Phoenix of the Vanities – the Bond Markets as ‘Masters of
Pauline Schnapper (Université Paris 3) et
David L. Baker (University of Cincinnati)
L’absence de contrôle démocratique de la finance dans le mondeanglophone:
une analyse de la crise actuelle dans une perspective historique
13 avril 2012
Organisé par le CREC et le CERVEPAS, CREW,
Université Paris 3
Maison de la Recherche, 4 rue des Irlandais,
75005 Paris, salle extérieure
“We wanted democracy, but we ended up with the bond market.”
Polish wall graffiti, quoted in the Economist “The World Economy,” October 7, 1995, p. 4.
"Speculation is what markets are about. It is simply an opportunity to make money. Financial markets are amoral, feral beasts. If they see a weakness, they go for it. And Greece was seen as weak."
Iain Begg, Chatham House. http://www.time.com/time/world/article/0,8599,1968308,00.html#ixzz1rAsuOUO1
The key failure of the current financial system is that it privatises gains, whereas it socialises losses.
Gerhard Illing; The Economist: 22/10 2008:http://www.economist.com/debate/days/view/229
Modern money is debt and debt is money.’
Philip Coggan, Paper Promises: Money Debt and the New World Order 2011
Our paper examines the world of global bond and asset trading, assessing its roots within the dominant Anglophone form of financial political economy and evaluating what democratic controls have been, or might be, exercised over it since the crash of 2007, with special attention to the European Union. In the process we examine the role and power of global hedge funds, a majority of which are registered in Tax Havens and managed from New York and London, in spreading the Anglo Saxon neoliberal financial market methods and ethos across the globe, including their role in the present sovereign debt crisis in the Eurozone.
Such was the supposed power of the bond markets in curbing Clinton’s spending plans that his adviser James Carville joked: "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody." Author Tom Wolfe, seeking to portray the ultimate amoral financier in his Bonfire of the Vanities, named his anti-hero Sherman McCoy – himself a bond trader – as a "master of the universe". Lord Myners, City Minister in the last Labour Government, former chairman of Marks & Spencers and hedge fund manager, said of these shadow bankers:
'I have met more masters of the Universe than I would like to, people who were grossly over rewarded and did not recognise that. Some of that is pretty unpalatable. 'They are people who have no sense of the broader society around them.[i]
Institutional investors (i.e. pension funds and major banks) hold monies in the Bond Markets in the form of sovereign debt as a safe low return haven for their funds. They are not the central focus of this paper. Hedge Funds hold sovereign debt bonds (amongst other investments) in order, where possible, to manipulate the markets and bet against weak economies like Greece and Spain, hoping to take large profits from their eventual failure – that’s one reason why the bond markets wield power in the present Eurozone crisis. They are the focus here.
We will argue that those bond markets influenced by hedge funds and similar financial market actors have a destabilising influence in global markets and in recent years have been instrumental in creating and spreading excess liquidity and risk through the global economy and pursuing the weaker Eurozone economies exclusively for profit without regard to the damage this is doing to the wider political economy of Europe and beyond. We will also argue that relatively little has been achieved by EU policy makers to reduce the power of the shadow banking sector to continue to create and spread excess liquidity and risk through the global financial system.
The impact of the so-called "secondary market" in bonds is crucial to this process, as investors bet on future values of assets, including national currencies and sovereign debts and adjust their portfolios by buying and selling these bonds. A wide variety of future asset values are traded including currencies, stocks, resources, oil, property, and fine art. From a base of virtually zero in 1985 this market rose to $250 trillion in 2005, against a global output of $45 trillion. By the time of the financial tsunami in 2007-8 a large number of global non-financial corporations had been drawn into the market, with General Motors becoming the largest private mortgage company and Enron, an energy distribution company morphed into an energy futures company, before collapsing in 2002 offering an unheeded warning of what was to come.[ii]
On October 12th, 2005 Alan Greenspan, the then Federal Reserve Chairman, delivered a speech to the National Association for Business Economics, in which he referred to the:
"…development of financial products, such as asset-backed securities, collateral loan obligations, and credit default swaps, that facilitate the dispersion of risk… These increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago." [iii]
Greenspan was the archetypal ‘Master of the Universe’ a merchant banker and bond trader who had risen to the top of the global financial system as Federal Reserve Chairman, yet within two years his essentially Anglo-American Business model of finance based capitalism (also referred to as the ‘Greenspan Doctrine’) had catastrophically crashed, bringing the entire world economy close to complete collapse necessitating massive state funding to bail out the entire system. And at the very heart of the clever and sophisticated system he described in such glowing terms lay the global bond markets and in particular a growing number of influential and powerful ‘hedge funds’.
Hedge Funds and Shadow Banking
Hedge funds are part of the wider ‘shadow banking’ system, along with private-equity and structured-investment funds, and are largely an Anglophone phenomenon, with over 80 per cent of funds operating under US and/or UK management in London and Eastern Seaboard USA, while registered in off-shore tax havens such as the Cayman Islands, Bermuda and Jersey – mostly under UK or US arm’s-length jurisdiction.[iv] These companies took full advantage of the growth of unregulated over-the-counter trading opportunities created in the deregulated London and New York markets to engage in ‘financial innovations’ including ‘collateralised debt obligations’, ‘special investment vehicles’, ‘hedging’ and ‘swapping’, in order to speculate over a variety of asset values including reselling debt and credit default swops and betting on the burgeoning foreign exchanges.
Ultimately millions of members of the general public in the UK and US were drawn into the housing asset speculation bubble, bidding up prices, taking our excessive mortgages and employing equity release schemes to consume luxuries, leading to the creation of toxic mortgaged backed securities which brought the system crashing down. Meanwhile the major global banks underwrote the schemes, and invested in the toxic assets without understanding the erroneous risk-reducing algorithms underpinning them, inspired by what J. K Galbraith has characterised as an: ‘inordinate desire to get rich quickly with a minimum of physical effort.’[v]
It has long been suspected that hedge funds pose a systemic risk of damaging other financial institutions, increasing market volatility and generating sudden liquidity excesses in key markets, a danger increased with the increasing spread, complexity, and electronic speed of operation of the global financial system.[vi] There were a number of clear warnings of the systemic dangers they posed with questions raised about their role in the Asian financial crisis in 1997 and the failure of US based long-term capital management hedge fund in 1998. In particular, their tendency to engage in ‘herding behaviour’ copying the mistakes and excesses of their rivals and subject to spreading and reacting to false rumours, was widely discussed. In addition, their role in undermining for their own short term profit a planned merger between the Deutsche Borse and the London Stock Exchange, led by the harmless sounding Children's Investment Fund Management hedge fund, revealed the interventionist power such funds could wield over corporate decision making in Eurozone countries.[vii] Moreover, since then the huge fraud perpetrated by Bernard Madoff’s hedge fund/Ponzi scheme, defrauding billions from investors, has left a further stain on an already tarnished industry.[viii] Nevertheless, Lucia Quaglia suggests that hedge funds were not the main cause of the global financial crisis in 2007, but she also accepts that they played a part in deepening it, “mainly through a transmission function and notably due to the massive selling of shares and short-selling transactions”.[ix]
Hedge funds are at the heart of the global ‘shadow banking’ system, operating largely under the radar of both domestic and global banking laws, with a majority channelling their vast profits through tax havens. As such they are not amongst the big names of the orthodox banking industry. Prior to 2007 Hedge funds were not viewed by the global authorities as a systemic risk to the financial system since the risk of failure was seen as carried directly by investors and their associates. In addition, since the hedge fund investor base has been largely restricted to institutional or highly savvy private investors, this caused regulators to place hedge funds outside a number of vital investment protection and disclosure rules. However, this does not mean that they are in fact insignificant. Take the case of ownership of Greek sovereign debt:
“European banks own most of the 200 billion euros ($263 billion) of Greek debt held by non-government investors. Hedge funds, pension funds, sovereign wealth funds and other “non- regulated investors,” own a further 60 billion euros, according to estimates by Pavan Wadhwa, JPMorgan Chase & Co.’s head of global interest-rate strategy.”[x]
Benefitting from Anglophone led neoliberal developments in the 1980s and ‘90s, especially the ‘Big Bang’ in the City of London in 1988 and its New York equivalent, and the subsequent ‘light touch’ regulation this introduced, hedge funds grew by a factor of 50 in assets values from $20 Billion in 1997 to close to $2 trillion+ in 2007. In the process they have become central creators of private liquidity and drivers of prices in global financial markets.[xi] The number of funds also grew exponentially from around 600 in 1990 to almost 9,000 in 2008 and the nature of their trading positions also changed:
"…. in 2001 and 2002, as hedge funds moved out of equities and into currencies and energy futures, shorted a falling dollar and exploited remaining interest rate differences through the yen carry trade. These conditions were reinforced over the next few years by generally rising asset prices as there was more money than good assets in most markets, helped by the liberation of global capital which was facilitated by deregulation and the growth of savings in larger fast-developing countries like China and India."[xii]
These funds often act covertly, leveraging profit from any traded commodities ranging from oil to currencies and government debt, seeking to remain outside national and global regulatory systems, a phenomenon often known as ‘vulture capitalism’ since they seek out the weak institutions and destroy them for profit. Part of this is asset stripping in which private equity groups take over public or private enterprises, reorganise them, lay off workers, strip out saleable assets and then sell them back into the public domain for more profit.
