discussion on the forthcoming emergency fund in the United States, my Democrat counterparts in Congress expressed their desire to make borrowing from this fund conditional on, among other things, the curbing of exorbitant managerial salaries and bonuses.

After all, it would beggar belief if Goldman Sachs and Morgan Stanley, who are now submitting themselves to that supervision and also wish to make use of those public funds, were to continue handing out bonuses running into millions. It is also appropriate that we in Europe go beyond the recommendation from a couple of years ago. I should like to ask the Commissioner what he intends to do about this, as it is high time we took action.


  Sharon Bowles, on behalf of the ALDE Group. Mr President, sorry, this is part two. 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.


  Eoin Ryan, on behalf of the UEN Group. – Mr President, certainly this report has come at a very interesting time, as we are experiencing a time of unprecedented economic upheavals, and recent events have made us sadly aware of some of the shortcomings, weaknesses and abuses in many sectors of the financial market.

There is no sector or grouping that has emerged unscathed or unblemished. There can be no case of ‘let’s go back to the same old rules’. Indeed, in the United States we are witnessing radical alterations in the landscape of high finance. Changes must also be made here in Europe, but also globally.

In such a tense financial climate, it can be tempting to make scapegoats of certain financial actors or bodies. The lack of understanding that can surround hedge funds and their operation often makes them good targets for this kind of scapegoating.

However, we must remember that neither hedge funds nor private equity led to the current financial crisis and, instead, at times provided much needed injections of liquidity into the market.

We should also remember that the crisis which started in America resulted from bad banking practices, and the European banking sector, while badly affected, seems to be in a better position to deal with this problem than those banks in the United States.

Nonetheless, we must not deny that there are problems and faults in the structure and operation of many investment vehicles, alternative investments included. It is not good enough to tinker with a small rule here or there. Real reform is needed, and it is needed on a global level.

I believe that the report that has emerged from the Committee on Economic and Monetary Affairs, under the stewardship of Mr Rasmussen, reflects these concerns. For longer-term financial health and competitiveness, we must not and cannot regulate away constructive risk. Despite its name, this text does not seek to vilify hedge funds and private equity but instead notes the need for general market reform, greater transparency and calls for principle-based regulation.

I welcome the comments made by the Commissioner here this evening, and I have absolutely no doubt that he will respond to the situation that we now find ourselves in.

The financial system is international by nature, and we need international supervision of these markets in a global context. To secure global economic stability we must work together to find the best way forward, to put credibility and confidence back into the financial institutions and market for citizens globally, but also for the citizens of Europe, for their pension funds and also for their savings.


  Pierre Jonckheer , on behalf of the Verts/ALE Group. – (FR) Mr President, Commissioners, rapporteurs, I believe that this report as adopted by the Committee on Economic and Monetary Affairs is a good one, and we should be grateful to Mr Rasmussen, in particular, for having insisted over so many months on the need for wider-ranging EU intervention in the areas that are the subject of tonight’s debate.

Nevertheless, my group has re-tabled a number of amendments which – strange as it may seem – were drafted not by us but by Mr Rasmussen himself. In other words, these are important proposals – notably on the establishment of an EU-level supervisory body and a European system of registration and approval for asset management and fund management companies (Amendments 6 and 7) and the introduction of a debt limit for capital investment funds (Amendment 9) – which Mr Rasmussen put forward but which he felt compelled to withdraw, understandably in certain respects, in order to secure a majority in the House: that is to say, a majority with the PPE Group and the Liberals.

As I see it, these amendments – which cover issues raised in the working documents and which we consider to be constructive and worth arguing for – were withdrawn because here in Parliament, as in the Council and most certainly in the Commission, there are two schools of thought: the first is that we have enough rules already, at both national and European level, and that any outstanding problems can be addressed through self-regulation by the finance industry; the second, to which Mr Rasmussen subscribes (and he is by no means alone), has been saying for years that the current supervisory system for the financial markets generally is inadequate.

The reason why no action was taken, Mr McCreevy, was not, in my view, because we could not predict, or were unaware, of developments. I believe that, over the years, quite a few authoritative voices have been raised, particularly in the Forum for Financial Stability, to alert the public authorities to the nature of the risks we faced.

You and the Barroso Commission have generally tended to argue for a more laissez-faire approach, deeming the current arrangements to be adequate. What Parliament is asking of you now is nothing less than a change of heart. Whether you can manage that I do not know, but I believe it is necessary.

Personally I should like to emphasise three points which other speakers have already touched on but which are of particular concern to environmentalists. We know that the climate and energy package that needs to be adopted will depend on a sustained level of investment, at a relatively modest rate of return with relatively modest gains, to provide the financing we need.

Financial instruments such as equity funds and hedge funds are not appropriate and we are waiting for the European banking and monetary authorities to come forward with ideas for putting some old proposals back on the table: I am thinking here of Jacques Delors’ proposals in the early 1990s and of a reinvigorated role for the European Investment Bank so that we can secure long-term investment at a moderate rate of return.

It will be hard to stabilise the financial system – and the Rasmussen report mentions this point – without a determined assault on offshore financial centres and tax havens, and this is another area where the Barroso Commission is failing to take a lead. Lastly, in relation to corporate governance – which other speakers have also mentioned – we ought to take a much harder look at investment funds’ managerial pay and reward policies. They are not acceptable and indeed they pose a threat to the economy generally.


  Konstantinos Droutsas, on behalf of the GUE/NGL Group.(EL) Mr President, in our opinion, whether to tackle the credit crisis through steadfast compliance with existing Community legislation or through some new, stricter regulations is a false dichotomy. Neither choice can thwart the cyclical course of the capitalist economy towards the crisis, which has its basis in the over-accumulation of capital in production.

The credit crisis is also a reflection of this course. Bourgeois management sought to tackle the problem of over-accumulation by encouraging over-lending and stimulation of popular consumption in hedge funds and private equity as ways of financing businesses. The specific management choices not only could not stave off the course towards deceleration and recession but, on the contrary, constituted a bomb ready to explode, with incalculable consequences for people’s income.

At the same time, EU policy accelerated the full liberalisation of capital in the credit system, in line with the principles of the capitalist market. Hedge funds and private equity are the progeny of this course towards liberalisation.

