Why the British may decide to love the euro

Why the British may decide to love the euro

By Wolfgang Münchau

Published: November 16 2008 18:12 | Last updated: November 16 2008 18:12

Let me start with a disclaimer. I was never a strong advocate of British membership of Europe’s economic and monetary union, though I was, and still am, a big fan of Emu itself. I always felt the economic arguments made by euro advocates in the UK were vastly exaggerated and counterproductive. Judged from a narrow economic perspective, which is how the British looked at this, they were right to stay out during the euro’s first 10 years. The tangible economic benefits that came with an independent monetary policy outweighed the much less tangible economic benefits of membership.

But that was then and this is now. A financial crisis, a house price crash and a recession later, the arguments are still fundamentally the same, but the cost-benefit analysis produces a different result. The advantage of monetary independence, while somewhat greater than zero, will be more than compensated by the following four factors.

The first relates to long-term economic costs. In the good old times of financial exuberance, global real interest rates were low and successive bubbles kept the credit-devouring beast of the British economy going. Even assuming that financial balance sheets will be back in good shape in 2010 or 2011, I would not expect a return to the credit-binge era. We have probably entered a secular bear market in equities. There will be no immediate appetite for another housing bubble and the regulatory framework will be conservative, to put it mildly.

In such an environment I would expect smaller economies with free-floating currencies to be forced to pay higher risk premiums on their sovereign bonds. Real interest rates in the UK will rise by more than elsewhere and this will weigh on long-term economic performance. The real interest rate gap with the eurozone will rise. To be clear: this is an argument about long-run economic costs. This is not a variant of the short-sighted argument that mortgage rates would be lower in the eurozone. They may, or they may not.

The second point relates to the City of London. The City has managed to remain the eurozone’s financial centre, even though the UK is firmly outside. We should not take this situation for granted. The transaction-based system of financial capitalism suited London better than Frankfurt or Paris. Regulatory revenge will push offshore activities back onshore and the relative attractiveness of the City of London will be correspondingly reduced. The UK will at some point have to make a choice whether it wants to be in the eurozone or whether it wants to seek an alternative use for those rather tall buildings in the heart of London.

The third point is one of political economy. There will be more economic governance at eurozone level in the future. The French have always been pushing in that direction. The Germans resisted vigorously, but are slowly beginning to move in the same direction. The UK and other non-eurozone members will not like it. Frank-Walter Steinmeier, Germany’s foreign minister and Social Democrat candidate for chancellor at next year’s election, last week announced a policy shift that the SPD was now in favour of macroeconomic policy co-ordination at eurozone level. Even in the German government, which has hitherto rejected any notion of EU or eurozone-level banking supervision, there is now an acceptance that such supervision may eventually be necessary for the 44 large cross-border European banks. This is still not yet an official policy position, but there is now an openness to the idea that was previously absent. Expect to see a lot more eurozone summits in the future, and this means a lot more group photos without Gordon Brown, the British prime minister.

The fourth, and possibly most important point, is that the UK’s macroeconomic policy framework may simply not survive this crisis. There must now be a risk of a real sterling crisis at some point, something significantly more alarming than the tremors felt last week. As Willem Buiter of the London School of Economics noted in his Financial Times blog, the UK is in many respects comparable to Iceland. It is bigger of course, but still tiny in relation to the global economy, with a sick financial sector that accounts for several times gross domestic product.

This is an argument about macroeconomic risk management. The world’s two large reserve currencies, the dollar and the euro, offer more protection from speculative attack than a free-floating offshore currency unit. And when global investors repatriate money, or wind down their carry trades, or when a deep global recession drives government into competitive devaluations, expect currencies to move all over the place and then back again.

None of these arguments is new, but they now appear in a new light. I know that British euro membership faces large political hurdles. Mr Brown’s famous five tests would have to be judged accordingly. Newspaper editors would have to be bribed. Parliament would have to vote in favour. A referendum would have to be held, and won, and the polls tell us that this is not possible.

But remember that public opinion in eurosceptic Iceland shifted from hostile to enthusiastic within a short period, when people discovered to their horror that monetary independence comes at a crippling cost. When the facts changed, the people of Iceland changed their mind. I cannot see any reason why the British, dispassionate and pragmatic as ever, should react differently.

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Asia hedge fund assets shrink in Q3-tracking firm
Fri Nov 14, 2008 1:29pm EST

BOSTON, Nov 14 (Reuters) - Hedge funds that focus on Asia saw assets shrink by 13 percent in the third quarter as investors pulled out money after heavy fund losses, according to new data from Hedge Fund Research.

The Chicago-based hedge fund tracking company said the Asian hedge fund sector declined to $87 billion at the end of September from $100 billion at the start of the quarter.

The global hedge fund industry invests $1.7 trillion.

Asian hedge funds faced $10 billion in performance-based losses in the quarter, prompting investors to pull out $3.4 billion, according to the fund tracker.

Managers are now waiting to see how much more money investors will pull out hedge funds as a Nov. 15 deadline, set by many funds for investors to get out by year's end, approaches.

George Soros, the hedge fund manager who emerged from retirement at age 78 to protect his fortune at Soros Fund Management, said he expects hedge fund industry assets to shrink between 50 percent and 75 percent.

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植物でシックハウス浄化　近大・京大、細菌利用し新種

2008年11月11日3時2分

　シックハウス症候群の原因とされるホルムアルデヒドを吸収する植物を、泉井桂・近畿大教授（分子植物生理学）と阪井康能・京都大教授（応用微生物学）らが開発した。ホルムアルデヒドを栄養源にする細菌の遺伝子を組み込むことで、植物に新たな性質を持たせることに成功した。今後、観葉植物に応用し、商品化も目指したいという。

　阪井教授らは、メタノールをホルムアルデヒドに変えて、栄養源として体内に取り込むメチロトローフと呼ばれる細菌に注目。この細菌が持つ２種類の遺伝子を、実験植物に使われるシロイヌナズナとタバコに組み込んだ。すると、二酸化炭素の代わりにホルムアルデヒドを使って光合成する植物ができた。

　このシロイヌナズナと野生種を４週間、高濃度のホルムアルデヒドが入った容器の中で栽培すると、遺伝子を組み換えたシロイヌナズナだけが枯れずに生き残った。容器内のホルムアルデヒドの濃度も野生種に比べて、１０分の１程度に減っていた。

　研究チームは、この手法をポトスなど一般的な観葉植物に使えば、室内で有害物質を効率よく吸収、除去できるとして研究を進めている。

　安価なホルムアルデヒドは、建材や壁紙などの接着剤に使われ、室内で目の痛みや皮膚炎などのアレルギー症状を起こすことがある。シックハウス症候群として問題になり、国は０３年に建築基準法を改正し使用を制限した。しかし、現在でも、室内の環境によっては、ホルムアルデヒドが残留する建造物も少なくないとの調査結果も出ている。（田之畑仁）

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China hints at aircraft carrier project

By Mure Dickie and Martin Dickson in Beijing

Published: November 16 2008 23:32 | Last updated: November 16 2008 23:32

The world should not be surprised if China builds an aircraft carrier but Beijing would use such a vessel only for offshore defence, a senior official of the Chinese Ministry of National Defence has told the Financial Times.

The comments from Major General Qian Lihua, director of the ministry’s Foreign Affairs Office, come amid heated speculation within China and abroad that the increasingly potent naval arm of the People’s Liberation Army has decided to develop and deploy its first aircraft carrier. Traditionally, a carrier would accompany and protect a battle group of smaller ships.

The Pentagon said this year that China was actively engaged in aircraft carrier research and would be able to start building one by the end of this decade, while Jane’s Defence Weekly reported last month that the PLA was training 50 students to become naval pilots capable of operating fixed-wing aircraft from such a ship.

Maj Gen Qian declined to comment directly on whether China had decided to build a carrier, but in the defence ministry’s most forthright statement yet on the issue he made clear that China had every right to do so.

“The navy of any great power . . . has the dream to have one or more aircraft carriers,” he said in the interview, which aides said was the first arranged by the defence ministry on its own premises. “The question is not whether you have an aircraft carrier, but what you do with your aircraft carrier.”