Seen in their own terms, of course, like the vulture in the natural world they do the world economy a service by removing the weak, preventing infection, and keeping the system functioning at peak performance. Since the Crash of 2007 bond market dealers have argued that they are simply keeping the global economy ‘honest’ by forcing recalcitrant government to correct their errors and return the system to perfect free market equilibrium. From this perspective their chosen tools (some argue weapons of financial mass destruction) of ‘shorting’, ‘leverage’ and ‘derivatives’ are merely employed to correct price anomalies amongst various asset classes.[xiii]
They also claim that they inflated the global economy prior to 2007 in a positive fashion by releasing funds for venture capitalists to start up new businesses and for governments to invest in infrastructure. From this perspective, hedge funds are simply market ‘traders’ and ‘arbitrageurs’, buying and selling underpriced/overpriced stocks and other traded commodities. This perspective asserts that hedge funds help perfect market operations because their arbitrage activity helps improve the price discovery process. Similarly it has been suggested that hedge funds’ willingness to engage with new and complex markets including credit derivatives, distressed debt, means that they provide forms of liquidity that risk-averse investors avoid, in so doing limiting the exposure of orthodox banks and other major financial institutions.[xiv]
Others claim that their effect is actually negligible, since they manage only 2% of all the assets in the financial sector. (Although the entire off balance sheet "shadow banking" sector turnover was some $60 trillion in 2010, roughly half the global banking industry.[xv]) However, in recent years between 25 and 50 per cent of all activity on the major financial markets and exchanges originated from their trades[xvi] and in 2005 up to 40 per cent of trading on the London Stock Exchange related to hedge funds’ use of derivatives, facilitating betting on changes in stock prices without the necessity of actually owning the shares.[xvii] High-frequency traders use computer algorithms in order to trade literally thousands of shares in milliseconds, a practice that accounted for more than 50 percent of daily stock trading in the U.S. in 2010. In 2007 King and Maier suggested that hedge funds represented 25 per cent of volumes in high-yield debt, 60 per cent of credit derivatives, 45 per cent of distressed debt and emerging-market bonds, and 32 per cent of leveraged loans.[xviii] Part of this is the selling on of risk between parties, enabling risks to be divided up and repackaged, generally termed derivatives. For obvious reasons their preferred self-description is that of market ‘players’.
The most significant hedge funds are relatively few in number with the largest 100 accounting for 65% of the total assets in management in 2006 and in exchange for their skills leading Hedge Fund owners and managers have obtained extraordinarily personal returns in recent decades, in some cases running into billions of dollars a year, rewards which have brought them political influence in the highest places, not the least amongst governing elites in the west (witness hedge fund owners on David Cameron’s published dinner party list). For Will Hutton the present financial system:
‘consists of what are essentially gambling chips, such as credit derivatives, options, swaps, contracts for difference and stock lending for short selling. These are used by a vast global hedge fund industry to bet on movements of prices in the first financial system – shares, currencies, interest rates and commodity prices’.[xix]
Under this form of ‘casino capitalism’[xx] trading takes the form of rampant speculation which far exceeds in total the value of transactions necessary to finance existing world trade, since the main drive is to maximise the return on capital for the bondholders, rather the maximum financing of global trade and commerce. That is why such a huge asset bubble was created in the global marketplace prior to 2007, in which the valuations of commodities and assets far outweighed the annual global value of productive goods and services. And that is where much of the ‘money’ went to after the crash – it simply disappeared as the value of the assets was marked down to their correct junk status.
The manner in which hedge funds operate in markets has caused Ertürk, Leaver & Williams to plausibly characterise hedge funds as akin to ‘war machines’ drawing on the work of Deleuze and Guattari (1988) and in particular their notion of a ‘nomadic war machine’:
“All of this suggests sophisticated guerrilla tactics and a war of movement rather than a war of position…… Here. Hedge funds use shorting and derivatives like options as a way of exerting power, threatening, manipulating other financial actors. This stands in contrast to the enduring image of hedge fund as ‘trader’, ‘arbitrageur’ or gambler”.[xxi]
These funds were are also implicated in ‘insider trading’ since a high proportion of all merger announcements are prefaced with abnormal share price moves emerging from options markets where hedge funds are often the key players.[xxii] Viewed In this light, hedge funds are much more than simply skilled market traders and well informed operators, rather they are market manipulators of those trades, employing shorting, leverage, derivatives, and media rumours as ‘weapons’ more than financial tools. This was reflected in the fears raised in the European Parliament in 2005 that hedge funds were obtaining voting rights in companies in which they already held an overall shorting position, raising the prospect of conflicts of interest.[xxiii] And there have also been claims that ‘hedge funds often purchase small syndicate stakes in firms precisely to acquire non-public information to aid them in arbitrage trading.’[xxiv]
By the end of 2008 it was widely reported that hedge funds were exploiting the lack of confidence at the peak of the credit crisis by spreading false rumours about major banks, including Barclays. HBOS and Bradford & Bingley also came under covert attack from hedge funds whilst attempting to raise money from shareholders. Their shares were ‘short sold’ forcing down the price before being bought back by the same investors. Forced by the government to disclose their identities – revealed as Harbinger, Tiger Global Management, GLG - it was further revealed that they never actually owned these shares, but rather borrowed them from pension funds to destabilise the market in order to make high profits before returning them to their owners with a fee included. ‘Share-loans’ were believed to exceed £7.5 trillion in 2008. The discovery of this practice caused UK regulators to ban short selling in 2008 to try to forestall profit taking from the act of provoking a self-fulfilling climate of fear. Will Hutton sums up the current sceptical attitude of some toward these funds:
One cynic mocked that the only unifying definition of hedge funds is that they are vehicles to enrich the people risking others' money; with a 2 per cent management fee and a 20 per cent share in any investment profits, they certainly do that…… Their pitch to investors - from an insurance company such as Norwich Union, to company pension funds, sheiks, Russian oligarchs, the British aristocracy and anybody with sufficient cash - is simple. They set out to make a return of 30 per cent a year any way they can in no-holds-barred, hyper-aggressive financial gambling. They take positions in any share, financial instrument or commodity you can name. When they were small you could argue they were a justifiable irritant, challenging and punishing governments and companies alike, who had got themselves into unsustainable financial positions. But now they are becoming the mainstream, degrading the operation of capitalism, turning it into a casino, reducing people's lives to the chips.[xxv]
The central political economy truth to be grasped from all this is that the process of Anglo-American financialization since the late 1980s was radically different from all earlier forms of rentier capitalism (in terms of oversight, methods , risk and scale) and also from that of most of the other leading world economies. Nor has the onset of the global recession halted, let alone reversed this process.