No proposed effort towards greater transparency and stricter legislative regulation in relation to the movement of capital in the credit sector, that is to say, in the sphere of circulation, can tackle all the inconsistencies and contradictions created by capitalist relations of production.

Correspondingly, the imposition of stricter lending terms will lead to a contraction of popular consumption and the very rapid manifestation of crisis. No-one can provide a clear definition or common characteristics, other than rapid profit, for these schemes, which have ever-increasing control within the global economy, schemes created by the plutocracy and exploitable by it alone, with the help of specialist market organisations.

The victims of this policy are the workers, who watch the wealth they produce accumulate in the hands of a small number of plutocrats and see their savings at risk of vanishing and their pensions also at risk.

It is typical that hedge funds and private equity are exempt even from those obligations that employers have towards workers. The same also happens with pension systems – public and private – which transform workers’ pension rights into prey for capital, participating ever more widely in these schemes, termed investment schemes, multiplying the risks and dissipating the rights of workers.

There are many recent examples in the United States and the United Kingdom of secure credit institutions collapsing in a single day like a pack of cards and hundreds of thousands of workers losing their savings and pensions.

The economic crisis that currently plagues the markets did not come as a bolt from the blue. It was widely anticipated, in terms of both timing and scale. Perhaps the measures being taken today were also planned. The workers, who, in the capitalist system of exploitation, financed the superprofits of the plutocracy through their labour and their savings, are today being called on in the name of stability – as taxpayers – to fund their losses as well.

Workers and the popular classes are unconvinced by the announced transparency measures, with the possibility of implementation and effectiveness, moreover, being doubtful. They are unconvinced by the measures, which call on them to pay yet again for the rescue of capital profits and the maintenance of the system of exploitation. They are expressing their disobedience and their insubordination towards this system and the centre-right and centre-left alliances that support and preserve it. They are fighting against injustice, inequality and the exploitation of peoples, and for radical changes towards a system of popular power that will serve the interests of the workers.


  John Whittaker, on behalf of the IND/DEM Group. Mr President, doesn’t this all go to show that this vast exercise of EU financial regulation has singularly missed the mark? In its obsession about money laundering and pursuit of the elusive single market in financial services, the EU has been pursuing the wrong objectives. Let us accept that, despite earlier assurances from Mr Trichet and Mr Almunia and others, there will be further financial failures in the European Union, and real economies in the EU will be affected by the credit crisis.

So there is not much point now in discussing capital requirements and what we will do in the future to stop this sort of thing happening again; we have a problem, and the problem is now. We can blame the Americans, we can blame hedge funds, we can blame investment bankers, we can blame who we like, but what Mr McCreevy’s Commission might rather spend its time now doing is discussing with the finance ministers of the different countries how the burden will be shared across countries when we find that we have to bail out financial institutions to the tune of hundreds of millions, as is now happening in the USA.

How are we going to come to the aid of Italy, Spain, Greece and Ireland – Mr McCreevy’s own country – when bad situations there are made worse by the crisis, and, stuck in the euro, there is nothing that those countries themselves can do to help themselves?


  Jean-Paul Gauzès (PPE-DE) . – (FR) Mr President, Commissioner, ladies and gentlemen, if European banks are withstanding the current crisis relatively well, it is simply because banking supervision in Europe – while far from perfect – is at least serious. The ongoing work on the Capital Requirements Directive and on Solvency II affords an opportunity for introducing useful measures to improve financial security. It goes without saying that the job of a banker entails taking risks but those risks must be controlled. The important thing for bankers is to know at all times what security they have on a given risk. Certain unregulated financial operators lost sight of that simple principle, and in their case self-regulation will no longer suffice. Derivatives markets have grown increasingly murky, and traders have bought and sold at levels of risk that could not be contained by the management of those institutions that are now most exposed.

Recovery from this crisis depends on creating a supervisory system capable of inspiring and re-establishing confidence. There are currently whole swathes of the finance industry that lie beyond the reach of supervisory authorities. Who was supervising the mortgage brokers as they lent so generously to households that would never be capable of repaying? Who was supervising the investment banks that took the crisis up a notch by transforming the bad debt into financial products for sale all over the world? There is a regulatory void out there that is also inhabited by credit enhancers, ratings agencies and hedge funds. It is not acceptable that Europe should periodically have to suffer the consequences of America’s faulty financial system.

With regard to hedge funds, the financial ‘police’ in the UK and the USA have just temporarily prohibited speculation on falling asset values, and quite rightly so! The failure of some of these murky operators would accelerate the crisis in the deregulated sector. Not all investment funds are pernicious and some of them are actually necessary, but we cannot permit the continued existence of financial black holes. Reviews are worthwhile and indeed essential but what we need right now is action! That is the thrust of the two reports we are debating.




  Manuel Medina Ortega (PSE). - (ES) Madam President, despite the fact that the speaker who preceded me is from a different political group, I am in total agreement with him: we cannot leave the financial markets in the hands of financial managers. It is like leaving cheese to be looked after by mice. Self-regulation and voluntary codes of conduct are no use. As Commissioner Matridis said earlier, the thing that is saving the European financial markets is the existence of regulations, national regulations because each of our countries has regulations which work and are preventing the financial catastrophe in the US markets from spreading to Europe.

What lesson can we draw from this? That Europe cannot copy the United States in financial deregulation. If our goal is to protect our economy and our economic and social system we have to have European-wide regulation but we must not replace national regulation with supranational deregulation as in the United States, where the system allows managers of companies to get rich on the back of poor investors, pensioners and people who depend on that capital.

I believe, therefore, that the lesson we must learn is not to deregulate but the reverse: it is that we need to adopt European regulations on all these aspects. That, to my mind, is the core of both the Rasmussen and the Lehne reports: the need to establish European financial regulation.

There is much talk of the European passport, of giving a passport to undertakings to allow them to move throughout Europe in complete freedom but how can we grant the passport if we cannot be sure that those undertakings are subject to detailed regulation in their country of origin? To do so would be to invite another supranational financial catastrophe.

The regulations in the Lehne report contain a number of indications or recommendations on, for example, the actions of fund managers. We should know how those funds are being managed; and especially, we should know about the profits they earn through, for example, the purchase and sale of shares. I believe this is essential. Transparency must be combined with very strict regulation with the option for intervention at the appropriate time without waiting until the market has collapsed, as is the case in the United States at the moment, only for tax-payers’ money to be used to right all the wrongs committed by people who have abused their position.