Though he did not mention the US by name, Maj Gen Qian pointedly contrasted the function of a possible Chinese vessel with the way the US Navy uses its 11 carriers. “Navies of great powers with more than 10 aircraft carrier battle groups with strategic military objectives have a different purpose from countries with only one or two carriers used for offshore defence,” he said. “Even if one day we have an aircraft carrier, unlike another country, we will not use it to pursue global deployment or global reach.”

That pledge is unlikely to reassure those in the region concerned about the PLA navy’s emergence as a blue-water force. An effective Chinese carrier could have serious implications for any conflict involving Taiwan by strengthening the mainland’s ability to counter the island’s air force and control its sea-lanes.

Beijing claims sovereignty over Taiwan and threatens military action against the island if it tries to further formalise its current de facto independence. Taiwanese separatism was the “biggest threat” China currently faced, Maj Gen Qian said.

Admiral Timothy Keating, head of US Pacific Command, said in Beijing last year that Chinese development of a carrier should not be the cause of any unnecessary tension, and that the US would even be willing to lend a helping hand.

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Iceland agrees deal on foreign bank deposits

By David Ibison in Stockholm and agencies

Published: November 17 2008 01:11 | Last updated: November 17 2008 10:05

Iceland said on Sunday it had reached a preliminary deal with Britain and other European countries on guidelines for dealing with foreign depositors in a collapsed bank, in an agreement likely to clear the way for a stalled International Monetary Fund support package for Reykjavik.

Conflicts with Britain and the Netherlands over the money in Icesave accounts at Landsbanki, the now-collapsed bank, had been delaying billions of dollars in loans for Iceland from the IMF and other lenders.

The Icelandic government said: “According to the agreed guidelines, the government of Iceland will cover deposits of insured depositors in the Icesave accounts in accordance with EEA [European Economic Area] law.

“They also entail that the EU, under the French presidency, will continue to participate in finding arrangements that will allow Iceland to restore its financial system and economy.”

The government said France, as holder of the EU presidency, had initiated the talks on the deal.

Sunday’s statement marked a sharp difference to the irate language that has characterised the debate between Iceland and Britain, in particular, in recent weeks, involving threats to take the issue to court and demands for independent arbitration on the issue.

A full resolution to the Icesave issue will clear the way for Iceland to be awarded a $2bn (€1.6bn, £1.4bn) loan by the IMF, which had been delayed repeatedly in Washington as the dispute over compensation payments festered.

Iceland agreed the loan with the IMF on October 24.

An IMF spokesman said in Washington last week that approval for the loan was being withheld until Iceland resolved “the process of determining obligations with regard to foreign deposits”.

Securing approval from the fund is crucial as it will remove the last remaining obstacle to a range of other countries in the Nordic region and elsewhere offering it up to $4bn in additional loans.

●Dominique Strauss-Kahn, IMF managing director, said at the weekend that it was close to agreeing a new loan to Turkey.

“We still have some disagreement on the size of their adjustment, the consequences of the adjustment which is needed by the Turkish economy, and following that, the size of the package of the programme that the fund may finance,” he said.

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France arrests suspected Eta military chief

By Victor Mallet in Madrid

Published: November 17 2008 08:00 | Last updated: November 17 2008 08:00

French police arrested the suspected military chief of the Basque group Eta in a pre-dawn raid on Monday, the latest blow to the separatist organisation held responsible for more than 800 deaths in Spain since 1968.

Garikoitz Aspiazu Rubina, known by the nom de guerre Txeroki or “Cherokee”, was detained together with a woman, also a suspected Eta militant, in Cauterets in the French Pyrenees, according to the French interior ministry and Spanish security sources quoted by the Spanish media.

The Eta military chief, accused of involvement in the murder of two Spanish police officers in France last year, was one of the most wanted men in Spain.

Spain’s ruling Socialist party welcomed the arrest of “a very bloodthirsty terrorist”. It described his capture as “magnificent news of great importance” because of his role as head of Eta military operations in ordering killings and carrying them out himself.

The arrest is the latest of several successes by French and Spanish police. Javier López Peña, presumed to be the overall head of Eta, was detained in May.

Eta has struggled to retain its popularity, even in the autonomous Basque region of northern Spain, since abandoning a ceasefire in June 2007.

But the group has continued to launch attacks on Spanish targets. Last month Eta detonated a car bomb in a university campus in Pamplona, injuring 21 people. And in September, a soldier was killed by a car bomb in Santoña on the north coast of Spain.

Nicolas Sarkozy, French president, said in a statement that the latest arrest demonstrated “the excellent cooperation between France and Spain in the struggle against Basque terrorism”.

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Kuwait exchange falls on re-opening

By Robin Wigglesworth in Abu Dhabi

Published: November 16 2008 17:40 | Last updated: November 16 2008 17:40

Kuwait’s stock market fell to a three year low on Monday, after being closed since Thursday when traders brought a court order to try to stem a precipitous decline this year.

The Kuwaiti bourse fell 2.6 per cent on opening, taking its yearly decline to 32.6 per cent, after a court allowed the exchange to re-open.

Traders had brought a case against the government demanding that it intervene to halt the exchange’s recent slump, and a court ruled that trading would be suspended until November 17 when the case would be heard. The exchange and the government appealed the closure, which came into effect soon after the stock market opened on Thursday morning.

Khalid Al-Awadhi and Walid Al-Hadlaq, two lawyers, had originally filed a case in October against the prime minister, the minister of commerce and industry, and chairman of the KSE committee, according to the state news agency Kuna. They demanded trade be halted till measures were taken to check losses at the exchange.

“The case concerned drastic and rapid loss of points at the national bourse and failure to improve even when international bourses recovered from the first blow of the financial crisis, indicating domestic factors,” Kuna said on its web site.

The Kuwaiti bourse has lost nearly a third of its value this year, despite the country’s sovereign wealth fund ploughing several hundred million dollars into the market to stem the decline.

Kuwait – and the wider region – is known for paternalistic policies to protect its nationals from severe declines or losses. “Moral hazard doesn’t exist here,” a senior banker remarked.

Kuwait’s banking sector is also in trouble, after Gulf Bank revealed it had lost a significant amount of money on a derivatives trade. The authorities were forced to bail out the bank and guarantee all deposits in the country, as rating agencies rushed to downgrade Gulf Bank and warned of risks across Kuwait’s banking sector.

Other markets fared a little better on Monday. Dubai and Abu Dhabi’s stock markets rose 4 per cent and 2.1 per cent respectively, and Oman’s securities market rose 0.5 per cent.

Saudi Arabia’s Tadawul All-Shares Index, the region’s biggest equity market, fell 0.2 per cent, while Qatar and Bahrain declined 0.4 per cent and 2.9 per cent respectively.

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EU and US back Caspian call

By Isabel Gorst in Moscow

Published: November 17 2008 01:52 | Last updated: November 17 2008 01:52

Europe and the US are renewing efforts to loosen Russia’s stranglehold over Caspian oil and gas exports, in spite of lingering fears about the security of pipelines in the region in the wake of the war in Georgia.

A declaration signed by the European Commission, the US and 15 countries at an energy summit in Baku, the Azerbaijan capital, on Friday, called for deeper co-operation in Caspian oil and gas transport projects to improve international energy security.

“We consider it is important to continue policies aimed at diversifying oil and gas supply routes from the Caspian basin to European and world markets,” the declaration said. It emphasised the importance of the stalled Nabucco pipeline to bring central Asian and Azerbaijani gas to Europe and of a pipeline linking Turkey, Greece and Italy with the Caspian.

Pipelines and railways carrying Caspian oil and gas across the Caucasus to the west were halted briefly during the war between Russia and Georgia last August, exposing the vulnerability of energy infrastructure in the region.

Mikheil Saakashvili, the Georgian president, warned that Russia’s goal was to establish control over Caspian energy infrastructure and resources. But Samuel Bodman, the US energy secretary, said the war in Georgia had “shown the importance of energy resources diversification.”

Kazakhstan, the Caspian country with the biggest oil and gas reserves, attended the summit, but did not sign the declaration, possibly out of deference to Russia, its main transport route to energy markets.