Crucially, in the post-1990s world awash with funds from surplus generating creditor nations (Japan, China, South East Asia, and the sovereign wealth funds of leading Arab nations and also Norway) and with the dollar acting as a proxy reserve currency representing a safe haven, it was the Anglo-American financial centres in London and New York that received the lion’s share of this investment capital, seeking safe havens and high returns for these high savings economies. And it was in these two centres that the most exotic (and dangerous) financial packages were created and promoted as high return ‘risk free’ solutions, supposedly protected by sophisticated risk spreading Credit Default Swops and other financial engineering packages. As banker Michael Pomerleano points out.
“Soon Mortgage Backed Securities (MBSs) were seen as one component of a broader class of collateralized-debt obligation (CDO). The practice of dividing expected financial payouts into tranches and recombining them in new synthetic instruments reached the point where neither a security’s seller nor buyer might know its precise risk characteristics. As in every period of financial excess since the dawn of time, lenders were reassured by the fact that others were using the same conventions. Many types of intermediary – private-equity funds, investment banks, and commercial banks – set up sub-prime and CDO funds, either directly or through hedge funds.”[xxvi]
In the process huge amounts of baseless endogenous liquidity was created in the shadow banking system and distributed through the financial systems of the entire global economy, even infecting the German and French banks, thought by their governments and peoples to be immune from Anglo-American financialisation. In some high profile cases outright fraud on a monumental scale has been linked to hedge funds, in particular Bernard Madoff’s $50bn hedge fund/Ponzi scheme.[xxvii] As Joseph Stiglitz has put it:
“The financial sector accounted for more than 30% of corporate profits in recent years—and yet, from a longer-term perspective, has contributed nothing—as the losses since mid-2007 have more than obliterated the profits of the boom years. The misalignment of private returns and social returns is obvious—while many of the industry’s executives are far poorer than they thought just a few months ago, most have done, by the standards of ordinary citizens, very well indeed.”[xxviii]
In the wake of the crash of 2007-8 a second crisis has emerged on the back of this process which has had a particularly harmful effect on Eurozone currency members – the growth of a sovereign debt crisis. And once again the bond markets and hedge fund industry have played a significant role in this ongoing process, buying Greek debt and insuring against its loss by default while refusing to sign up to the Eurozone ‘haircut’ of creditors in the hope that it would trigger payments under their default swops.
Hedge funds also impacted on the wider financial system as global banks and other high finance organisations have sought to emulate their tactics and organisational forms to increase their profits, spreading the hedge fund philosophy and methods across the financial system and in the process blurring traditional distinctions between traditional banks, investment banks and hedge funds. Thus, as Ertürk, Leaver & Williams argue.
“….hedge funds exist in a symbiotic relation with regular institutions like banks, who supply liquidity and vital services in return for a fee (Aldridge 2008) or pension funds which lend their shares for a fee. Hedge funds’ connection with and reliance upon, other institutions ….. complicates the notion that they act alone in financial space…..The closest, most important relation is with investment banks which act as prime brokers for hedge funds and supply a range of essential services and profit hugely from servicing hedge funds. For example, prime brokers lend hedge funds the securities they need to undertake short sales, provide debt to allow hedge funds to leverage their investments.”[xxix]
The Bank of England estimated that hedge funds had generated $25.8 billion in revenue for major investment banks in 2005 through offering their services in prime brokerage deals.
A European Commission report on hedge funds in 2008 suggested that: “Hedge fund investment techniques have recently been borrowed by mainstream asset management (130/30 funds or funds of hedge funds) and in recent years they had also become increasingly accessible to affluent and retail investors in diluted form.”[xxx] One of the key arguments that hedge funds should be policed by central authorities to the same standards as mutual funds lies in the fact that their investments have become increasingly available to lower net-worth parties and individuals.
By the time of the crash in 2007 all the leading investment banks such as Goldman Sachs, Lehman Brothers and Citi Corp had created their own internal hedge fund departments, challenging free standing hedge funds at their own game - although events proved them to be a high risk form of investment given the major losses many such banks experienced from their internal hedge fund departments when the Crash finally occurred. Serious doubts were raised after the crash over the co-existence of hedge funds and traditional banking practices within the same institutions banks.[xxxi]
Frank Partnoy captured the collapse of control within the entire banking system in 2003 in his prophet Infectious Greed:
"In just a few years, regulators had lost what limited control they had over market intermediaries, market intermediaries had lost what limited control they had over corporate managers, and corporate managers had lost what limited control they had over employees. This loss-of-control daisy chain had led to exponential risk-taking at many companies, largely hidden from public view. Simply put, the appearance of control in financial markets was a fiction."[xxxii]
A country’s Sovereign debt represents the total value of bonds issued by the government to fund national investment and/or cover shortfalls in current account revenue, often denominated in a foreign currency and guaranteed by the country of issue. Government bonds have often been regarded as largely risk-free bonds, since a government can, in theory, raise taxes or reduce spending, or at least print money to redeem the bond at maturity. In some cases, governments may consider provoking inflation to pay down the debt. Because of this governments today issue inflation-indexed bonds, protecting investors from inflation by increasing the interest rate as inflation increases. Central banks can also buy government bonds in order to finance government spending or reduce national debt. Private individuals and corporate investors in sovereign bonds issued in a foreign currency accept the additional risk that the country may not be able to redeem the bonds in the nominated foreign currency.[xxxiii]
The debt of leading economies, such as the United States, UK, France, Germany and Japan, are traditionally considered largely risk free, as against the debt of less developed countries which carries greater risk and therefore are charged higher rates of interest/return. Investors attempt to weigh up a government's stability, and the potential of the country entering into default. Defaulting on sovereign debt is more complicated than defaults on corporate debt since national assets cannot be seized to reclaim investments. Instead the terms of the debt will be renegotiated, often leaving the lender with considerable or total losses. The alternative scenario – a major default on the debt by a state - can have considerable impact on international markets via distress caused to global banks holding the debt and on a the defaulting country's economy and society, which will be locked out of the bond markets at normal rates, or completely excluded from them.