Therefore, Commissioner, I urge you to use your position to try and establish a genuine Community system for regulation of these sectors so that we do not follow the path of self-regulation or deregulation.


  Olle Schmidt (ALDE).(SV) Madam President, Commissioner, I should like to say a big thank you to Mr Rasmussen and Mr Lehne for their important reports. As many have pointed out, they could not have come at a better time.

Developments on the US mortgage market have had major consequences for the entire global market over the last year. Bad loans have been bundled and passed on. Short-sightedness and the difficulty and complexity of many of the new market instruments have made the market more obscure and fast-moving. Besides, exorbitant remuneration for company directors has seriously shaken confidence – I think we can agree on that. Nor have the world’s financial supervisory authorities been able to strengthen their cooperation and competence sufficiently. New instruments have been introduced; openness and transparency have been lacking. The starting point now should be the equal treatment of all financial market players; that is to say, the introduction of stricter capital requirements and regulation, including for hedge funds and private equity.

On the matter of supervision, there has been discussion of the need for new authorities, in which regard many – I saw Gordon Brown only today – have been pressing for a common European, indeed even a global, system of financial supervision. In my opinion, the continuing differences between markets – as illustrated by developments in the United States – give cause for reflection. On the other hand, markets are connected globally. As our committee also said, the existing committees in Europe for cooperation in the financial, banking and insurance fields should be strengthened considerably. A great deal can be done in this regard – including at global level. Transparency and clearer supervision need to be achieved if we are to rebuild confidence in the financial market. I believe that there is a complete consensus on this, too.

The market economy needs clear rules, including clear rules of play. As a Liberal, I have no difficulty at all in arguing in favour of clearer rules and more effective legislation. On the other hand, we must take care not to introduce laws and rules that do not solve current problems and do not take account of the importance of a global financial market. Global access to capital increases growth potential and creates new jobs – we should not forget this. Europe needs an open, effective financial market that also leaves scope for self-regulation and internal remedial measures.

The challenge, therefore, is to avoid paralysing our systems by over-regulating, leaving us unable to handle either growth or new crises. This week there was panic among the financial community. We must not let such panic dictate our legislation – at least in this House.


  Ilda Figueiredo (GUE/NGL). - (PT) Mr President, Commissioner, ladies and gentlemen, this debate is taking place against a backdrop of widespread financial market crisis caused by the increasing ‘financialisation’ of the economy, unregulated speculation and the proliferation of financial instruments and products, the aim always being ever higher speculative gains. This is one more facet of the crisis of capitalism. It has been clear for some time that there was another financial bubble, and that one day it would burst, not only in the United States but in the European Union too. It is also a result of the neo-liberal policies that prompted investors to seek increasingly higher gains, that encouraged lack of transparency, and that created tax havens and allowed them to shelter and launder capital from the underground economy, from the profits of war, from people trafficking and from drugs.

Now, the public funds that were not available for social policy, for combating poverty and social exclusion, and for preventing millions of people, including children, from dying of hunger and lack of basic health care, now, I repeat, public funds are being used to avoid bankruptcies and greater losses among financial groups. The profits and gains were in the private hands of just a small group of investors and obscenely well-paid administrators, but those who will suffer the consequences are always the same: workers who lose their jobs, the rank and file who have to pay more interest, including here in the European Union, particularly in countries with weaker economies. Take Portugal for example, where low wages and pitiful old-age and retirement pensions are the rule, and where poverty and unemployment rates are amongst the highest in the EU. Since households have one of the highest debt ratios, amounting to around 120% of GDP, and micro and small and medium-sized companies depend a great deal on credit, they are now experiencing ever greater difficulties due to the resulting increased interest rates, a particularly serious problem in Portugal and other countries with weaker economies.

Some measures are therefore required in the immediate term, beginning with the abolition of tax havens and confidentiality, without which there can be no transparency. From what has been said here, however, by Commissioner McCreevy in particular, it seems that that will not be the way forward, and that is unacceptable. In this critical situation the European Central Bank’s false independence must also be abandoned in order to ensure a change in monetary and financial policy objectives, and far-reaching measures must be taken to combat stock market speculation. The priority in public policy must be to support the creation of jobs with rights, production and poverty reduction, thereby raising the purchasing power of workers and pensioners and supporting quality public services.


  Nils Lundgren (IND/DEM).(SV) Madam President, at present the financial crisis is casting hedge funds and private equity in a frightening light – and other financial innovations such as structure investment vehicles, conduits and money market funds are being similarly affected. All of these have been conceived precisely for the purpose of sidestepping the capital adequacy and transparency requirements we impose on banks. There is much profit to be made from borrowing liquid assets short, investing in illiquid assets long and staking minimum own capital, but this is a dangerous activity. As we can see, both liquidity and solvency can soon vanish. That is the reason for the strict international banking rules. We are now seeing the collapse of the international non-banking system. Hedge funds and private equity are next. These have very little own capital; they are highly leveraged. Private equity involves enormous numbers of leveraged buyouts, LBOs, which have been carried out with virtually no own capital. This being the case, should we really be presenting feeble reform proposals such as these in this field at this historic juncture? I for one do not think so.


  Karsten Friedrich Hoppenstedt (PPE-DE). - (DE) Madam President, Commissioner, ladies and gentlemen, we have now heard everything from the experts who produced the report – Mr Rasmussen, Mr Lehne, Mr Lauk, thank you very much. It was an excellent piece of work and met with great approval in the Committee on Economic and Monetary Affairs.

In the past three years, Commissioner, we have constantly been asking for rules to be established, for questions to be raised, such as: how can we obtain greater transparency for hedge funds, who is advising the rating agencies, and so on. They now come from Ireland and are therefore racing experts. When the fences are high, the horses may well shy. Put simply, shying away from an obstacle that is no longer there! We must now – and this you have indeed promised – lay down rules and make proposals. We have to show that we have learned something from all these crises and are striking new paths. You put forward this proposal . I hope that in October we shall be receiving the guidelines from you.

A few days ago I was at a large conference near Rome. The first item discussed there, of course, was that of the banks. On the Thursday the newspaper headlines read: Morgan Stanley offers hope. On Friday, they read: Morgan Stanley seeks protection. How can this happen in a single day? There are deficiencies here in transparency and the like. If, after Bear Stearns, Lehman Brothers and Merril Lynch, this investment bank is also now sinking in the chaos of the financial markets, corrective action should be taken as a matter of urgency.