However, Kazakhstan signed an agreement to form a joint company with Azerbaijan to ship Kazakh oil across the Caspian to enter the Baku-Tbilisi-Ceyhan pipeline to the Turkish Mediterranean.

Sauat Mynbaev, the Kazakh energy minister, said Kazakhstan “held great hopes” for the $3bn trans-Caspian export project that will transport 1.2m barrels a day of Kazakh oil to western markets.

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Top seven at Goldman forgo bonuses

By Peter Thal Larsen, Banking Editor

Published: November 16 2008 23:17 | Last updated: November 16 2008 23:17

Top executives at Goldman Sachs will receive no bonus for 2008 after the Wall Street group’s seven most senior bankers waived their right to a payout.

The move, which is likely to put pressure on other banks to follow suit, comes after a turbulent year in which Goldman converted itself into a commercial bank and received a $10bn capital injection from the US government. It also follows intense scrutiny of Wall Street bonuses from legislators and regulators.

Goldman’s compensation committee on Sunday approved the request from executives including Lloyd Blankfein, the bank’s chairman and chief executive, not to pay bonuses for 2008.

Other executives giving up their payouts include Jon Winkelreid and Gary Cohn, Goldman’s co-presidents; chief financial officer David Viniar, and Michael Evans, Michael Sherwood and John Weinberg, who are all vice-chairmen of the bank.

A Goldman spokesman said the bankers decided to waive their bonus voluntarily. “Our senior executive officers made this decision because they believe it is the right thing to do. We cannot ignore the fact that we are part of an industry that is directly associated with the ongoing economic problems.”

Fuelled by its enormous profits, Goldman has in recent years topped the league tables for executive bonuses. Last year, which was a record year for Goldman, Mr Blankfein was paid $68.5m in cash and stock, while Mr Cohn and Mr Winkelreid were each paid $67.5m. Mr Viniar received $57.5m. Goldman does not disclose the pay of Mr Evans, Mr Sherwood and Mr Weinberg.

The decision comes as Wall Street banks are firmly in the spotlight as bonus season approaches. Though the terms of the federal bailout do not prevent banks from paying executive bonuses the nine largest US banks, which shared a $150bn capital injection, have come under pressure to promise that they will not use federal cash to fund bonus payments.

Last week, US banking regulators warned banks that compensation structures should be in the “long-term prudential interests of the institution”. Goldman said that, for the rest of its employees, compensation would be based on performance.

However, bonuses are likely to be sharply reduced, in line with the drop in the bank’s profits this year. In the first three quarters of 2007, the bank set aside $11.4bn for compensation and benefits – a third less than in the same period of last year.

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Prejudice in Europe is more than skin deep

By Mark Mazower

Published: November 16 2008 18:36 | Last updated: November 16 2008 18:36

A collective sigh of relief could be heard from Europe last week after Barack Obama emerged victorious; there is no doubting the fervent European desire to relegate the Bush doctrine to history and to return to a more collegial relationship with the White House. Yet Mr Obama’s welcome has been accompanied by unhappier undercurrents.

It is not so long ago that Austria’s rightwingers used to campaign on the slogan: “Vienna must not become Chicago”. They were not the only Europeans to become more xenophobic with the end of the cold war. But they were perhaps the only ones to link their detestation of the new immigrants from the Middle East and eastern Europe to hoary images of race riots and organised crime drawn from America’s bad old days.

Now that an African-American from Chicago is set to become president in Washington, not everyone in Vienna is happy. In an extraordinary on-air outburst, Klaus Emmerich, the veteran Austrian television pundit, declared: “I would not want the western world to be directed by a black man.” When invited to retract, Mr Emmerich stood by what he had said, adding that “blacks aren’t as politically civilised” and pouring fuel on to the fire by hinting that Mr Obama’s “rhetorical brilliance” and ability in organising a movement made him comparable to infamous demagogues from the past. America’s choice, Mr Emmerich concluded, was as misplaced as a Turk becoming the next chancellor of Austria.

His comments were greeted by a storm of criticism, just as Italian premier Silvio Berlusconi’s “joke” about Mr Obama’s “sun tan” had been: two elderly men betraying their generational prejudices, one might think. Yet the underlying problem goes deeper. A comment such as Mr Emmerich’s would be political suicide in the US; in Austria it earned little more than a slap on the wrist. How is it that while both places have their fair share of racism, one finds such contrasting public and political responses?

One difference is that in Europe today truly to belong still means being white. “Do you feel yourself to be British?” BBC journalist Jeremy Paxman asked a young black London rapper after Mr Obama’s victory. Europeans find it hard adjusting to a colour-blind world. Indeed their hesitancy is growing. In Austria, the extreme right carved out big gains in September’s general elections. Pope Benedict weighed in over the summer to warn against a possible resurgence of fascist values in Italy. Europe as a whole, according to recent polls, has become significantly more xenophobic over the past few years. Fears of Islamic terrorism and anxiety about globalisation have fed this trend. So has fervent anti-European Union sentiment, strongly correlated to populist anti-immigrant rhetoric. By contrast, Mr Obama’s story is that of the immigrant dream, a tale of upwardly-mobile success that cut decisively across race lines. Immigrant voters played a decisive electoral role in Mr Obama’s win, yet immigration – for all the prior public debate – figured little as a campaign issue.

Culturally, globalisation is pushing many Europeans – whether pro- or anti-Europe – into a kind of conservatism. As the continent struggles with the task of turning itself into a political force capable of acting on the world stage alongside former colonies such as the US and India, or rising powers such as China, its elites fall back on memories of a time when Europe taught the world its values. “Blacks aren’t as politically civilised,” claimed Mr Emmerich. Not long ago, such frank racism was unremarkable – on both sides of the Atlantic. Today, it is much rarer. Yet too many Europeans still talk and act as though their task is to shore up western civilisation against the barbarians whether by defending some vision of the Enlightenment against religious fanatics, or by defending Christendom against its historical enemies. An immigrant of Turkish descent as leader of Austria? Why, that would signify that Vienna’s long struggle against the Ottomans had all been in vain.

History can be cruel. Generations of Europeans grew up with the goal of ethnic homogeneity as one nation after another across the continent tried to purify itself. The huge population transfers, expulsions and killings of the 1940s reflected the fact that both the Nazis and their opponents believed that minorities were a source of political instability. By 1950, they had all but disappeared across much of central and eastern Europe. Yet almost at once, postwar growth brought new minorities in – first into western Europe and now further east. The result is a kind of cognitive dissonance. Europeans inhabit increasingly globalised multi-ethnic societies; yet their attitudes remain shaped by a 19th-century mindset. Vienna is not yet Chicago. But it cannot get there a moment too soon.

The writer is the author of Hitler’s Empire: Nazi Rule in Occupied Europe (Penguin). He teaches history at Columbia University

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Iraq agrees US three-year troop stay

By Mary Beth Sheridan in Baghdad

Published: November 17 2008 02:00 | Last updated: November 17 2008 02:00

After months of painstaking negotiations between Baghdad and Washington, the Iraqi cabinet yesterday approved a bilateral agreement allowing US troops to remain in the country for three further years.

The accord still needs approval by Iraq's parliament, but the Cabinet vote indicated that most of the significant Iraqi parties were in support.

An Iraqi government spokesman portrayed the pact as closing the book on the occupation that began with the US-led invasion in 2003.

"The total withdrawal will be completed by December 31, 2011. This is not governed by circumstances on the ground," Ali al-Dabbagh told Iraqi reporters, rejecting the more conditional language that the US government had earlier sought in the accord.

US officials have pointed out that there is nothing stopping the next Iraqi government from asking some US troops to stay.

The Iraqi military is years away from being able to defend the country from external attack, according to US and Iraqi officials.

Still, there is no doubt that the accord, if passed by parliament, will sharply reduce the US military's power in Iraq.

US soldiers will be required to seek warrants from Iraqi courts to execute arrests and to hand over suspects to Iraqi authorities. US troops will have to leave their combat outposts in Iraqi cities by mid-2009, withdrawing to bases.

The US government has lobbied hard for the status-of-forces agreement, which would replace a United Nations mandate authorising the US presence that expires on December 31. Without a legal umbrella, the 150,000-strong US forces would have to end their operations in Iraq in a few weeks' time, military officials said.