Examples of sovereign debt default exist throughout modern history. Greece has spent more than half its existence in default and many Latin American countries come close to this figure. It has been estimated that in 1947 states which accounted for 40% of global GDP were in default on their debts and Turkey has defaulted on its debts five times.[xxxiv] In more recent times major defaults have occurred in North Korea (1987) Russia (1998) Argentina (2002) and most recently Greece (again) which passed into technical default in 2012 under the terms of the Eurozone ‘rescue’ agreement.[xxxv]
Some economists have challenged the fashionable neoliberal politicians’ and populist media notions that rising debt levels after 2007 were the result of profligate government spending caused by ‘state capture’ by ‘rent seeking’ groups such as welfare dependants and state employees. Instead, the rapidly increasing national debt levels are largely due to the cost of bailing out the finance industry and the economic recession that followed in its wake reducing tax takes. Spain had low government debt and a budget surplus on the eve of the crisis. Further evidence for this lies in the fact that the average fiscal deficit for the eurozone in 2007 stood at 0.6%, growing to 7% as the Credit Crunch unfolded, with average government debt rising from 66% to 84% of GDP.[xxxvi] Paul Krugman famously identified Greece as the single country where naked fiscal irresponsibility lies at the heart of the crisis.[xxxvii]
The other crucial aspect of sovereign debt crises is that they almost always turn into banking crises, and in this case since this originates in the heart of the old developed world it risks turning into a global banking crisis to match the original crisis of 2007-8. And centre stage in this are the European banks which hold more than $1.3 trillion of Spanish sovereign debt, with German and French institutions currently hold more than half of this. In addition, the interconnectedness of the global financial system means that when one or more nations default on their sovereign debt, the banking systems of creditor nations face losses. Thus in October 2011 Italian borrowers owed French banks $366 billion meaning that the French banking system would come under significant pressure, affecting France's creditors and so on – a process often referred to as financial contagion.[xxxviii]
The Eurozone Sovereign Debt Crisis
During the pre-2007 boom years major Banks were incentivised to facilitate the growth of sovereign debt amongst the weaker euro zone countries through the high fees earned for underwriting such debt sold to other investors. This practice continued into 2009 and since 2005 a number of banks in Europe and the US gained $1.1 billion in fees from selling bonds on behalf of European governments. According to Thomson Reuters and Freeman Consulting Services….. “There was encouragement from European authorities for banks to load up on more debt, because it was seen as safe,” said Nicolas Véron, a senior fellow at Bruegel, a research firm in Brussels. “In hindsight, it was unwise risk management.”[xxxix]
Losses incurred by European banks have been significant. In 2011 Société Générale marked down €333 million ($450 million) of its Greek sovereign debt cutting its exposure to €575 million, from €2.4 billion, while BNP Paribas, reduced its Italian sovereign debt exposure by 40 per cent in five month, down to €12.2 billion. In effect, southern European debt was treated exactly as if it were German debt, although the fact that they were higher yield bonds signalled that they were in fact of a higher risk factor.
The Eurozone sovereign debt crisis represents the second stage of the ongoing global financial meltdown of 2007-9. It was caused by a number of intersecting factors: the globalization of finance; lax credit facilities which continued until 2008 which encouraged high-risk investments and borrowing; trade imbalances both within the EU and internationally; real-estate bubbles that European banks became major player in funding; insufficient economic growth and policy choices related to government revenues and expenses, especially the austerity policies imposed from within and without members of the Eurozone.
And at its heart lay the Greek debt crisis. Representing a mere 2.6% of euro-zone GDP, it seems impossible that Greece, clearly a peripheral economy, could possibly threaten to undermine the world’s largest internal market. The crisis first emerged in October 2009 when a new socialist Greek administration announced that its conservative predecessor had falsified the national statistics for GDP and debt, revealing that the actual budget deficit was 13.6% and the stock of debt was 115% of GDP, which has since risen to 160% under Eurozone imposed austerity measures. In effect, European sovereign debt has become the new subprime equivalent.
It wasn’t long before the hand of the currency and bond markets were revealed behind this deceit - especially that of Goldman Sachs (GS) in hiding Greek debt which came under intense scrutiny in February 2010 when the BBC and Der Spiegel claimed that GS had devised a derivatives package that circumvented Maastricht rules, masking the extent of the government deficit:
“The deal involved so-called cross-currency swaps in which government debt, issued in dollars and yen, was swapped for euro debt for a certain period – to be exchanged back into the original currencies at a later date…..This enabled Greece to receive a far higher sum than the actual euro market value of $10bn or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1bn for the Greeks. This credit disguised as a swap didn’t show up in the Greek debt statistics. As a result, in 2002 the Greek deficit was calculated at only 1.2 percent of GDP.”[xl]
Since then Greece has been frozen in a spiral of decline where it cannot grow because of fiscal austerity and lack of high value added exports. It cannot devalue either, because it is in the euro currency zone, which is pegged to the powerful German economy. Finally, its people are highly resistant to enduring the savage cuts in jobs, wages and services and steep rises in personal taxation deemed necessary by the Eurozone leaders to ‘restore’ competitiveness to its economy, while witnessing rich Greeks take their money out of the country and global bankers remaining seemingly untouched by the aftermath of the Credit Crunch.
In April 2010 Greek sovereign debt was downgraded three levels to junk bond status and the costs of borrowing to cover past and future debt rose dramatically. Nor is Greece alone in the Eurozone; Portugal maintains a high budget deficit and shares Greek problems of competitiveness, Spain has a lower sovereign debt ratio, but it is unable to restructure its weak tourist dependent economy and Italy, also heavily indebted, lacks an ability to export itself out of the crisis.
To add to the general difficulties, the majority of eurozone government debt is held by private banks and hedge funds via the bond markets and as this debt increases and the debt crisis grows the value of these assets falls, threatening to spill over into a second banking collapse. In fact, as suggested above, almost all sovereign debt crises become bank crises at some point.
Coincidentally, the Euro currency itself came under attack in early 2010 from global hedge funds hoping to make money out of the growing sovereign debt crisis in Europe. The Wall Street Journal reported that hedge-fund managers had made a number of "large bearish bets" against the euro in February 2010.[xli] Believing (correctly) that Greek government bonds was the weakest link of the eurozone and that “Greek contagion” might spill over into all sovereign debt the value of the Euro was undermined by a wave of selling, reducing its value to under $1.36. Since no active collusion between the funds could be proven the regulators viewed this as legal and proper market trading and took no action. This was followed by shadow banking speculative attacks on the Italian and Spanish economies causing severe difficulties in raising funds in the bond markets at reasonable interest rates. The German Chancellor, Angela Merkel, attributed some blame for the crisis to speculators remarking that "institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere".[xlii] But since hedge funds were not directly bailed out and a proportion were destroyed in the Crash, this misses the point.
Another factor feeding into the difficulties experienced by the weaker Eurozone economies are the rules governing membership of the Euro, which operates under a single monetary policy, which means that individual member states can no longer act independently, unlike the UK and US which are able to create money electronically in order to pay their creditors and stave off default. Of course, "printing money" devalues the currency, but it also makes exports cheaper, helping (all other things being equal) to improve the balance of trade, increased GDP and higher tax revenues in nominal terms. But, above all, it explains the continued ability of the UK and US to borrow on the bond markets at low rates. The only Eurozone country which escapes this financial straitjacket is Germany, where the continued strength of its export sector and lower debt to GDP ratios allow it to actually gain from the situation. Indeed by late 2011, Germany has been estimated to have made more than €9 billion out of the crisis as investors moved to safer, although almost zero interest rated, federal government bonds.[xliii]
While the actions taken by the European Central Bank (ECB) in 2011-12 in injecting liquidity into the European banks has gone some way towards answering the European banks’ problems, many economists, market operators and media commentators remain sceptical that unless the sovereign debt of the entire eurozone is successively ring-fenced, a major default could cause a meltdown of the European and then the global financial systems. And the German led policy of imposing austerity in a period of rising unemployment, threatens, in the view of such critics, including George Soros - Chairman of the Open Society Institute, and a pioneer of the hedge-fund industry - to tip the eurozone into a ‘vicious deflationary debt spiral from which it will be difficult to escape’.[xliv]
A real democratic debate on economic policy choices must be opened in France and Europe. Most of the economists who participate in public debates do so in order to justify or rationalize the submission of policies to the demands of financial markets.[xlv]
According to Dymski financial governance and oversight has two components: “prudential supervision, bounding the financial risks of a set of financial firms or markets; and lender-of-last-resort intervention, which involves defending the integrity of the financial system when it is subject to destabilization.”[xlvi] The Crash of 2007-8 certainly unleashed the second of these functions – a mass bailout of the financial intuitions, with all the issues of moral hazard that this raises. But the first function – prudential supervision and excessive risk limitation – has proved much harder to achieve.