A short time ago I was in China. The Chinese were saying: our role model, the United States, has collapsed. Together we – Europe, China and others – must seek out new paths. My hope is that together we shall have the strength to strike these new paths, then not only those who have won, but also those who have lost will be rescued with us.


  Pervenche Berès (PSE) . – (FR) Madam President, I know that the Commissioner enjoys betting on horses so he will forgive me for using a sporting metaphor when I say that he is not exactly a favourite in today’s event. Poul Nyrup Rasmussen, on the other hand, looks like a very good bet, so I think you might do well to consider changing colours, Commissioner. What Mr Rasmussen has just outlined and proposed to us is precisely what the European Union needs. It is right not only for the Union but for the rest of the world too – and the trans-Atlantic relationship that is so dear to your own heart would be enhanced by a European initiative on the basis of the Rasmussen proposals.

You seem to have come to the wrong debate, Commissioner. You gave us a review of how the crisis started last year, but the issues we are discussing now are issues that had engaged our attention long before the crisis surfaced last August, for the rot had clearly set in at that stage and the financial world was ripe for a collapse. We are not fuddy-duddies seeking to condemn or to prohibit alternative funds or investment funds. We simply recognise that when certain financial vehicles or instruments are performing such strategic functions in the international markets and have acquired such a key position, then they must be subject to the general principle of regulation. The operators in question are, in fact, telling us this themselves. They are saying: ‘Yes, OK, we can agree to regulation; we just do not want to be stigmatised and we do not want a special system of regulation.’

Well, fair enough! We want them to be registered, we want them to be supervised, we want them to be paid in accordance with normal principles, and we want them to be subject to transparency rules and to the rules on capital adequacy. That is the reality. These structures now occupy such an important place on the financial markets that they cannot continue to be exempt from the general rules. Yet, this is the very point that you, Commissioner – a former Irish Minister for Finance – are refusing to concede. That is the reality! You tell us that hedge funds and private equities ‘are not the cause of the current turmoil’ and that the blame lies with the regulated sector. I have no wish to deliver an economics lesson, but we know full well that the banks felt able to take the risks they took precisely because of the parallel existence of hedge funds and private equities, processing financial products that accelerated the rot in the banking sector.

In relation to Mr Rasmussen’s report, I should like to invite you to respond to it in practical terms, point by point, for it contains a number of legislative proposals that might improve your own end-of-term report when the current Commission steps down. I listened to what you told us and you spoke of a ‘window of opportunity’ for improving transparency. Well, we agree with you and we expect the Commission to use that opportunity. The key to confidence among ordinary people and among financial-market operators is transparency. It is obvious today that, in the areas of alternative funds and investment funds, there is no transparency. But transparency is what we need.

It goes without saying that I support many of the proposals in Poul Nyrup Rasmussen’s report but I should also like to take the argument a little further. If we really want to strike at the heart of the problem, we shall have to examine the concept that you have described as the ‘shareholding democracy’. What is meant by a shareholding democracy if it is possible, in a matter of minutes or a matter of days, to put so many people’s jobs in jeopardy? There is a very real problem here, which you need to address and on which we expect effective proposals. Securities lending and borrowing jeopardises jobs in Europe and is at odds with the Lisbon Strategy.

My final point is one that previous speakers have also raised, namely the problem posed by offshore centres. You, Commissioner, are an ardent defender of the trans-Atlantic alliance, so allow me to inform you that over on the other side of the Atlantic there are democrats who, like us, are ready to lobby for a full-scale assault on tax havens. What is the use of fighting heroically in Afghanistan or Iraq without attacking evil where it exists on the financial markets – and offshore centres are a source of evil for the finance industry. This is another subject on which we await your proposals, Commissioner.


  Andrzej Wielowieyski (ALDE). - Madam President, such failure of financial markets has never happened until now. The main cause was the enormous increase in turnover, and the development of a new system of financial gain beyond the existing banking system without transparency, any effective evaluation or supervision. New investments and vehicles brought big profits, but also caused an increasing threat, even to the IMF.

Although the proposal from Mr Rasmussen and his committee concerning transparency and supervision – particularly of the excessive debt leverage - are right and indispensable, we should also acknowledge as very dangerous the opinion of the Committee on Legal Affairs which demands simply that it be left solely to participants in the market to assess the appropriate level of risk to take. The committee overlooked the fact that last year the average securities firm was leveraged 27 to 1, with no regulation or supervision. What is more, they regulated themselves completely on their own, and even the big lenders ignored the extent of the risk they were taking.

The cost of this failure will be extremely high. The cost to Americans, for example, has been terrible, at around USD 1 000 billion. It will have yet another additional effect: the actors on financial markets may not learn to be more cautious, because they will be accustomed to relying on help from taxpayers. We then have the choice of either protecting the almost full freedom of choice for financial actors in taking risks, or to impose distinct obligations and limitations insuring effectively against excessive shocks and guaranteeing a stabilising development of financial markets.

The opinion of the Commissioner gives some hope for the future, but I am afraid that the tasks facing the Commission are extremely difficult and demand much more courage in finding new methods and new measures.


  Othmar Karas (PPE-DE). - (DE) Madam President, ladies and gentlemen, I should first of all like to say that both reports – the Rasmussen report and the Lehne report – as well as the social agenda with its 19 items that we debated last time, and the Council and Parliament resolutions on Georgia show what we are capable of when we are all pulling together, despite our different opinions.

I am saying this, therefore, because I am glad that the socialist election campaign machine, the superficial populism and the mutual recriminations have been dispensed with and the business of democratic parliamentarianism, responsibility for taking the necessary action and a frank and realistic debate will hopefully win through tomorrow. Hence I am also saying this because the Chairman of the Socialist Group in the European Parliament, Mr Schulz, has tried repeatedly in plenary to drive a wedge between the groups on precisely these issues. Good/bad, left/right, state/market thinking does not equate with the reality of people’s lives today, but emanates from an old electoral rhetoric based on class war, which I had hoped had been conquered in the EU, and today’s debate has so far also thankfully shown this.