The Iraqi spokesman said his government could cancel the agreement if its forces became capable of controlling security at an earlier point.

"That matches the vision of US president-elect Barack Obama," Mr Dabbagh said, referring to the Democrat's plan to withdraw US combat troops within 16 months.

While the Cabinet vote indicated that Nouri al-Maliki, the prime minister, had rounded up the support of most of Iraq's large parties, final passage of the accord was not guaranteed, politicians said.

One issue is timing. The notoriously slow-moving Iraqi parliament is scheduled to adjourn on November 25 for a three-week break to allow lawmakers to make the Hajj pilgrimage.

Another wild card is the position of the Sunni parties. The Shiite-led government has sought consensus so the treaty would not become a political football in the run-up to provincial elections set for late January. "There will be a problem if the Sunni bloc decides to abstain. That is quite critical," said Haidar al-Abadi, a member of the prime minister's Dawa party.

In Washington the White House described the Iraqi cabinet agreement as "an important and positive step".

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Saudis spurn chance to help IMF by focusing on domestic woes

By Abeer Allam in Riyadh, Daniel Dombey in Washington,,and Carola Hoyos in London

Published: November 17 2008 02:00 | Last updated: November 17 2008 02:00

Saudi Arabia at the weekend resisted international pressure to copy Japan's example and give the International Monetary Fund additional funds to bail out ailing economies. It has opted instead to focus on domestic expenditures amid complaints from Saudi commentators that the west was attempting to "steal" the oil exporter's wealth.

A Japanese spokesman said Tokyo was not disappointed by the failure so far of countries such as China and Saudi Arabia to replicate last week's Japanese offer of $100bn (€79bn, £68bn) in emergency funds for the IMF. "We will keep suggesting this but we did not expect something this time," he said.

Japan argues that it is important to make more funds available to the IMF in case the effects of the financial crisis continue to spread. In the latest case before the IMF, Dominique Strauss-Kahn, the lender's managing director, said the fund was close to agreeing a new loan to Turkey.

"We still have some disagreement on the size of their adjustment, the consequences of the adjustment which is needed by the Turkish economy, and following that, the size of the package of the programme that the fund may finance," he said.

At the G20 summit in Washington, King Abdullah, the Saudi monarch, pledged to continue investing in the country's oil industry to increase capacity and maintain market stability.

As the Saudi stock market has plummeted, and benefits of the economic boom have failed to trickle down to the population, speculation the government might help bail out other countries had caused anger at home.

The Opec, the oil producers' cartel, forecasts that about $2,400bn (€1,900bn, £1,600bn) will need to be invested by 2030 to expand crude oil capacity and continue to meet global demand. Although demand is set to slow, the severe drop in the price of oil has threatened to delay new projects, which could result in a greater shortage when the global economy recovers.

*Chakib Khelil, Algeria's energy minister and Opec's president, said the cartel wanted oil prices of $70-$90 a barrel, and he suggested the group would try to defend this level with further production cuts in the coming months.

Opec no longer has an official price band that it tries to maintain but several members have pushed for its resurrection. Saudi Arabia had so far resisted the idea, analysts and Opec delegates said.

Analysts have said the organisation would need to take a further 1m-2m barrels of oil out of the market to rebalance supply with falling demand. Iran at the weekend called for Opec to agree a 1m-1.5m b/d cut when it meets this month.

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Opec wants oil at $70-$90 a barrel

By Carola Hoyos

Published: November 17 2008 02:00 | Last updated: November 17 2008 02:00

The Opec oil cartel wants oil prices of $70-90 a barrel, Chakib Khelil, Algeria’s energy minister and the group’s president, said on Sunday, suggesting the group would try to defend this level with further production cuts in the coming months.

Opec no longer has an official price band, which it tries to maintain, but several countries, including Venezuela, have pushed for its resurrection. However, Saudi Arabia has so far resisted the idea, analysts and Opec delegates said.

The group, which control’s 40 per cent of the world’s supplies, will next meet this month in Egypt and in Algeria in mid-December.

Analysts have said the organisation would need to take 1-2m further barrels of oil out of the market to rebalance supply with falling demand.

Iran at the weekend called for Opec to agree a 1-1.5m b/d cut when it meets later this month.

Opec has already begun to cut its production in an effort to adhere to its recent decision to reduce its output by as many as 1.8m a day from November 1.

Mr Khelil said: ”Our objective is to reach a price of $70-$90…Because it’s the price of the marginal cost for new developments, whether that’s Canadian bituminous sands, the Brazilian deep offshore or even Venezuelan heavy crude. If we don’t have $70-$90 in the next few years then eventually we’ll go much higher [in price] because we will have no production from these deep reserves, from the bituminous sands or from the kind of reserves that need $70.”

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Lion Nathan bids for Coca-Cola Amatil

By Peter Smith in Sydney

Published: November 17 2008 04:57 | Last updated: November 17 2008 04:57

Lion Nathan, the drinks group backed by Japanese brewer Kirin, has made a A$7.7bn (US$5bn) offer to acquire Coca-Cola Amatil in a move that would create the largest beverage company by sales in Australia and New Zealand.

CCA, which is 30 per cent-owned by Coca-Cola of the US, its major supplier, said the cash and share takeover proposal was pitched at 25 per cent premium to both group’s Friday close.

“There are a number of material deficiencies in the proposal”, CCA said in a stock exchange statement on Monday, adding that Lion Nathan’s offer price was “materially below recent multiples paid for domestic and international beverage companies”.

CCA said the offer was not attractive and it was not giving it further consideration.

Although it avoided an outright rejection of the bid proposal, which it called “incomplete and non-binding”, CCA said it could not provide an assurance the bid would proceed with its backing, or the support of Coca-Cola.

Lion Nathan said the A$4.5bn cash component of the deal would be largely financed by a fully committed share placement to Kirin that would raise about A$3.8bn.

Lion Nathan said the deal would create a diversified beverage group with well-known brands spanning soft drinks, spirits and wine. Lion Nathan, which is quoted in Australia and New Zealand, is Australia’s second largest brewer behind Foster’s. Its brands include Tooheys and Hahn.

It added the enlarged entity would be conservatively geared and that it had already secured facilities for “transaction debt” of A$800m

The offer comes amid a wider shake-up in Australia’s consumer industries sectors.

Kirin, which owns 46 per cent of Lion Nathan, this year expanded its presence in Australia after it acquired Dairy Farmers for A$884m, its second big purchase in the country after it bought National Foods last year.

Cadbury Schweppes, the UK-based drinks group, is also looking to sell its Australian operations, while Molson Coors, the North American beer group, has taken control of a 5 per cent stake in Foster’s, which is undertaking a strategic review of its wine operations.

Under the Lion Nathan proposal, CCA shareholders woluld be offered a mix of A$4.54bn cash and 346m Lion Nathan shares, equivalent to A$6.15 and 0.469 Lion shares for each CCA share.

Based on Lion Nathan’s closing share price last Friday of A$8.95, the proposal equates to A$10.35 per CCA share, a premium of 25 per cent to CCA’s closing share price of A$8.25 on the same day.

CCA rose A$1.35 to A$9.60 in lunchtime trading in Sydney on Monday.

CCA is being advised by Macquarie Capital, while Lion Nathan is being advised by Caliburn Partnership.

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German billionaire Merckle hit by VW bet

By Daniel Schäfer in Frankfurt

Published: November 16 2008 20:48 | Last updated: November 16 2008 20:48

The surge in Volkswagen’s share price in October not only left hedge funds reeling, but also caused a crisis for one of Germany’s richest men.

Adolf Merckle, owner of a large family group that employs more than 100,000, is in talks with a consortium of almost 40 banks over a bridging loan after losing a large sum by betting on a falling VW share price.

Several bankers told the Financial Times that Mr Merckle’s VEM investment company made a “high three-digit million euro” loss after selling short VW shares.

Neither Mr Merckle, who is Germany’s fifth-richest person with a net worth of $9.2bn, according to Forbes magazine, nor a spokesman could be reached for comment yesterday.

VEM’s troubles are another example of how Germany’s family owned companies, once famed for their anti-cyclical, long-term approach to business, have made use of short-term tactics or complex financial instruments that were previously a speciality of hedge funds.