German and French policy makers have long argued that direct regulation of hedge funds is necessary, since market failures and the lack of transparency in the sector could prevent market discipline from being effective. At a G7 meeting in 2007, the German government proposed global controls to promote greater openness and transparency over the shadow banking sector, seen as too secretive and beyond proper democratic oversight, but US treasury secretary Hank Paulson rejected the idea, arguing that the hedge fund industry would lose its cutting edge ability to innovate and inherent dynamism as a result. He preferred to rely on the traditional “due diligence" on the part of all who operated and dealt with and operated in the sector.
Again in at the February 2009 G7 meeting, Christine Lagarde, the then French finance minister, called for tighter regulation of hedge funds, concerned that the “momentum” towards regulation of the financial system had been lost. Since 2007, of course, the German and French position has been strongly supported by the evidence and Paulson’s position largely discredited, but in many ways little substantive regulation has occurred with regard to the shadow banking sector, which remains highly active, secretive and largely unregulated on a European, let alone a global scale.[xlvii]
The main regulatory responses – in Europe and elsewhere - have been to pump increased capital and liquidity to the banking system whilst largely ignoring the continuing problems generated by shadow banking. Very little policy has been developed to deal with cross-border regulation for instance. And none of the more far reaching forms of regulation, including a global ﬁnancial transactions tax, or a new form of Glass–Steagall Act, are gaining any real political traction:
"Tough new rules on capital requirements for banks -- known as Basel III -- are forcing banks to increase their safety buffers, while the U.S. "Volcker rule" bans overly risky bets by banks on financial markets. And opaque unlisted derivatives will have to be traded on exchanges in the future, rather than directly between banks in "over the counter" deals. But despite these efforts, large swathes of the financial system remain outside the remit of the regulators, even though they provide essential funding to banks, and were at the heart of the global financial crisis."[xlviii]
It appears from all this, that so strong is the ruling neoliberal orthodoxy that widespread recognition that self-regulation failed is outweighed by a continued belief in the self-regulating market rebalancing itself and also a related fear that regulation will impose additional costs to economic growth at a time of global economic crisis, backed up by furious lobbying from the hedge fund and wider shadow banking industry, not to mention the UK and US authorities. Finally, hedge fund managers often threaten to respond to any close supervision by relocating outside the EU, often citing Switzerland as a natural alternative base.[xlix]
In addition, many in authority believe that it is simply a case of obtaining better information about the activities of hedge funds. Thus, as Jacqueline Best suggests:
"Once again, the belief is that more accurate calculations and better information should ensure that market discipline functions as it should. ….The call for better and more accurate measurement and disclosure of ﬁnancial risks assumes that these risks are in fact capable of being fully or at least adequately calculated."[l]
Nevertheless, against all the odds, there have been some initial moves within the EU and Eurozone to place curbs on the freedom of off-balance-sheet banks to act freely in complete secrecy. For instance, in October 2010, the EU adopted a directive regulating alternative investment funds managers (AIFMs), including hedge fund managers.[li] But such policy remains largely ad hoc and fragmented in nature as Lucia Quaglia suggests: “the reforms enacted were not as far-reaching as one might have expected in the aftermath of the worst financial crisis since the 1930s….they should be seen as incremental changes, rather than path-breaking reforms.”[lii]
The bond markets are like crocodiles; it takes elephants to drive them back into their river. The elephant in this case is a powerful, determined sovereign… …. The eurozone does not have anything like such a sovereign. To create it is a political challenge, not just an economic one.”[liii]
“Good financial institutions are essential to a well-performing economy. Our financial institutions have failed us, with the predictable and predicted consequences. Part of the reason is inadequate regulations and regulatory structures. We can do better.”[liv]
There is little doubt that the past thirty years have witnessed the unfolding of a vast neoliberal experiment, led by the global finance industry, nor that this has had a significant impact on the nature and outcomes of that industry and the global economy. Thus, as Dymski has suggested:
“…the structural financial dynamics of the neoliberal era have deepened financial risk, led to more financial crises, and made financial governance less effective. Perverse interactions between risk and governance have arisen because of the tension between the prudential oversight and lender-of-last-resort dimensions of financial governance.”[lv]
The crisis also caused a sea change in EU attitudes towards financial services:
“….the crisis undermined some of the key assumptions of the market-making regulatory paradigm in the EU. It was a policy learning that largely contradicted the policy learning of the late 1990s and early 2000s, which had heralded the British model as a successful one for the EU in the struggle over the global competition for financial services. Prior to the global financial crisis, British policy-makers and their regulatory philosophy had been very influential in shaping the EU’s regulation of financial services…”[lvi]
The creation of the single market in financial services in the EU in 2007 represents a clear indication of the victory of the neoliberal coalition in the EU, headed by the UK. [lvii] This framework of market orientated multilevel governance has underpinned a number of largely unsuccessful attempts to police globalisation in the financial services.[lviii] In order to fully understand the reasons behind the manifest failure of the EU to legislate decisively on this vital issue it is necessary to separate out the various elements which have militated against moves to police shadow banking’s ability to destabilise the European and global financial systems through creating and injecting vast amounts of excess exogenous liquidity and inadequately secured risk into the global economy.
The first obstacle is ideological, embodied in the continuing ascendency - even after the Crash of 2007-8 - of the unfettered free market neoliberal orthodoxy of ‘efficient markets’ (sometimes called the American Business Model ABM), which supports hedge fund and shadow banking practices as necessary dynamic and productive elements of the global financial system.
The other side of this hegemonic belief system can be seen in recent concerted moves towards austerity policies to solve the sovereign indebtedness and economic stagnation of many post-Crash states, a clear continuation of the neoliberal ‘Washington Consensus’ which has governed macro policy in the west for many decades, with its view that to recover from economic crises, state authorities should maintain strict fiscal discipline and retrenchment, while permitting unfettered inflows of overseas goods and capital. This orthodox policy prescription also chimes in with the German predilection for fiscal discipline, linked to the historic fear of inflation at the heart of the German psyche.
The second obstacle is political – a complex mixture of divisions between the governments of the constituent nation states of the EU and Eurozone, fierce opposition from the US and UK to any measures which are seen as damaging to their national interests and a widely shared fear that, in response to legislation, the core shadow banking institutions will move entirely off-shore to Switzerland or the Caribbean, taking their jobs and taxation with them. It appears that the crisis did little to alter the pre-existing blocs of political/financial interests in the EU, centred on domestic political economies and the dominant national forms of financial capitalism – especially in the UK.
Locating her thesis in the wider scholarly ‘clash of capitalisms’ debate in the EU[lix] Lucia Quaglia contrasts the ‘market-making’ position of the UK and US with the ‘market-shaping’ paradigm of Germany, France, Italy, etc., the former emphasising maximising free competition and market efficiency and the latter preferencing financial stability, consumer protection and local/regional protectionism. The market-making approach relies on private sector self-regulation, while the ‘market-shaping’ position favours legislative/rule-based regulation by the public authorities.
