Germany Battles On Against Hedge Funds

by Ulrika Lomas, for LawAndTax-News.com, Brussels

05 June 2007

Despite Germany's failure to get the G8 Finance Ministers to impose a Code of Conduct on hedge funds at Potsdam last month, Deputy Finance Minister Thomas Mirow told a conference last week that hedge funds should be more transparent.

And Bundesbank President Axel Weber told another conference later in the week: “It is time to actively develop ambitious best practices maybe in the form of a code of conduct.” But he emphasized that he wasn't expecting any immediate action. “This is a medium- to long-term process,” he said. “What we want to do is to start a discussion process.”

Germany is likely to raise the issue again at this week's G8 summit in Heiligendamm, although Chancellor - and host - Angela Merkel is reported to have accepted that progress will be slow.

Prior to the Potsdam meeting, Germany (hosting the meeting) had included a mention of a code of conduct in its preparatory draft of the communique, but could not have been surprised at its omission. "Even if this term will not be used in Potsdam, don't think that Germany has given up on this issue," said a German official before the meeting. As expected, Germany failed to wring a hedge fund code of conduct out of the meeting, having to be content with a renewed commitment to 'vigilance'.

"We continued our discussion on recent developments in global financial markets, including hedge funds, which have contributed significantly to the efficiency of the financial system," said the closing communique. "Given the strong growth of the hedge fund industry and the increasing complexity of the instruments they trade, we reaffirmed the need to be vigilant."

German Finance Minister Peer Steinbrueck has said he wants the outlines of a code of conduct in place by the end of this year, and he may yet get it: Jean-Claude Trichet, president of the European Central Bank, told the Financial Times recently that a voluntary code could cover risk management within hedge funds and the exchange of information between funds and their bankers and between funds and their investors. And at last month's Ecofin meeting in Brussels, European finance ministers, while agreeing not to regulate hedge funds, spoke in favour of a code of conduct to guide their behaviour. New French President Sarkozy has consistently spoken out against hedge funds: "We didn't create the euro to have capitalism without ethics or morals," he said recently, attacking “these aggressive [hedge] funds ... that buy up a company, sell it off in pieces, sack 25% of the staff in the meantime, collect 25% profit and create zero wealth.”

The United States, Japan, Britain, and Canada remain opposed to any interference in the workings of the markets. "Central banks and other regulators should resist the temptation to devise ad hoc rules for each new type of financial instrument or institution," said Fed chairman Ben Bernanke in May.

Germany in particular has been pushing for greater controls over hedge funds ever since the Deutsche Boerse affair in 2005, which saw investors remove Chief Executive Werner Seifert and Chairman Rolf Breuer, leading the SPD's Franz Muentefering to compare the funds to locusts.

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