Reason has triumphed and a realistic step forward can therefore be taken, a response given to the financial turbulence and people’s questions answered. We have an enduring financial crisis. We therefore need action. We cannot ignore the agenda. We need more European Union, more transparency, more supervision, more European and global regulation. We need risk-based equity capital and we must ensure that we do what we admit to in these reports and that what we demand in both reports is implemented by all those involved.


  Udo Bullmann (PSE). - (DE) Madam President, Commissioner, Mr Karras, if I have understood Morgan Stanley correctly in the last few days, they are less fearful of Mr Schulz’s stranglehold than of hedge funds.

If I have grasped one thing from the discussion of the last few days, Commissioner, it is that the American consensus in this company, which has made many mistakes in handling the property and financial crisis, is that we no longer want to allow individual gamblers to drive the entire financial system to the wall by exploiting its flexibility and lack of regulation. How much longer do we actually want to carry on waiting until not only the ailing institutions, but also the sound ones have the red light forced on them and then hedge funds and other funds bet on their decline in order to snap them up again later at cheaper prices?

This leeway must be dispensed with and for this reason I doubt that what you have done here will be sufficient. It is not the time merely to be commissioning further studies. It is not the time for further supervision of those involved. It is time for action!

Last week I looked at an enterprise in my constituency, a sound enterprise, an enterprise producing the new materials we need: the vacuum melting company in Hanau, near Frankfurt. For a very long time it was a sound enterprise, until it was taken over by an American investor. Debts from the takeover are affecting the workforce, they are affecting the enterprise. Since then the enterprise has been trying to pull out of the collective labour agreement and has been forced back into it by a bitter strike. Is this what we to happen all over Europe? Do we really want the strength of the European economy to be based on this kind of conflict or can we regain some kind of understanding and fill the regulatory loopholes with European legislation?

This is what is on the agenda. In the last nine years in this House, Commissioner, I have not experienced a discussion on economic policy in which you have been asked to act so unanimously and by such common consent.


  Zuzana Roithová (PPE-DE). - (CS) Ladies and gentlemen, six years ago we launched the global harmonisation of accounting rules and competitiveness in the European banking sector. The Union’s cross-border financial integration has no equivalent in the world. Financial researchers have long been pointing out that the European Union is far from being sufficiently equipped with mechanisms for solving cross-border crises arising from the increasing interdependence of European banks and their links to the global financial markets. Although the European Central Bank has managed to maintain financial stability in the eurozone to date, the fragmented national regulatory bodies are not capable of implementing effective solutions to the cross-border banking crises we continue to experience. In other words, centralised control is crucial. However, rather than establishing an all-encompassing financial regulator, we should carefully define specific conditions for intervention by a pan-European financial regulator. State intervention in investments banks such as AIG also arouses fears that such a precedent will lead to banks behaving irresponsibly in the future.

I am therefore convinced that we must introduce control mechanisms that will prevent the managers of investment and hedge funds from making ill-judged analyses of operational and systemic risks. For example, hedge funds and private equity should not be able to finance long-term investments through short-term loans without setting the minimum amount of their capital stock, according to the level of risk of their activities. The way mortgages have been financed not only in the US but also in the United Kingdom and Spain serve as a warning that the European financial markets are due some fundamental self-reflection, which will, I am afraid, be just that little bit too late. Even if the European Commission came up with concrete binding legislation tomorrow, it would be implemented not in calm conditions but in a stormy and possibly hysterical atmosphere. In any case, there is also the question of how acceptable the legislation would be to the Council.


  Kristian Vigenin (PSE). - Madam President, let me start by saying that it is a rare event when a European institution is acting before and not after a problem occurs. And we are talking about a huge problem the real consequences of which will become visible in the months to come.

Thanks to the efforts of the rapporteur, Paul Rasmussen, the issue of hedge funds and private equity regulation has moved from the periphery to the centre of attention of the financial experts and policymakers. It is the European Socialist Party that raised the need for better regulation of the activities of hedge funds and private equity. We did it because all European policies need long-term investment, which requires long-term financing. We did it because our main goal should be to secure sustainable growth and job creation, to ensure predictability and long-term planning for families and businesses.

I urge all Members to support the report, which has been approved by a large majority in the Committee on Economic and Monetary Affairs. That will be a big step for Parliament since we are going to request from the Commission a number of legislative measures which are aimed at achieving transparency and financial stability.

This is not an easy debate. It is true that this report foresees much less than we initially strived for. At the same time we are about to achieve more than seemed to be possible a few months ago. Recent times and developments on the financial markets prove that we are right.

Now, Commissioner, we are not going to blame you if you decide to act preventively, and include in your legislative proposals more than the European Parliament will require from you. It is not a time for competition in regulation – since excessive regulation is not better than the lack of regulation – but it is high time to act, and you know it.


  Tadeusz Zwiefka (PPE-DE).(PL) Madam President, the events of recent years, or months, even, but also the efforts made by individual countries and regions, indicate the growing importance of transparency not only for individual companies, but also for the development of specific states’ economies.

One barrier to direct regulation of the activities of hedge funds is the global nature of this industry and the potential for a fund’s offices to move to another state in order to avoid being subject to national regulations. This is the main reason why all international institutions dealing with hedge funds try to influence fund activities through their relations with entities that are subject to regulation, especially banks.

The problems of transparency in the European Union are concentrated mainly on convergence and harmonisation of the law in Member States. The problem areas relating to transparency aspects may be summarised as follows: establishing unified standards for information disclosed by companies introducing their shares onto the stock market and company law and corporate governance in relation to the question of the collective responsibility of agencies for information contained in company reports, reinforcing the role of independent council members, standards in the area of setting up committees as part of councils, disclosure of information on council and board members’ reimbursements, and also increasing investor protection.

The introduction of unified regulations, creating better conditions within the European Union for hedge fund action and distribution, could have a positive impact on their development in Europe, but the introduction by individual countries of their own, individual regulations relating to these funds is not helping to create a unified, common European market. The establishment of common and transparent principles would considerably facilitate fund product distribution.

In the opinion of the European Commission, which received a request to review the framework principles relating to non-harmonised products like hedge funds, with a view to creating a pan-European market, there are no significant arguments for the creation of EU regulations on hedge funds. Nothing could be more wrong! I side with the rapporteur’s call for the Commission to present a legislative conclusion on the transparency of hedge funds and private equity.


  Andrzej Jan Szejna (PSE). - Madam President, to begin with I would like to congratulate Poul Nyrup Rasmussen for his preparation of the report based on such profound analyses and excellent knowledge of the financial markets.