Porsche, the carmaker, made billions of euros from VW option trades – the same stock on which Mr Merckle, along with many hedge funds, bet and lost.

Bafin, the financial watchdog, is formally investigating the extraordinary surge in VW’s share price last month, which briefly made the carmaker the world’s biggest company by market capitalisation. However, the market turmoil stirred by VW’s ballooning share price caused no political backlash in Germany.

Bankers said pressure on Bafin to act could rise now that a leading German industrial family, and not only foreign hedge funds, had been hit.

The Merckle family empire makes about €30bn in revenues and stretches from Ratiopharm, Germany’s largest generic drugs maker, to a majority stake in Heidelberg Cement, the country’s biggest cement maker.

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餅菓子から基準の７千倍の殺虫剤成分　福岡の「もち吉」（1/2ページ）

2008年11月17日21時39分

写真殺虫剤成分が検出された「えん餅」の小倉あん入り

　福岡県は１７日、和菓子メーカー「もち吉」（本社・同県直方市）が１０月末に販売した餅菓子「えん餅」の小倉あん入りのものから、最大で基準値（０．０１ｐｐｍ）の７千倍の殺虫剤成分フェニトロチオンが検出されたと発表した。県は食品衛生法に基づき、もち吉に製品の回収と原因究明を指示した。健康被害の訴えは寄せられていないという。

　県保健衛生課によると、通信販売で購入した横浜市と大阪市の消費者から、「ナフタリンのような風味と苦みを感じた」などという苦情が寄せられたため、調査していた。いずれも１０月２９日に製造された小倉あんのえん餅から、１．１～７０ｐｐｍのフェニトロチオンが検出された。

　７０ｐｐｍの餅の場合、体重６０キロの人が１０分の１個を生涯食べ続けると、健康被害が出る可能性があるという。

　同課は「濃度からみて原料に入っていたとは考えづらい。製造工程中に故意か過失で混入した可能性が高い」としている。

　えん餅には白あん入りと小倉あん入りの２種類ある。あんは作り置きで、同一ラインで午前に白あん、午後に小倉あんを皮で包んで完成品にしているという。１０月２８日～１１月５日製造の完成品を調べたところ、１０月２９日に作られた小倉あんのえん餅からだけ問題の成分が検出された。

　同日製造の小倉あんのえん餅は、２９８個が通信販売で売られ、６千個は工場内で保管、８１６個は店頭で販売されていると見られる。北海道から鹿児島まで３４都道府県、１２指定市に１８７店舗ある。

　皮は小倉あん、白あんとも共通のものを使っているため、県は問題成分は小倉あんに混入していたとみている。

　従業員への聞き取りで、このあんは１０月２５日に作ったらしいことがわかった。同社は、同日製造の小倉あんを使った可能性がある１０月２８日～１１月２日製造の完成品１４万５１２８個について、１４日から自主回収を進めている。

　県によると、同社は苦情を把握した４日以降もえん餅を作り続け、回収指示を受けた翌１５日も、午前中まで白あん分は製造を続けていた。記者会見した宮越博昭常務は「当初は苦情の内容が把握できておらず、製造を止めるという判断に至らなかった。結果を踏まえると、すぐに止めるべきだった」と述べた。

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関西テレビ、開局初の営業赤字に　広告収入回復せず

2008年11月17日20時45分

　関西テレビが１７日発表した０８年９月中間決算は、営業損益が１７億円の赤字、純損益が１１億円の赤字だった。営業損益、純損益ともに赤字に転落するのは５８年の開局以来初。通期も営業赤字になる見込みという。

　売上高は同１５．５％減の３１３億円。「発掘！あるある大事典ＩＩ」の捏造（ねつぞう）問題発覚で０８年３月期に落ち込んだ広告収入が回復しなかった。大型のイベント収入がなかったことも響いた。

　０９年３月期は、売上高は前期比１０％減の６３８億円、営業損益は８億６千万円の赤字を予想。通期での営業赤字も開局初。役員報酬の削減など経費削減で営業赤字幅を最低限に食いとどめるという。

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朝鮮総連本部の土地建物、差し押さえ認めず　東京地裁

2008年11月17日17時26分

　在日本朝鮮人総連合会（朝鮮総連）の中央本部がある土地建物（東京都千代田区）をめぐり、整理回収機構が、差し押さえのための強制執行手続きができるよう求めた訴訟で、東京地裁（山崎勉裁判長）は１７日、機構側の請求を棄却する判決を言い渡した。機構は控訴する方針。

　機構は、朝銀信用組合が融資した約６２７億円を機構に返済するよう朝鮮総連に命じた昨年６月の東京地裁判決を受け、本部の競売を申し立てた。訴訟では、団体名義で土地建物を所有権登記できない任意団体である朝鮮総連から債権回収する際に、所有者である第三者の合資会社「朝鮮中央会館管理会」に対しても差し押さえることができるかが、争点となった。

　山崎裁判長は、第三者名義の不動産に競売が行われると、登記が権利関係を正しく示さない状態を許すことになる、と指摘。管理会は朝鮮総連とは独立した会社だと認め、「朝鮮総連の最高幹部が代表社員を務めるなど、実質的な所有者は朝鮮総連だ」とする機構側の主張を退けた。

　機構はこの訴訟のほか、朝鮮総連が土地建物の所有者であることの確認を求めた別の訴訟も起こしており、東京地裁の判断が注目される。

　判決について朝鮮総連中央本部は「当然の結果だ。そもそも朝鮮中央会館は管理会の所有であり、強制執行を求めること自体、事実と法を無視したものだ」とするコメントを出した。

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ＧＭ、保有スズキ株売却へ　２２３億円でスズキが取得（1/2ページ）

2008年11月17日19時45分

　スズキは１７日、米ゼネラル・モーターズ（ＧＭ）が保有するすべてのスズキ株（発行済み株式の約３％）を買い取って、自己株式にすると発表した。取得総額は約２２３億円。ＧＭは販売低迷で経営不振が続いており、資金繰りのため、スズキ株を売却する。両社の業務提携関係は継続するが、２７年間に及んだ資本関係にいったん幕を閉じる形となる。

　株式売却はＧＭ側がスズキに申し入れた。１４日、同社の鈴木修会長とＧＭのリチャード・ワゴナー会長兼最高経営責任者（ＣＥＯ）が電話会談を行い、合意に至ったという。鈴木会長は１７日、「ＧＭが資金調達上、保有株式を処分する必要性に迫られた状況も十分理解したので、応じた」とコメントした。

　スズキの株式は１７日の終値の１株１３６３円で１８日の立ち会い外取引で売却される。スズキは手元資金で取得資金をまかなう。ＧＭが再度取得する意向を示した場合は「前向きに検討する」としている。ただ、ＧＭの経営の行方によっては、スズキ株の再取得は難しいとの見方もある。

　一方で、ＧＭはガソリン高による大型車離れや、金融危機による消費の冷え込みが経営を直撃し、０８年７～９月期決算は５四半期連続の赤字に転落した。７日の決算会見では同業大手のクライスラーとの合併交渉を中断し、「資金繰りの改善に百％集中する」（ワゴナー会長）との考えを示していた。

　ＧＭとスズキは８１年に５．３％を出資して資本提携を結んだ。一時は比率を約２０％に引きあげ、スズキが主導して開発した小型車をＧＭグループのブランドで販売するなど提携関係を深めてきた。今後も「現在進行しているプロジェクトは継続する」（鈴木会長）と強調。ＧＭのワゴナー会長も「株式売却に影響されることなく、相互のビジネス関係を継続する」などとコメントした。

　両社の提携関係で最も重要視されているのは、地球温暖化問題に対応する燃料電池車などの共同開発だ。中核の燃料電池の開発はＧＭが主導。ハイブリッド車も開発中だ。ただ、環境対応車の開発は巨額の投資資金が必要なため、ＧＭの業績悪化が続けば、開発が遅れる懸念がある。

