Local view for "http://purl.org/linkedpolitics/eu/plenary/2004-01-15-Speech-4-036"
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"en.20040115.2.4-036"2
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"Madam President, the term ‘sophisticated alternative investment vehicles’ is such a sophisticated phrase that I shall replace it with the expression ‘hedge funds’.
The Socialist Group does not consider hedge funds in particular or derivatives in general to be particularly wonderful. These instruments are to some extent useful in covering certain investment risks or risks linked to international trade. Given, however, that all of these financial instruments are highly speculative – indeed with very limited leverage, phenomenal sums can be raised – one simply has to be careful. My Group supports the Commission’s prudent approach in this regard and we agree with the argument that Commissioner Bolkestein has just put forward. Enron, Parmalat and other scandals have reminded us that sophisticated products often conceal highly sophisticated financial wrongdoing.
The near-collapse of the Long Term Capital Management hedge fund revealed the scale of the risks involved. At the beginning of 1998, LTCM had USD 4.8 billion of its own funds to meet liabilities worth USD 120 billion, in other words, a leverage of 25. By 23 September 1998, LTCM’s net assets had fallen to USD 600 million, with liabilities of around USD 100 billion, or a leverage of 167. The rescue of LTCM, which entailed neither penalties nor consequences for the fund managers, avoided a chain reaction, but who can guarantee that similar events will not happen again, this time on a scale that will make any rescue impossible?
The capital with which LTCM started operating essentially came from banks which were, in theory, monitored. We must, therefore, toughen the prudential requirements set for banks when they underwrite speculative funds. Because many of these funds are domiciled in offshore centres that are unregulated or barely regulated, the simplest way of countering hedge funds that wish to remain opaque would be to make it more difficult and onerous for them to obtain refinancing from banks operating in countries covered by the Basle Accords. Bank loans could be strictly limited, in line with the amount of collateral provided by funds domiciled offshore. The Financial Stability Forum, the International Organization of Securities Commissions and the Basle Committee for Banking Supervision have all made important recommendations and suggestions on this matter, in particular in the Brok/Mayer report of January 2000. To date, none of these proposals has been translated into action.
Mr Purvis’s report seeks to arrange a comeback for hedge funds in Europe and to gradually open their products to ‘moderately affluent investors’. Personally, I am not quite sure what a moderately affluent investor is, but my group is not opposed to such a move, on the condition that there is much more transparency as regards hedge funds and that national and, in future, even European regulators authorise and monitor this process. Indeed, we must not forget that in this murky area, significant gains necessarily entail substantial risks.
I shall finish, Madam President, by thanking Mr Purvis for this report which is, on the whole, extremely constructive. I thank him for his open-mindedness and for having accepted some compromises, which will allow my group to vote in favour of his report. I will also end by addressing my personal congratulations and those of my group to Mrs Kauppi, on her report, but especially on the happy event that has just been announced."@en1
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