Both types of alternative financial instruments that we are discussing have an increasing share of assets in the global market and participate in creating new jobs.

However, the most important thing in the face of the financial crisis we have lately been observing with great anxiety and unsuccessfully trying to fight is to ensure financial stability.

In my opinion, the most efficient way to increase not only financial stability, but also fair competition between participants in the market, is to enhance supervision and transparency at the appropriate levels without doing any harm to the model based on innovative market strategies.

Some norms concerning the financial markets that have a direct and indirect application to hedge funds and private equity do exist above the national and European level. Nevertheless, we should strive for the coherent, non-discriminatory and consistent implementation and application of those juridical regulations. For this reason, I fully agree with the recommendations of the European Parliament, directed at the Commission, for increased activity and submission of the appropriate legislative proposals.


  Silvia-Adriana Ţicău (PSE). - (RO) I would like to congratulate rapporteur Rasmussen, and I believe that the recommendations contained in the annex to his report are particularly important. Hedge funds and private equity funds ensure the capital required in order to meet the demand for the funding of long-term investments and of innovative, often highly risky projects. Their operation, however, is less regulated than the banking system. The stability of financial markets requires appropriate transparency, and that specific measures must be taken in order to prevent excessive debt.

Over the last 10 years, pension funds and insurance companies have provided one third of the amount collected by private equity funds. I believe that increased transparency is needed, particularly in the case of pension funds, for them to be able to accurately assess the degree of risk of various investments. I would like to draw attention to the fact that hedge funds and private equity funds are based on a growth strategy designed for a term shorter than the duration of the investments which Europe needs.


  Antolín Sánchez Presedo (PSE). - (ES) Madam President, the financial crisis has shown that the various financial operators are interlinked. Their conduct has weakened the financial markets and the real economy: growth and employment.

Achieving open, competitive and reliable markets is not something that occurs by happy chance; this is shown by the experience in Europe. The fragility of the financial markets also requires political action at European and international level.

It must remain clear that to innovate does not mean to imitate the old practice of privatising profit and socialising losses or that to diversify means to transfer the costs of decisions made by a few people to society as a whole.

The European Union cannot just do nothing in the current crisis. The rapporteur, Mr Rasmussen, has taken the initiative and had the vision to propose that hedge funds and private equities, which hold assets amounting to over 4.5% of world GDP, are not free of responsibility towards society and must be subject to intelligent regulation and supervision. I congratulate him for this and support him, as I do Mr Lehne for his report on transparency.


  Kostas Botopoulos (PSE).(EL) Mr President, with regard to the immense and tragically topical issue we are discussing, I should like to focus on a single question: is there a right and a left answer to the issue we are considering? Is there a right and a left way out of the crisis? Many would say, and indeed some of us today have said, that there is not – that everyone here must agree on such questions, which are technical and economic.

Apart from the fact that those who say this are nearly always on the right, I want to say that the dividing lines here – and the reports show this – are very clear. What is the perspective of the left? That the market cannot regulate everything on its own and regulation by state power is required – and regulation even means prohibitions. Why should we not think about what was said previously in the Katiforis report: that credit-rating agencies must only provide ratings and all other activities should be prohibited; that transparency is important, not for the markets, but for citizens? Here we must think about the fact that pension funds must have special supervision.

Lastly, that it is highly crucial that state intervention takes place not at the end, as is now happening in America, and the American people are paying for it, but at the necessary moment so that the crisis is avoided.


  Manuel António dos Santos (PSE). - (PT) Madam President, I agree wholeheartedly with what has been said here on the window of opportunity created by Poul Rasmussen’s excellent report. I would say, however, that it would have been even more opportune if it had been politically possible to present it six years ago – and I think Poul agrees with me. Six years ago some of us tried to raise this issue of regulating hedge funds in the European Parliament, and the majority formed by the Liberals and the PPE systematically prevented the Socialist Group from incorporating it into various debates.

We are now experiencing a crisis, a structural crisis as Mr Almunia puts it, a crisis that will end no-one knows where, and one that we cannot turn a blind eye to. We cannot take the position that Commissioner McCreevy has taken, we must – and I want to believe that the Commission is prepared to do this, bearing Mr Almunia’s comments in mind – we must be proactive and must abandon the financial governance model that has regulated the European and global economy in recent years. This is what Poul suggests in his report, and this is what the Commission has the duty – I repeat, the duty – to examine and follow closely.


  Mia De Vits (PSE).(NL) Madam President, people are worried about what will become of their savings, but this seems to be of little concern to the Commissioner. Workers have been urged to take out non-statutory pensions, which were supposedly safer and more efficient than state pensions; their money is now in these pension funds, but they no longer have any certainty.

Current events are a setback for those who believe in unbridled free-market forces. The Commissioner himself is one such believer in the free market. As far as can be anticipated, there should not be too much regulation, he said last year in this House, and he is still saying it today. Well, it is never too late for him to change his mind. After all, in his opinion, what further action is needed in the way of prevention? The consequences of failing to act in good time will be felt for many years. Prevention is better than cure.


  John Purvis (PPE-DE). - Madam President, the new demon, I think the Commissioner will agree, seems to be short-selling. I would ask the Commission to arrange a study which compares in the case of HBOS the incidence of short-selling against sales by long-only investors – pension funds, insurance companies, private investors and their fund managers – and the plain withdrawal of deposits by frightened banking clients and other banks. I suggest we should have some facts before rushing to a conclusion, and yet another possibly mistaken conclusion.

In his report, to which incidentally our group has made a lot of contributions, Mr Rasmussen used HBOS and Northern Rock in his speech as reasons for more regulation, but HBOS and Northern Rock were banks, not hedge funds and private equity, and subject to the full rigour of the existing regulatory system for banks, including statutory capital requirements. Is it not ironic that the crisis has occurred and spread in the supposedly most highly regulated part of the financial industry? Beware Sarbanes-Oxley!


  Victor Boştinaru (PSE). - (RO) Sometimes we, politicians especially, are trapped in a dogmatism that leads to catastrophic consequences. A few years ago, the supporters of liberalism, and in particular those of neo-liberalism, would have thought it impossible that something like the recent events in Washington could have occurred. They would have rejected it on the basis of their doctrine, and yet it still happened. Today, in the context of globalisation, consequences are quick to arise and they affect every country and every economy. What the Rasmussen report says is that the EU must take action and I am convinced that, as a result of the vote of the European Parliament, the European Commission will be called upon to rise to this challenge that affects not only the life of a few, but the life of the population of the entire European Union– and will do so.