"In the early 2000s, the market-making coalition was empowered by the introduction of the single currency, which increased financial market integration in the EU, and by the renewed competition between the EU and US in this field. In this context, the completion of the single market in financial services became a priority for the EU and the market-making, competition-friendly approach was regarded as the most successful……. The global financial crisis acted as an external shock that fundamentally altered the policy environment in which the competing coalitions operated. [lx]
But, while Quaglia sees the EU’s post-crash regulatory changes as significant when compared to the reforms in other sovereign jurisdictions: “the reforms enacted were not as far-reaching as one might have expected in the aftermath of the worst financial crisis since the 1930s. Hence, they should be seen as incremental changes, rather than path-breaking reforms.[lxi]
In addition, hedge funds engage directly and vigorously through the formal and informal lobbying processes, in concert with the orthodox banking sector, to prevent hostile legislation from reaching EU law. Thus, when the Commission proposed curbing hedge funds via the Alternative Investment Fund Managers (AIFM) Directive, the industry mounted a concerted public and private counter campaign under the auspices of the Alternative Investment Management Association (AIMA) and the European Private Equity and Venture Capital Association (EVCA). When the draft law reached the European Parliament in spring 2010, around 900 of the 1700 amendments submitted came from industry employed lobbyists:
"AIMA and EVCA claim their members played no role in causing the financial crisis and have employed a range of deceptive tactics to successfully make their case. For example, EVCA sent a letter to the Commission which appeared to be written on behalf of 700 small and medium sized enterprises, warning that the directive would damage for them. The vast majority of signatures on the letter coming from private equity funds that were owned, part-owned or financed by members of EVCA. The industry has also engaged prominent politicians to speak on its behalf. When London’s mayor Boris Johnson spoke in Brussels in favour of the investment fund industry, he was accused of being “bought off” as more than half the money donated to his mayoral campaign had come from the financial sector including hedge funds and private equity.”[lxii]
Equally, although the US investment bank Goldman Sachs has been widely condemned for its activities the European Commission often chooses advisors from the bank to sit on its Expert Groups shaping the rules governing financial markets in the European Union.[lxiii]
In the US the finance industry as a whole spent more than $3.4 billion on registered lobbying of federal officials during the period 1998-2008 and the sector employed 2,996 lobbyists in 2007.[lxiv] The U.S. hedge-fund’s main lobbying group, Washington-based Managed Funds Association (MFA), vigorously opposed legislation curbing high-frequency trading, arguing that this increase costs for investors and reduce volume and market liquidity. Stuart Kaswell, general counsel of the MFA, wrote in a Sept. 12 letter to a panel advising the Securities and Exchange Commission and Commodity Futures Trading Commission:
“We respectfully urge that you proceed cautiously and introduce changes that are supported by empirical data…. Proposals to expand the use of speed bumps, delay trading or set maximum execution speeds would cause greater harm to investors by increasing trading and execution costs…. We respectfully urge the commission to limit regulatory experimentation in what we would argue are the most efficient and effective markets in the world.”[lxv]
In another example of successful lobbying by the shadow banking industry outside the EU, when the Securities and Exchange Commission attempted to require hedge fund managers with 15 or more individual customers and $25 million or more under management to register as investment advisers in 2006, this requirement was eventually overturned by the U.S. Court of Appeals after a long struggle by lobbyists. It should also be noted that the very invisibility of the trades that hedge funds engage in makes it extremely difficult for the authorities to track their activities and assess their complicity in excessively high risk and/or profit taking.
The third obstacle is institutional in nature – the well-researched difficulties of reaching meaningful agreement across the European parliament and other EU institutions on such contentious issues, given the various strong national interests at stake, summarised here by Scharpf:
"Without a common foundation in an encompassing, normatively binding political system with effective sanctions, the parties involved in European-level negotiations confront one another as independent actors, each in pursuit of its own, highly distinct, and often opposing interests, each oriented in terms of its own, culturally stabilized interpretation of the situation. …such negotiations are difficult and always threatened by failure. As a rule, their success presupposes complicated deals for compensating interests that have been, or claim to have been, adversely affected. In short…the policy-making capacities of the EU are strictly limited, and it will be almost impossible to increase them significantly in the immediate future."[lxvi]
There also remains the problem of the ‘Democratic Deficit’ in EU policy making which, since the European Parliament acquired powers to approve or reject EU legislation (jointly with the Council), has been linked to the void between the EU’s elites and its citizens/voters. This implies that there is no way of translating widespread popular anger amongst EU citizens against the banking system in general into meaningful pressure on EU politicians and policy makers who are under constant pressure from powerful shadow-banking interests employing professional lobbyists and exploiting privileged access to leading politicians and Eurocrats.
The fourth obstacle lies in the fact that no meaningful package of interventionist solutions can be successful at the EU level, since hedge funds and other shadow banking entities are global institutions of huge wealth and power, the majority of which are domiciled outside the EU, requiring global agreements to make any real difference. Thus, as Gerhard Illing suggests:
"The flaws of the current system are obvious; they have been discussed within the academic community for a long time. We need to address the problems of pro-cyclicality, excessive leverage, and the opaqueness of the shadow banking system. We need greater emphasis on liquidity regulation and an overhaul of incentive structures. All this cannot be solved on a national level.Prudential regulation needs to be implemented on an international level.”[lxvii] [Emphasis Added PS DL-B]
In addition, the Eurozone has been wrestling with the specific and serious problem of the sovereign debt crisis centred on Greece and the other PIGS, in which most of the policy emphasis has been on supporting the major conventional deposit and investment banks through their continuing liquidity crisis.
Thus, when on 26 October 2011, leaders of the 17 eurozone countries met in Brussels they agreed on a package of measures including a 50% write-down of Greek sovereign debt, a fourfold increase in bail-out funds administered under the European Financial Stability Facility, an increased mandatory level of 9% for bank capitalisation within the EU, along with €35 billion in "credit enhancement" to mitigate any losses encountered by European banks. The package, which did nothing to police the shadow banking industry, was characterised by José Manuel Barroso as "exceptional measures for exceptional times."[lxviii]
Contrast this optimistic line with the views of a leading expert on hedge fund and shadow banking, Michael Pomerleano, who has worked at the Bank of International Settlements and the Bank of Israel, published in June 2011:
“It is important to note that prospectively shadow banking is bound to take on a greater role in lending vis-à-vis the banking sector because banks will be limited by the new capital regulations. Therefore more stringent measures are needed to harmonise the regulation of the shadow-banking and traditional-banking sectors. Among them there is need for a new approach to supervision that focuses on markets and instruments as opposed to institutions…..Policy makers need to redouble efforts to address the excessive liquidity build up in shadow banking.[lxix]
Almost a year after Pomerleano published these thoughts and for all the reasons contained in our paper, his suggestions remain a pious hope, rather than an immanent reality within the EU.
 This ‘grey’ market has recently been exploited by the British Government to engage in Quantitative Easing and it is in this market that the European Central Bank (ECB) has been intervening, in order to reduce interest rates on Spanish and Italian bonds to end the funding crisis in the two countries.