ＧＭは円高などの影響で日本メーカーの業績が低迷した９８年以降に、豊富な資金を背景にいすゞ自動車への出資比率を拡大するなど、国内メーカーとの関係を強化。ただ、その後の経営悪化で、０５年には２０％保有した富士重工業株、０６年には７．９％保有したいすゞ自動車株のすべてを売却。その後、トヨタ自動車が一部を取得した。最後に残ったスズキ株の売却で日本メーカーとの資本関係はなくなる。

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マンション開発「環商事」倒産、負債１５８億円

2008年11月17日19時41分

　マンション開発の環（たまき）商事（大津市）が１７日、大津地裁に自己破産手続きを申請し、開始決定を受けた。民間調査会社の帝国データバンクによると、負債総額は１５８億円。主に滋賀県と京都府で「アメニティ」「コンフォール」などのブランド名で分譲マンションを販売していたが、販売減で資金繰りに行き詰まったという。

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キリンの豪子会社、豪コカコーラに買収提案

2008年11月17日18時31分

　キリンホールディングス（ＨＤ）は１７日、傘下の豪ビール大手ライオンネイサン社が、オセアニア最大手の清涼飲料会社コカコーラ・アマティル社（ＣＣＡ・本社シドニー）に買収提案したと発表した。実現すれば、オセアニア最大の総合飲料会社となる。

　ライオン社はＣＣＡの全株式を取得して経営統合する計画で、買収総額は約８０億豪ドル（約４９００億円）。ライオン社はＣＣＡと１１月中に合意し、豪州当局の承認を得た後、来年６月をめどに契約を締結したい考えだ。一方、ＣＣＡは同日、「ライオン社の提案した買収価格は、ＣＣＡの適正価値を反映していない」とのコメントを出した。

　キリンＨＤはライオン社の第三者割当増資に応じ、約２３００億円を出資する方針。キリンＨＤは市場縮小が続く国内酒類事業に依存する体制を見直している。１２年度までに約３千億円を企業合併・買収（Ｍ＆Ａ）に使う計画で、大半をこの買収に費やす。古元良治常務は「グループのアジア・オセアニアでの総合飲料戦略に合致しており、調達、製造、物流面で合理化メリットがある」と強調した。

　ライオン社の０７年度の売上高は約１２００億円、ＣＣＡは２４５０億円。

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相撲協会、12月26日に研修会　土俵態度など徹底

　日本相撲協会は16日に開いた理事会で、12月26日に親方や力士など全協会員を対象として、生活面や土俵態度、礼儀作法などを徹底させるための研修会を開催することを決めた。東京・両国国技館で約２時間行う予定。

　ロシア出身力士による大麻騒動など、不祥事続出の角界を引き締めることが狙い。武蔵川理事長（元横綱三重ノ海）は「ビデオを見せるとか、これからいろいろ考える」とし、無気力相撲防止の呼び掛けについては「話の中に入るでしょう」と明言した。

　また2009年の力士、親方らの給与は、不景気などを理由として８年連続で据え置き。相撲協会の九重広報部長（元横綱千代の富士）は「もっと頑張ればアップしてやるよ」と話した。〔共同〕

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武蔵川理事長は無気力相撲に厳しく対処

　日本相撲協会の武蔵川理事長（元横綱三重ノ海）は１６日、「無気力相撲」に対して厳しく対処することを宣言した。この日、福岡国際センターで外部役員（理事２人、監事１人）を加えて初めての理事会を開催。同理事長は「八百長相撲と世間で言われているが、無気力相撲にはいっそう厳しく処分していく」と話し、村山弘義外部理事も「誤解を受けないように協会を浄化してほしい」と続けた。同協会は八百長疑惑を報じた「週刊現代」などと係争中で、あらためて「無気力相撲」に対しての協会側の厳しい姿勢をアピールした。また０９年も力士、親方らの給与改定を行わないことも決定。力士会側は７月から給与アップを求めてきたが、協会側は人気低迷、不景気を理由に８年連続での据え置きを決めた。

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「無気力相撲」めぐり迷走＝相撲協会

　日本相撲協会が１７日、覇気のない相撲を取った十両の保志光への「注意」をめぐって迷走した。

　審判部は、九州場所４日目に体調不良のためあっけなく負けた保志光（モンゴル出身、八角部屋）を「注意」するよう監察委員会に具申。友綱監察委員長（元関脇魁輝）は、保志光の師匠の八角親方（元横綱北勝海）と一門が同じ高砂監察副委員長（元大関朝潮）を介して、八角親方にこうした問題点を指摘したという。

　ところが、友綱親方は１７日夕に「八角親方にはっきりと意思が伝わっていなかった」として「注意を与えた」とする同日午前の発言を撤回。けがや病気のためとはいえ、気力のない相撲は許されない。相撲協会は、八百長報道をめぐる裁判の係争中で「無気力相撲による注意処分」と誤解されることを嫌った関係者らの思いが、過剰反応となったようだ。（了）

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Man's shares plunge on hedge fund outflow fears
Thu Nov 6, 2008 11:27am GMT

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By Laurence Fletcher

LONDON (Reuters) - Shares in Man Group (EMG.L: Quote, Profile, Research), the world's largest listed hedge fund group, fell more than 27 percent on Thursday on fears of further client redemptions, while other asset managers also reported gloomy results.

Man said it had been moving most assets into cash in its Man Global Strategies (MGS) product, which fell 18.6 percent in the period, and this had caused the firm to bring forward a $107 million (67 million pounds) amortisation charge on sales commissions.

The MGS product, which invests in hedge funds, had $8.6 billion in funds under management at the end of September.

"We read management's decision to accelerate amortisation of upfront MGS sales commissions as an admission that outflows from MGS are expected to accelerate," analysts at Citi say.

The group's first-half pre-tax profit fell 24 percent to $622 million, due to a drop in performance fees, while funds under management fell 9 percent to $67.6 billion.

Separately private equity investor group 3i (III.L: Quote, Profile, Research) and fund firm Henderson Group HGI.L gave sombre assessments of their businesses, reporting falling returns as nervous investors pulled money out, sending their shares lower.

"We are managing the business on the assumption that market conditions remain difficult in the short to medium term," Henderson chief executive Andrew Formica said.

Man Group led the falls with its stock down over 27 percent at 284.75 pence at 10:11 a.m., when the Dow Jones Stoxx European financial services sector index was down 8 percent.

Meanwhile Henderson Group said its assets under management fell 3 percent in the three months to end-September, sending its shares down 6.6 percent.

And 3i said it expected a more challenging second half as the credit squeeze and economic downturn continues to reduce portfolio earnings and dampen M&A activity.

Its shares lost 8.5 percent after it said first-half revenues from companies sold from its portfolio were some 43 percent lower as the credit crunch curtailed exits from companies in which it had invested.

NET INFLOWS

But despite shell-shocked financial markets, investors continued to look for places to put their money, and both Man and Henderson saw solid net new asset inflows.

At Man, client inflows were up 17 percent as institutions continued to invest in funds, while Henderson said that its net inflows were 800 million pounds in the period.

And Henderson's Formica said it sees the opportunity to add an investment team by the end of the year.

3i also sees opportunities in the wake of the credit crunch despite a severely curtailed M&A market and a poor outlook for portfolio company sales.

"We have on the buyouts side some evidence of being able to access debt where there have been good quality buyouts to be done," said chief executive Philip Yea.

"My own guess that for the right transactions, the next calendar year credit will be available but it probably needs to get through year end," he said.

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The Hedge Fund Collapse

by Jesse Eisinger | See Archive
In the next few months, thousands of hedge funds will go out of business. What the world will look like for the survivors.

The past several years, the most valued people in our society were those who could make money from money. They weren’t cancer researchers or astrophysicists. They weren’t even the really important people, like N.B.A. players or movie stars. They were hedge fund managers. Last year, five of them made well over $1 billion each.

They scored, in part, by charging enormously high fees to investors who felt lucky just to be in business with them. The air of mystery that surrounded hedge fund managers—aided by their unregulated status and in some cases their black-box investing techniques—seemed only to bring in more money.

So much for that. The hedge fund mystique died with the crash of 2008. Youthful traders and big shots from investment banks won’t soon be given billions to invest based on their résumés. Mystery and opacity will be a negative, not cause for reward. Regulators, one hopes, are unlikely to again ignore an industry that, under their noses, grabbed at its peak nearly $2 trillion to manage.