  Margarita Starkevičiūtė (ALDE). - Madam President, some time ago we had a hot debate about investment banks. Now investment banks have gone from the market, and we are feeling good with the current rules for the banking sector. The same issue is relevant to hedge funds. Hedge funds, in the current environment, are not sustainable any more, and I do think that we just need the same rules for all investment funds rather than specific rules for hedge funds. With these rules, Mr Rasmussen, we are actually hindering restructuring of the financial sector, and the losses will mount. That means that, in the end, you will not be able to protect the ordinary people you want to protect.


  Charlie McCreevy, Member of the Commission. − Madam President, one of the latter speakers, in furtherance of his argument, made the point – but I am sure he did not mean me to use it against him – when he said, people should not be blinded by their own dogmatism.

The danger in this particular debate is to try and get a balanced solution to the problems that we now have. In the main, the report, which has been amended considerably from the initial ideas put forward by Mr Rasmussen, makes a genuine attempt, in my view, to have a balanced approach to this whole area. But many of the contributors to the debate here in this House want to have an unbalanced approach to it, and that is not reflective of what was in the report.

Some – many of the speakers from one side of the argument, in particular – see the current financial turmoil and the difficulties which there undoubtedly are as the great opportunity to regulate everything out of existence, and the great danger is going to be, both nationally and in Europe in particular, that a very unbalanced approach is going to be taken to this.

I think Mr Purvis put his finger on the pulse when he made reference to the fact that the supreme irony of this particular financial crisis has been that it was the most heavily regulated sector, namely banks, that got themselves and the rest of us into considerable difficulty, and that it was not the activities of private equity or hedge funds that caused any of these problems at all. In fact many of them suffered considerable losses as a result of the things that happened in other areas.

I certainly will take on board what Mr Purvis said about looking at what the incidence of short selling contributed to the demise of some of these institutions as against what long-term disposals by long-term investors have contributed to it. I suspect that Mr Purvis knows the answer nearly as well as I do, which is that, in those two particulars which he has referred to, it will not be short sellers that will be deemed to be the problem in this area: it was long-term investors, rightly getting rid of long-term positions, because they felt that a particular institution was not on a sound financial footing.

But, be that as it may, I think the Rasmussen and the Leinen reports as they have come before us are a genuine attempt to look at all of these particular areas in a balanced way. And I am prepared to do that. For a number of months – for nearly a year now – I have signalled that I am going to do something in the area of credit-rating agencies. As far back as last November/December, I started the process by writing to CESR, posing them a number of questions, finally getting reports from them this year, and ESME and other bodies, as well. And having received all of that, I will be putting forward a proposal before Parliament and the Council in the next couple of months. Credit-rating agencies are referred to in this particular in the Rasmussen report.

I also have been making efforts for well over a year to try and get some semblance of order into the idea of colleges of supervisors or a better regulatory system for cross-border financial institutions.

Anyone that has been following this particular debate is very much aware that there has not been universal agreement or anything near it among the Member States. The proposal which is currently before the ECON Committee under the rapporteurship of Peter Skinner, namely the Solvency II Directive, and the ideas I put forward there about cross-border supervision of insurance companies and the considerable advancement there as to supervision, has run into considerable opposition from a large number of Member States and from a large number of parliamentarians in this House who are affecting the views of the supervisors and in their own Member States. And, even though the call in the main in this House is for better cross-border supervision, when a test is put in front of them as to what I should do about it to have a more coherent approach to cross-border supervision, they go back and represent their national positions.

So let us have a little bit of honesty in all of this particular debate and in all of these debates.

In the area of the Capital Requirements Directive, as people who follow this in the ECON Committee will know, since the time we put through the Capital Requirements Directive, left over from that were a number of areas which we said we would deal with in an amended Capital Requirements Directive in the autumn of 2008. This is well over a year, 18 months ago.

Then we have added on to that, in particular, other areas, such as the cross-border supervision of financial groups, about which we finally got some type of conclusions from the ECOFIN Council some months ago, and I have signalled what I am intending to do in the question of the ‘originate and distribute’ model. It goes a long way towards what I signalled were my intentions some months ago – what I want to do – and I put forward some propositions; it is reflected in Mr Rasmussen's report, which is more or less in the same idea as myself in this particular regard. But I will tell you this before it comes before the relevant committee: the Members of Parliament – if form is anything to go by in the past – will be representing the position of a lot of their own Member States, which is very much anti what I have put forward there.

So the proof of the pudding is going to be in the eating. There is no point in supporting Mr Rasmussen's report in this particular area and then, on the other hand, when the specific questions come before Parliament in the form of a proposition – which I am putting forward also in the next couple of months and which many months ago I signalled I was going to do – if Members of Parliament then take their own national positions, representing the views of some of the banking firms in their own country and some of the views of the governments of the Member States, then this will not necessarily be a very good idea.

Again I appeal for some type of rational approach, and at least some coherence. I very much respect the opinions of people who are consistent in all of this: people who say, ‘I do not think that is a particularly good idea’, and follow it through by saying it here in Parliament and when they go before the committee and stick with that position.

But where I do have difficulty is with people who in the main go along with some advancement in some of the areas which are referred to and then, when it gets down to a specific proposal, go back and more or less represent the views of their own Member State’s position or of institutions in their own Member State.

But this particular city is probably the headquarters of the world lobbying industry. I have heard different figures over the years as to whether there are more lobbyists here than there are on Capitol Hill in Washington, but there is not much between them in any event.

So I will be interested, when some of the ideas which I am bringing forward, which I have signalled for some time and which are now in the public domain (there has been consultation about it, the papers have been out and everybody knows some of these propositions in the areas which have been referred to) – when, in the next very short while, these propositions come before Members of the European Parliament – whether all the Members who spoke so heavily for some changes in the wider area, when it comes down to specifics, will follow through and support what is here.

We have taken good note of the points identified in both the Rasmussen and Leinen reports. As I promised in my earlier remarks, we will respond to this in more detail in the context, as provided for in the framework agreement. Mr Rasmussen asked me if that would be before the end of this year – I think a couple of months ago he said that, hopefully, by the end of the year we would be able to respond – and I promised him we would be able to respond.