 Prominent British institutional investors in hedge funds include USS (the Universities Superannuation Scheme), which has a hedge fund portfolio valued at more than $1.2bn that is expected to double in the next year, and BT Pension Scheme Management, one of the largest pension fund investors in Europe in hedge funds. Investors continue to express confidence in the industry. Barclays Capital put out a report saying that investors may add about $80bn (£51.78bn) of net new capital to hedge funds globally in 2012, the most since 2007. More than half the investors surveyed by BarCap plan to increase their hedge fund investments in the coming year, more than seven times the number that plan to reduce their allocations. Andrew Baker: In defence of hedge funds: Institutional investors are giving a vote of confidence, 20th January 2012: http://www.cityam.com/forum/defence-hedge-funds-institutional-investors-are-giving-vote-confidence
 For a discussion of definitions of hedge funds see Narayan, Naik: Hedge Funds: Transparency & Conflicts of Interest, European Parliament Report, IP/A/ECON/IC/2007-24, pp. 2-3:https://docs.google.com/viewer?a=v&q=cache:JIgKmqBvmpUJ:www.europarl.europa.eu/document/activities/cont/201108/20110818ATT25074/20110818ATT25074EN.pdf+&hl=en&gl=uk&pid=bl&srcid=ADGEESgZ3w5RsKvWKF6JuVo24bEiN4EcWbtKaMXmX9GAkq87WVg9CUdkWn0FVTI_6cVwd7yDpXuHtanfm7jKu5RKp5zNwFiEqRQTKBSswtbA-E4gUfDbtD9gmLGZw3Md5OSAmfATu1WT&sig=AHIEtbTKQsG4sTlzD2pWWntRYN0FzIX1Kw
 Paul McCulley, the former PIMCO portfolio manager credited with coining the expression "shadow banking," warned as early as 2009 that the system "drove one of the biggest lending booms in history, and collapsed into one of the most crushing financial crisis we've ever seen." http://www.reuters.com/article/2012/02/07/us-banking-shadow-idUSTRE81610Z20120207
 The growth in foreign exchange markets has been huge; in the early 1980s trading stood at around $70 billion a day, by 2007 it was $3.2 trillion a day. The global derivatives market stood at $370 trillion in June 2006, by December 2007 it had reached $596 trillion. Paul Mason: Meltdown: The end of the Age of Greed, Verso Books, 2010, pp. 67-8.
 Warren Buffet told his shareholders in 2002 that derivatives were ‘inancial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.’ Berkshire Hathaway: Annual Report 2002.
 In 2006, 55 per cent of hedge funds were incorporated offshore.
 Hedge funds often have a high leverage ratio through the use of margin accounts, derivatives and short sales. High levels of Leverage accentuate liquidity, market, and asset risks. With excessive levels of leverage a small price swing can compel hedge funds to instantly liquidate positions in order to sell their most liquid assets, sending shocks across the markets. The 1998 collapse of Long-Term Capital Management (LTCM) represents a spectacular example of the impact of excessive leverage. (Garbaravicius, T. and F. Dierick: 2005. “Hedge Funds and Their Implications for Financial Stability:” European Central Bank Occasional Paper No. 34.).
 Arbitrage is buying cheap in one market, selling dear in another and pocketing the profit, or collecting a fee for doing it.
Hedge fund rich list 2009
Hedge fund manager
Hedge fund group
SOURCE: AR MAGAZINE
Soros Fund Management
Paulson & Co
SAC Capital Advisers
Citadel Investment Group
Harbinger Capital Partners
 As Paul Mason points out one of the main differences is that much of the capital being created in the world today, even that generated by companies producing goods and services, is reinvested in the financial system rather than back into production “creating a tendency for capital to flow frantically into one asset bubble after another, with the finance system as the conduit.” Paul Mason, 2010, p. 70
 Endogenous liquidity - liquidity and liquidity risk that are specific to a firm and the actions it takes in managing its assets, liabilities, and off balance sheet activities. Exogenous liquidity: liquidity and liquidity risk that relate to an entire industry or national system, and are not confined to, or significantly influenced by, a single firm and its actions. http://finance-dictionary.com/definition/e/endogenous-liquidity/
 Roger Bootle cites the interaction of eight factors that caused the Crash of 2007/8: the bubble in property, the explosion of debt; the fragility of the banks; the weakness of risk assessment; an error of monetary policy; the super savings of China and a number of other countries; the complacency and incompetence of the regulators; and the docility of outside assessors [investors, analysts, economists, media commentators, scholars, politicians, bureaucrats etc.] The Trouble with Markets: Saving Capitalism from Itself: Nicholas Brealey, 2011, p. 8.
In terms of percentage of total assets, in 2006 the top five investment banks involved in this trade with hedge funds were Morgan Stanley 22%, Bear Stearns 19%, Goldman Sachs 17%, UBS 7%, and Credit Suisse 5%. (Michael R. King and Philipp Maier: ‘Hedge Funds and Financial Stability: The State of the Debate’ Bank of Canada Discussion Paper 2007-9, September 2007, p6.)
 The role played by the largest credit ratings agencies was also crucial, since they routinely valued vast amounts of dubious quality assets– such as collateralized debt obligations (CDOs), as being of AAA status - the same rating they gave to government and corporate bonds yielding systematically lower returns. These ratings instantly fell to Junk Bond grades as soon as the crisis unfolded. The fact that the financial institutions pay the Agencies a fee for their ratings services, causing an obvious potential conflict of interest, caused considerable public and media disquiet when it was subsequently revealed. See also: Siegfried Utzig: The Role Played by Credit Rating Agencies in the Financial Crisis, ADBI Institute Paper, 26 January 2010, http://www.adbi.org/working-paper/2010/01/26/3446.credit.rating.agencies.european.banking/the.role.played.by.credit.rating.agencies.in.the.financial.crisis/
 The three countries most affected, Greece, Ireland and Portugal, collectively account for only six percent of the eurozone's gross domestic product. Spain and Italy are much larger and much more of a problem should either/both of them be forced to default in some manner.
[ii] David Harvey: The Enigma of Capital and the Crises of Capitalism, Profile Books, 2010, p. 21.
[iii] Bezemer, Dirk J: ‘“No One Saw This Coming": Understanding Financial Crisis through Accounting Models’ : MPRA Paper No. 15892 16. June 2009 http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf (Accessed 17/3/2012)
[iv] For historical and analytical accounts of hedge funds see: Fung and Hsieh (1997); Tsatsaronis 2000; Bandopadhyaya and Grant 2006; Hardie and MacKenzie 2006; Nyberg (2008); Meligkotsidou and Vrontos (2008);
[v] John Kenneth Galbraith (2009): The Great Crash of 1929, Harcourt Publishing, p. 3.
[vi] Corrigan, E. G.: “Hedge Funds and Systemic Risk in the Financial Markets.” Statement before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C., 13 March 2007.
[vii] ‘A Little Fund with Big Demands: TCI has moved to the forefront of a new breed of restless shareholders in Europe.’ Bloomberg BusinessWeek: MAY 23, 2005, http://www.businessweek.com/magazine/content/05_21/b3934161_mz035.htm
[viii] Lucia Quaglia (2011a): The ‘Old’ and ‘New’ Political Economy of Hedge Fund Regulation in the European Union, West European Politics, 34:4, pp. 665-6 http://www.uaces.org/pdf/papers/0901/quaglia.pdf
[ix] Lucia Quaglia (2011a): p. 666. See also: Brunnermeier et al. 2009; de Larosie`re Group 2009; Group of Thirty 2009; FSA 2009.
[x] Jesse Westbrook ‘Hedge Funds Underestimating EU’s Will to Force Greek Losses’. - Feb 6, 2012 http://www.bloomberg.com/news/2012-02-06/hedge-funds-underestimating-europe-s-will-to-force-greek-losses-on-them.html (Accessed 12/02/12).
[xi] Working document of the commission services (dg internal market) consultation paper on hedge funds: 2008, p.2. http://ec.europa.eu/internal_market/consultations/docs/hedgefunds/consultation_paper_en.pdf
[xii] Ertürk, Leaver & Williams (2010) Hedge Funds as ‘War Machine’: Making the Positions Work, New Political Economy, 15:1, p.22.
[xiii] Agarwal and Naik 2004: Duarte et al. 2005.
[xiv] Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience
[xv] Douwe Miedema - Watchdogs to drag shadow banks into the light. Reuters US Edition, Feb 7, 2012: http://www.reuters.com/article/2012/02/07/us-banking-shadow-idUSTRE81610Z20120207
[xvi] Stalmann and Knipps 2007: Feenstra et al. 2007.
[xviii] Michael R. King and Philipp Maier: ‘Hedge Funds and Financial Stability: The State of the Debate’ Bank of Canada Discussion Paper 2007-9, September 2007, pp. 2-3.