As many as half the funds that existed earlier this year, when the industry topped out at 10,000 funds in business, could fail or be wound up in a year’s time, industry watchers estimate. Assets under management at hedge funds are falling as investors rush to pull money out of good funds and bad. In September, investors took out an estimated $41 billion from the sector, the largest monthly outflow of money since experts began tracking numbers. October looked even worse.

Washington is gunning for the industry. In a now-infamous memo, disgraced Lehman Brothers C.E.O. Dick Fuld reported disapprovingly that Treasury Secretary Hank Paulson wanted to “kill the bad [funds] and regulate the rest.” Regulators may soon have the chance. In November, managers of the biggest hedge funds will be dragged before Congress and given a roasting that could make the treatment of Fuld look cool by comparison. What will emerge from the heat is a smaller, more focused hedge fund industry, regulated by the federal government, with pay that better reflects long-term performance.

Many of the industry’s stars have been crushed. Tontine, a fund run by Jeff Gendell, one of the hot Greenwich, Connecticut, managers, was down 65 percent through September after a less than stellar 2007. Phil Falcone’s Harbinger had more than $20 billion under management after its main funds were up 116 percent in 2007; it was up 40 percent in the first half of 2008, before that gain was almost entirely wiped out in the third quarter. Steve Mandel’s legendary funds—among the so-called Tiger Cubs spun out of investor Julian Robertson’s company—were off between 23 and 31 percent this year through September, and an investor in his funds says that through mid-October, each of the funds was down another eight percentage points or so. Two funds run by onetime hockey player Tim Barakett’s Atticus were down 25 and 33 percent this year, and their assets under management fell by $5 billion, to $15 billion.

Many fund managers knew this day would come. They just thought it would happen to the other guy. Cliff Asness, a hedge fund manager and finance scholar, cautioned repeatedly in recent years about the faddishness of hedge funds. In 2004, he concluded, “The hedge fund structure does not create investing skill out of thin air…and the tools that hedge funds use (leverage, short-selling, and derivatives) certainly come with risk.”

At first, hedge funds were truly innovative. Eventually, though, so many new funds poured into the industry that they eroded the competitive advantage of the original investors. Hedge funds, it turns out, were not “hedged” in any meaningful sense of the word. Too few shorted enough stock or managed risk prudently. Recent months have made it clear that hedge funds as an industry were, as the wisecrack had it, a pay scheme masquerading as an asset class. Sure, many funds have their “high-water marks,” meaning they don’t receive their performance fees until they get back to the levels they had achieved at the peak. But many won’t bother staying in business.

Some managers may harbor secret hopes of reopening with new funds, à la the patron saint of undeserved second chances, John Meriwether, who blew up Long-Term Capital Management before blowing up again this year. But this time, the world won’t be fooled again. At least we hope.

To be clear: Though no group benefited more from the worldwide speculative bubble—not corporate chieftains, not homeowners, not individual investors—hedge funds didn’t cause the credit crisis. Some are doing well, even spectacularly. And many will survive. While hedge funds have been attacked for their risky behavior, in the end they weren’t the causes of systemic collapse. It was the “respectable” outfits—Bear Stearns, Lehman Brothers, A.I.G., Wachovia, Washington Mutual—that went down, bringing the world’s financial system with them. Hedge funds are now feeling the aftershocks.

Which is perhaps how it should be. The truth that’s now becoming clear is that hedge fund managers didn’t have some magical ability to spin wealth while the rest of us toiled at our day jobs. Instead, they made money because markets were predictable, stable, and for the most part, up. Hedge fund managers reached their apotheosis in recent years because of their dazzling performance after the Nasdaq crash. They seemed to have made good on their promise to make money in friendly markets and bad ones. But that was easy. Other than tech stocks and giant blue chips, nearly every possible asset class and sector had become cheap by 2000. Stock hedge funds shorted the obvious garbage and bought the cheap stuff, like real estate and industrials. Over the next several years, the investing world was placid. Prices didn’t gyrate. With interest rates low, it was logical to make more risky investments.

That led to a worldwide bubble. Too much money was chasing the same things. Some people warned of impending pain, like money manager Jeremy Grantham or New York University economist Nouriel Roubini, but they were dismissed as one-note permabears. Former Federal Reserve Chairman Paul Volcker, nobody’s idea of a panicker, sounded the alarm about the fragility of the financial system in a 2005 speech that was widely circulated on Wall Street. And it was just as widely ignored.

Then came the misbegotten ban on short-selling implemented by the Securities and Exchange Commission in the wake of the failures of Bear Stearns and Lehman Brothers. Hedge funds couldn’t unwind bets they had already made. The measure of how damaging that move was is that investors now talk about “political risk” when assessing the United States. Previously, that phrase was reserved for investments in a capricious state like Russia.

Other problems were self-inflicted. Hedge funds have been like lemmings over the past several years. They ran the same strategies. Often, they crowded into the same stocks. In October, Volkswagen soared mysteriously to briefly become the largest company in the world by market cap amid the global economic chaos. The reason? Hedge funds had bought Porsche and sold short ­Volkswagen, of which Porsche owned a piece. Once the market began to crash, they all rushed to reverse the same trade.

In their heyday, fund managers would go to “ideas dinners” at the best restaurants in New York and London and persuade one another to make the same investments. Those excluded from the dinners would peer at the S.E.C. filings of the smarter among them and copy their trades, eliminating the advantages the more intelligent investors had in the first place.

The deeper problem among the long-short equity investors—those using the most popular hedge fund business model—has been Warren Buffett idolization. These investors didn’t worry about having to get out of an investment, because they were buy-and-hold guys, like Buffett. They didn’t worry about overconcentration because Buffett had famously said, “Wide diversification is only required when investors do not understand what they are doing.” Hedge fund managers took it to heart.

Harbinger’s Falcone is fast becoming the poster child for this approach. He had a spectacular 2007. And then in the first half of 2008, again, he was continuing to blow away the indexes.

There’s an old joke on Wall Street in which an investor calls his broker every day to tell him to buy. After a couple of weeks of this, the stock is up. The investor calls the broker and tells him to sell. The broker says, "Okay. To whom?"

The joke was on Falcone. Take the case of a tiny biopharmaceutical company called Medivation. Falcone’s funds filed a notice that they had become a holder of more than 10 percent of the company in December 2007. After that, Falcone was an insider, required to file with the S.E.C. within two days each time he bought and sold the company’s stock. Everyone in the market could see every move he made in it, which meant he lost whatever competitive advantage he had.

Then there is the age-old problem of leverage. Equity hedge funds began using more and more leverage in the past decade. The rule in the U.S. on stock investing is that you cannot borrow more than half your position. But many long-short hedge funds had much more leverage than that, in part by running some of their money through affiliates in London, where regulation is weaker. Some equity funds would go to five or even six times.

The Fed has the responsibility of interpreting margin rules, and in theory, the S.E.C. enforces them. In reality, the rules have been interpreted to the point of meaninglessness. When he was Fed chairman, Alan Greenspan explained the central bank’s view, testifying in November 1995 that the Federal Reserve Board “continues to believe that self-regulatory organizations should be given greater responsibility for margin requirements.” In 1996, the Fed came out with an updated rule that allowed for American broker-dealers to “arrange” credit for their clients in other countries, if they couldn’t give it themselves. The result was that investors could shop around for jurisdictions that allowed as much leverage as they wanted. “That’s when our world changed from asking ourselves, ‘How levered can we be?’ to ‘How levered do we want to be?’ ” says one hedge fund veteran. Today, nobody knows precisely how much leverage is out there in the financial markets because no one attempts to keep track.

Investment banks’ prime brokerages would offer their clients “enhanced leverage,” according to hedge fund insiders, through their London affiliates, neutering the rules to the point of uselessness. When Lehman went down, everyone paid the price. Dozens of managers found that their money wasn’t held in separate, accessible accounts. Today, they are standing in line with everyone else, somewhere on the long list of Lehman creditors.

Smart investors will always be with us. They will continue to invest both long and (assuming that it remains legal) short. They will call themselves hedge funds unless they get smart and rebrand.