But in response to the gentlemen who spoke about how everyone should not be blinded by their own dogmatism, I think he might be referring to the other side of the argument. I ask people on that side of the House not to be blinded by their own dogmatism either.


  Poul Nyrup Rasmussen, rapporteur. − Madam President, I want to thank my colleagues, and also the Commissioner, for the debate.

Just before I round off the debate as far as I am concerned on the report, I want to say to Mr Purvis, my colleague, that it is true that banks are regulated, but the products that were the cause of all this trouble we are having now are not regulated, and it was not regulated that we could put as much aside of the balance sheet as we actually did. So, Mr Purvis, the answer is that we need better regulation and we need regulation for the products as well.

I would say to Mrs Starkevičiūtė, in order to avoid any misunderstanding, that I am not talking about regulating the entity but about regulating the behaviour. We know that in real life hedge funds and private equity often change their legal constructions, and there are a lot of examples of that – investment banks themselves have executed private equity activities. So it is behaviour we have to change, and this is at the heart of this report.

I would say to Commissioner McCreevy that there is one fundamental thing – which has nothing to do with dogmatism or whatever – that I want to underline to you, and that is that the first paragraph in our report underlines the following: that the regulation has to cover all financial actors. It is the fundamental intention of this report, for the first time in the European Union’s legislative history, that what we want is a common total regulation based on the philosophy of a level playing field, leaving no one outside, but which has a unique regulation covering all financial actors. The report explicitly adds: ‘including hedge funds and private equity’. Then you tell me, Commissioner McCreevy, and the rest of the European Parliament: yes, I agree with you, but not on hedge funds or private equity. What are we talking about here? For three years we have been discussing with you whether private equity or hedge funds should be covered or not covered by regulation. Before the financial crisis you said this was not necessary: they are better than any government to regulate, so let them do their job. Now you say that they do not have a share in the financial crisis, so we will not intervene in regulating the hedge funds and private equity.

Mr Commissioner, you talked about lobbyism here in the European Parliament. I can confirm to you that many hedge funds, lobbying organisations and private equity organisations are here every day, every night, every time. But I think this House must now insist that the Commission – and that is you – come up, before the end of the year, with a total regulation; this is the first paragraph covering all financial actors.



  Klaus-Heiner Lehne, rapporteur. − (DE) Madam President, ladies and gentlemen, so great is the transparency of funds that the well-endowed rating agencies, the even better-endowed boards of banks and the more meagrely endowed regulatory authorities no longer knew what was going on. That is how transparent things are! The fact that we need to act here is self-evident and needs no further justification.

Commissioner, you addressed the question of the position with regard to short sellers. It is not a matter of whether the short sellers themselves lose out at the end of the day. The point is what they set in motion and what damage it might have caused. It is really about the effects of their actions on others. That, indeed, is precisely why the regulators in numerous countries have reacted.

As various Members have said, it is about ordinary people, about pensioners and taxpayers. I must re-emphasise that we are nationalising losses, and that cannot be right.

My report, like Mr Rasmussen’s report, contains a large number of very specific proposals. In my case, they mainly relate to issues of company law. It is relatively easy to draw up and implement proposals on these issues. In essence, the only thing that need be done is to supplement the existing rules. Nor is it in any sense a matter of discriminating against some hedge funds or other.

At the present time, we have a situation in Europe – and no one disputes this – in which these alternative financial instruments are regulated by national law but are regulated in very different ways in some instances. It makes perfect sense to incorporate them all into a European financial market and regulate them uniformly. To call for more specialists’ reports now, when we have already been discussing the matter, as Mr Rasmussen said, for three years, when we in this House already have specialists’ studies, when the Commission has been dealing with the matter and we have held hearings about it, is, I believe, pointless and would only waste time. There is truly a need to take real practical measures. The situation demands action.

Let me make one more remark, which relates to government funds. I entirely agree with you. We need government funds, and in the long term we shall also need government funds from other countries, from countries outside the EU, because otherwise it will probably become impossible in the long run to fund infrastructure expenditure in Europe. That is a matter in which you surely have the support of the Committee on Legal Affairs too, although it is not directly connected with the subject we are discussing today. We have always backed initiatives that the Commission has taken in this domain, and we shall continue to do so.


  President. – The debate is closed.

The vote will take place tomorrow.

Written statements (Rule 142)


  Corina Creţu (PSE), in writing. – (RO) The fact that the lack of transparency concerning hedge funds and private equity funds has led to a flare-up of the current economic crisis is not up for debate. It is one of the elements which have led, among other things, to the current impossibility of an accurate evaluation of the debt and loan balance of many financial institutions. For years on end these financial institutions have wrecked economies and carried out aggressive take-overs, ignoring not only medium and long-term economic consequences, but also the social consequences of their activity. Lured only by the prospect of short-term profit, they orchestrated the breakdown and sale of entire companies, disrupting national economies and toying with monetary markets, in total disregard for transparency and rules. It is clear that these funds must be regulated and that an appropriate level of transparency must be put in place. This is necessary not only for the stability, health and proper functioning of financial markets, but also in order to decrease the risk threatening those financial markets which are in an early stage, in developing countries, and therefore lack stability. This crisis has proven how dangerous the consequences of laissez-faire are, and how important it is to ensure the future transparency of financial activities.


  Daniel Dăianu (ALDE), in writing. – (RO) I commend the rapporteur for his tenacity in pursuing a topic against stiff opposition from various vested interests. The deepening financial crisis has structural causes which are linked to a huge overexpansion of financial transactions during the past decade, which have been based on a flawed securitisation process, reckless risk-taking, a breakdown of due diligence and lack of understanding of systemic risks. The problem with hedge funds, in particular, is that they contribute to increasing systemic risks. The claim that it is the money of investors which is at stake is only a very small part of the whole story. Very high leveraging and focus on short-term gains increase overshooting. But, even worse, the speculative nature of such operations produces instability and can damage financial stability, as has been clearly indicated by the current crisis. It makes sense to bring the activity of hedge funds (and equity private funds) within the territory of regulated financial entities. Leveraging should not be unconstrained. Likewise, hedge funds should provide the regulatory and supervisory authorities with full information on their transactions.

Last updated: 18 November 2008Legal notice