[xix] Will Hutton, ‘Stop the gamblers on stock market’, China Daily, 29/10/2008: http://www.chinadaily.com.cn/opinion/2008-10/29/content_7157475.htm (Accessed 2/3/2012)
[xx] Susan Strange: (1997): Casino Capitalism. Manchester: Manchester University Press.
[xxi] Ertürk, Leaver & Williams op cit: pp. 18-19.
[xxii]Scheer, D. (2007): ‘Insider Trading Concerns Rise as Stock Options Surge’, Bloomberg, 7 May
[xxv] Will Hutton: ‘As we suffer, City speculators are moving in for the kill’, the Observer, 29 June 2008
[xxvi] Michael Pomerleano: ‘The fallacy of financial regulation: neglect of the shadow banking system’, Financial Times Economists’’ Forum, June 5, 2011
[xxvii] Lucia Quaglia (2011): The ‘Old’ and ‘New’ Political Economy of Hedge Fund Regulation in the European Union, West European Politics, 34:4, pp. 665-6. For discussions of the corrupt practices of hedge funds see: Michael Lewis’ (1990) Liar’s Poker, Connie Brooks’ (1989) The Predators Ball, John Rolfe and Peter Troob (2000) Monkey Business and James B. Stewart (1999) Den of Thieves. Bookstaber (2007) A Demon of our Own Design and Chancellor (2000) Devil Take the Hindmost.
[xxx] Working document of the commission services (dg internal market) consultation paper on hedge funds: 2008, p. 2 http://ec.europa.eu/internal_market/consultations/docs/hedgefunds/consultation_paper_en.pdf
[xxxi] Gary A. Dymski ‘Financial Risk and Governance in the Neoliberal Era.’ September 10, 2008 p. 10 http://www.uadphilecon.gr/UA/files/1604690999..pdf
[xxxii] Frank Partnoy: Infectious Greed: How Deceit and Risk Corrupted the Financial Markets, Times Book, 2003, p. 4.
[xxxiii] ‘Government bonds are usually denominated in the country's own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds, although the term "sovereign bond" may also refer to bonds issued in a country's own currency….. In the UK, government bonds were called "government stock" or "treasury stock" and the older issues are still called "treasury stock". Newer issues are called "gilts". The name "bond" was reserved for fixed-value investments, which were not tradeable on the stock market. Inflation-indexed bonds are called Index-linked gilts in the UK.’ http://en.wikipedia.org/wiki/European_sovereign-debt_crisis
[xxxiv] Bootle, Roger: The Trouble with Markets: Saving Capitalism from Itself: Nicholas Brealey, London, 2011, p. 158
Although most of the global media did not pick up on it, Greece has officially defaulted under the terms of the second bailout deal, representing an “orderly” default in that it was subject to agreement with most of its creditors.
[xxxvi] Manifesto of the appalled economists: Real-World Economics Review, issue no. 54: 27 September 2010, pp. 19-31. http://www.paecon.net/PAEReview/issue54/Manifesto54.pdf p.24.
This manifesto was issued by a group of French economists: Philippe Askenazy (CNRS, France) ; Thomas Coutrot (scientific council of ATTAC, France) ; André Orléan (CNRS, EHESS, president of the French Association for Political Economy); Henri Sterdyniak (OFCE, France).
[xxxvii] Paul Krugman: ‘What Greece Means.’ New York Times: March 11, 2012 (Accessed 11/03/12012 http://www.nytimes.com/2012/03/12/opinion/krugman-what-greece-means.html?_r=1&ref=opinion
[xxxviii] It’s all connected A Spectators Guide to the Euro Crisis, New York, Times 23/10/2011, http://www.nytimes.com/imagepages/2011/10/22/opinion/20111023_DATAPOINTS.html?ref=sunday-review
[xxxix] Sydney Morning Herald: ‘Euro zone sovereign debt is the new subprime’, November 12, 2011
[xl] Goldman Sachs’ role in Greece a real scandal: http://www.iol.co.za/business/business-news/goldman-sachs-role-in-greece-a-real-scandal-1.1258930 For a partial defence of GS which points out that it lost as well as made money from Greek deals see: Goldman Sachs Shorted Greek Debt After It Arranged Those Shady Swaps: http://www.forbes.com/sites/streettalk/2010/02/18/goldman-sachs-shorted-greek-debt-after-it-arranged-those-shady-swaps/
[xli] Hedge Funds Are Ganging Up on Weaker Euro, Wall Street Journal, 26th Feb 2010: http://www.jstic.com/Newsgroup/WSJE/2010/WSJE_February_26th.pdf
[xlii] Patrick Donahue Merkel Slams Euro Speculation, Warns of ‘Resentment’, Bloomberg Report, - February 23, 2010: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aQ9wHnlOENSc
[xliv] George Soros - Project Syndicate - Europe’s Year of Indecision: http://www.project-syndicate.org/commentary/europe-s-year-of-indecision
[xlvi] Gary A. Dymski: Financial Risk and Governance in the Neoliberal Era, September 10, 2008 http://www.uadphilecon.gr/UA/files/1604690999..pdf
[xlviii] Douwe Miedema - Watchdogs to drag shadow banks into the light. Reuters US Edition, Feb 7, 2012: http://www.reuters.com/article/2012/02/07/us-banking-shadow-idUSTRE81610Z20120207
[xlix] Matthew Lynn ‘Bankers Will Follow Hedge Funds to Switzerland’: Matthew Lynn
October 12, 2009: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ap19tV54PWuE
[l] Jacqueline Best, ‘The Limits of Financial Risk Management: Or, What We Didnʼt Learn from
the Asian Crisis’: http://aix1.uottawa.ca/~jbest/Subprime%20paper-NPE-web%20version.pdf
[li] Mugge 2011a.
[lii] Lucia Quaglia (2010b): The “Old” and “New” Politics of Financial Services Regulation in the EU, OSE Research Paper No. 2 / April 2010, p. 10. http://www.ose.be/files/publication/OSEPaperSeries/Quaglia_2010_OSEResearchPaper2_0410.pdf
[liii] Timothy Garton Ash – ‘The eurozone crisis: a terrifying race to become a diminished world power’. http://www.guardian.co.uk/commentisfree/2011/dec/07/eurozone-crisis-world-power
[lv] Dymski Gary A.: 2008, Op Cit p. 1 http://www.uadphilecon.gr/UA/files/1604690999..pdf
[lvi] Lucia Quaglia: (2010b), Op Cit, p. 14.
[lvii] Available at: http://ec.europa.eu/internal_market/top_layer/financial_capital/index_en.htm; Mügge 2006; Bieling 2003.
[lviii] Posner and Véron 2010: pp7-8; Baker et al. 2005.
[lix] Quaglia: (2011b) op cit p.7. Clift, Ben (2009): ‘The Second Time as Farce? The EU Takeover Directive, the Clash of Capitalisms and the Hamstrung Harmonization of European (and French) Corporate Governance’, Journal of Common Market Studies, 47:1, 55–79.; and Callaghan, Helen, and Martin Hopner (2005): ‘European Integration and the Clash of Capitalisms: Political Cleavages over Takeover Liberalization’, Comparative European Politics, 3, 307–32. See also Story and Walter (1997), Hall and Soskice (2001); Schmidt (2002); Hancke´ et al. (2007).
[lx] Quaglia: (2011b) op cit, p 7.
[lxi] Ibid. p. 10.
[lxiii] The People vs. Goldman Sachs: Corporate Europe Observatory, May 2010, p.5: http://www.corporateeurope.org/sites/default/files/sites/default/files/files/resource/Goldman%20Sachs%20%28June%202010%29.pdf
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