But the hedge fund business itself will not look anything like it did during its heyday. Washington clearly intends to declaw the industry. That will probably mean, among other things, that hedge funds (and private equity firms) will finally lose the argument about taxation. No longer will their income be taxed as capital gains but as regular income. The additional tax dodge of keeping money offshore to defer taxes for years should, and probably will, be closed.

After having looked obviously unsustainable for years, the egregious hedge fund fees will come down. The model of charging a 2 percent management fee while the fund manager takes a fifth (and sometimes more) of the profit is finally under sustained attack. Not long ago, the trend was for hedge funds to become bigger. They morphed into traditional money managers and began to manage tens of billions of dollars. Most hedge fund watchers think the biggest fund managers will only get bigger. But that’s hard to see. Endowments and pension funds are going to be chastened. The remaining hedge fund investors will demand focus from their managers. Small will become beautiful again. The survivors will be nimble and run less money. The esoteric strategies based on levering up small arbitrage opportunities will become less popular if regulators do their job and crack down on excessive borrowing.

Perhaps ironically, many hedge fund managers are anticipating great times—if they survive. “This will be the best moneymaking environment of my career,” the hedge fund veteran tells me. “Tons of competition are out, and even the capital that will survive is underlevered. And we are starting with disparities and opportunities you’ve never seen.”

For the survivors, it’s going to be a wonderful time. But there won’t be many of them.

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U.S. hedge funds anxious as redemption deadline looms
Thu Nov 13, 2008 7:23pm EST

By Svea Herbst-Bayliss

BOSTON (Reuters) - Anxiety is sweeping the hedge fund industry before a crucial deadline on Saturday, when investors angered by recent heavy losses are expected to demand the return of billions of dollars.

"Managers have a pretty good feeling for what is coming, and there are significant redemption requests out there," said Stewart Massey, founding partner of Massey, Quick & Co., an investment consultant that puts money into hedge funds.

Saturday is the last day for thousands of investors to notify hundreds of hedge funds if they want their money back by year's end.

Hedge funds that require three months notice from investors who wanted to exit by year's end had a similar deadline on September 30 -- also known in the industry as "D-Day."

More such deadlines loom for funds that allow investors to give less notice before taking their money out, fund managers said.

In the last two days, several prominent fund managers made public predictions that illustrate the depth of gloom now sweeping the $1.7 trillion hedge fund industry.

Pension funds, endowments and wealthy investors have put money into hedge funds so quickly that industry assets have doubled in about three years.

Hedge funds are nursing their the worst-ever losses, with the average fund down 15 percent this year, and many investors are punishing the managers for lousy returns.

The flood gates are about to open.

George Soros, an industry elder statesman who emerged from retirement at age 78 to protect his fortune at Soros Fund Management, said he expects hedge fund industry assets "will shrink by between 50 percent and 75 percent."

Daniel Och, who runs Och-Ziff Capital Management Group (OZM.N: Quote, Profile, Research, Stock Buzz), told analysts he expects investors to run for the exits soon. The same goes for Wesley Edens, the head of Fortress Investment Group's (FIG.N: Quote, Profile, Research, Stock Buzz), who is also bracing for redemption notices.

"We expect to experience increased redemptions at year end" in our liquid hedge funds, Edens told investors on a conference call on Thursday, adding that he expects the pace of redemptions to remain high next year.

PUNISHMENT

Even though hedge fund losses are less than mutual fund losses, wealthy investors said they are disappointed because hedge funds have been just as vulnerable to market declines. They are also tired of the long lock-up periods and lack of transparency in the funds, several investors said.

In October alone, investors pulled $100 billion from the loosely regulated funds, according to hedge fund data tracker, Eurekahedge. And investors expect that number to keep rising in November and December.

Even fund managers who have not posted poor returns are being punished.

Jeff Gendell, an industry star who had delivered average annual returns of 39 percent since 1997, said redemptions at other fund firms are causing a "cascading effect" as people try to reposition themselves in the market. In turn, his own funds suffered such heavy losses that he decided to close two portfolios.

Some large hedge fund managers are also being hit with redemption notices from endowments and pension funds that have been forced to reshuffle their portfolios in the wake of sharp stock market declines. Many have to meet asset allocation targets, and with stock prices way down, they find themselves too heavily invested in hedge funds.

"We are definitely seeing a lot of rebalancing which has led people to redeem," said Massey, the consultant.

Hedge funds may try to defend themselves against the liquidation wave by limiting the amount of money investors can withdraw at a time by either suspending redemptions or throwing down gates.

Lawyers for hedge funds have said dozens of managers are looking at how they can hold on to clients. Swiss hedge fund group Gottex Fund Management said Thursday it has temporarily suspended redemptions from funds of funds holding some 65 percent of its total assets.

With November 15 seen as a watershed date, some funds are sitting on a pile of cash in anticipation of meeting investor requests.

But some firms that did not plan as well may be forced to sell, managers said, possibly putting more hurt on an already-ailing market.

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Hedge managers brace for shrinking feeling

By Kate Burgess

Published: November 15 2008 02:00 | Last updated: November 15 2008 02:00

This weekend is a witching hour for hedge fund managers. Many will receive redemption requests from clients wanting to cash in their holdings at the end of December.

After the sharp deterioration in asset values and market turmoil since the end of September, many analysts have predicted a surge in client requests to withdraw their money. It could mark a critical moment for the industry, allowing it to quantify accurately for the first time how much money will be withdrawn by the year end. From there, managers will be able to assess how much more of their investment portfolios they might have to sell to meet redemption requests.

Many funds allow monthly withdrawals. But as one analyst says: "Macro and multi-strategy funds are mostly on 45- and 30-day notice periods, and November 15 will be first opportunity for these clients to vote with their feet on September's and October's performance."

For some investors, hit by unrelenting bouts of market turmoil and poor performance, a wave of more redemptions in December will be the final straw.

"This quarter raises major questions for the industry," says a fund of hedge fund manager. The money flowing out of the industry "will be the highest it has ever seen. We are watching the tidal wave that helped hedge fund managers build their businesses fast over the past 10 years suddenly turn back even faster. The industry could halve in six months."

George Soros told US Congress this week the industry could shrink by up to 75 per cent next year.

For more than a year hedge funds have come under pressure from rising withdrawals. At the same time, prime brokers have been jacking up the costs for funding hedge funds and raising collateral demands.

Banks and investors have become more risk-averse amid unprecedented volatility and illiquidity, causing a race to sell assets before markets freeze up entirely.

This has led to a massive reduction in money borrowed by funds, which have sold assets to "deleverage" their portfolios even if it means crystallising losses and sacrificing fees.

Risk-aversion is expected to increase in the next two months as banks, facing year-ends in November and December, will become more careful to conserve their capital, warn hedge fund managers.

Falls in the value of Man Group, the world's largest listed hedge fund manager, illustrate the scale of concern about the industry. Man's shares have halved in a week after it surprised the market by revealing faster and worse-than-expected falls in assets under management, largely as a result of deleveraging. Analysts say it could be forced into further asset sales as redemptions pick up.

Additional pressure is now coming from funds of hedge funds, which are reckoned to own as much as a third of single-manager hedge funds. Many are expected to put in redemption requests in anticipation of high levels of withdrawals from their own investors in coming months.

"There is a mad rush for liquidity," says one manager of a fund of hedge funds.

"Clients are taking what cash they can, where they can, regardless of whether a fund is performing well or poorly," says another.

Many funds have put up gates and barriers to lock in investors and block redemptions. Fund of hedge fund managers are beginning to do the same.

Managers fear that if they do not, withdrawals will set off another bout of selling into falling markets, spurring another vicious cycle of redemptions and selling.

Despite hedge funds' best efforts to stem the outflows, analysts at Morgan Stanley say: "We think we may see 20 to 30 per cent net redemptions from European/Asian hedge funds and 10 to 15 per cent from US hedge funds, as clients seek to de-lever.

"On top of this, hedge funds are down 15 per cent year-to-date. We forecast hedge fund assets could shrink by at least 35 per cent from $1,900bn at June 2008 to $1,300bn."

If the worst comes to the worst, says Morgan Stanley, hedge fund assets could be down a further 45 per cent by next year to below the $1,000bn mark.