Sarkozy asks - should banks be allowed to operate offshore!!!!! -

[milkeybar kid]

Full article -

http://www.ft.com/cms/s/0/464f09e2-bf49-11dd-ae63-0000779fd18c.html

  8th paragraph down

Some European finance ministers claim that the "opaque environment" of

offshore finance - particularly hedge funds - contributed to reckless

behaviour and, ultimately, the current crisis. President Nicolas

Sarkozy of France is among those questioning whether, at a time of

taxpayer-funded bail-outs, banks should even be allowed to operate in

tax havens.

[giantpanda]

Hi!

A completed theoretical question.

In practice, this is hardly possible.

Where he to impose this in France, where would it put French banks in the international competition.

His affirmation is only to increase the control on tax havens.

Yours,

giantpanda

[cooperlola]

MBK, I was reading a related article in the Grauniad some weeks ago.  I confess that hedge funds are a bit of a mystery to me yet they do seem to influence the world economy far more than is healthy.  These are the times when I really miss Gluey who used to explain such things really well.

But the tail really does appear to be wagging the dog now and high stakes gamblers (which is truly all these people are) are milking the common man, who's just trying to keep his head above water, for all he is worth.

[milkeybar kid]

[quote user="cooperlola"]

MBK, I was reading a related article in the Grauniad some weeks ago.  I confess that hedge funds are a bit of a mystery to me yet they do seem to influence the world economy far more than is healthy.  These are the times when I really miss Gluey who used to explain such things really well.

But the tail really does appear to be wagging the dog now and high stakes gamblers (which is truly all these people are) are milking the common man, who's just trying to keep his head above water, for all he is worth.

[/quote]

I agree 100%  , based offshore and are virtually unregulated.   I digress - but perhaps this is a start of closing the doors - recently read somewhere (sorry cant remember where) " Could UK offer options for expat banking. "

 Interesting read Times Online 11th December 2008     The article uses the words 'tax haven' and 'Isle of Man' from the outset.

A

tax to fund a deposit protection scheme? It sounds nice but isn't all

this a move to level the playing field for investment right across the

board. Once you start reducing the element of risk then investment

management starts to become pointless and holding back some interest at

source is going to turn people away from the offshores, which is

obviously the intention.

So, the UK Government will be

appearing to help offshore investors and in the same breath deter them

from investing with the likes of IoM.

I think all this is going to get very, very messy.

 

[Slippery Sam]

Interesting post MBK. It sounds like you have fallen for the "unregulated, offshore, secret, dodgy tax haven" banking stories so common in the Times and Guardian. Yes, "offshore" and" tax haven" are effective sound bites for those who want to build a false mental picture but I can tell you the Isle of Man is very well regulated. If it wasn't, France would hardly be signing a dual taxation agreement with the Isle of Man Government today would it?

Never let truth get in the way of a good story eh?

[parsnips]

Hi,

    It may well be that people from more exotic places like russian oligarcs and south americans can exploit so-called "tax havens" like the I.O.M, but for european based savers it was all sewn up by the european savings directive which all the european centres have signed, and which means you have either to pay a (progressively more punitive) witholding tax, or agree to declare your interest in your country of residence. For good measure the "havens" report your interest to your government.You should not believe much that you read in the Grauniad, the other day there was an article (by one of their irish writers) claiming that Arthur Scargill was right all along!!

[Slippery Sam]

[quote user="parsnips"]You should not believe much that you read in the Grauniad, [/quote]

I don't but Mr Broon loves to keep going on about offshore tax havens and the rags keep printing the same old **llocks. Say things enough times and someone will believe it.

[baypond]

There are thousands of hedge funds, but you have to remember this is a generic name. They actually operate in many different ways in many different assets. Some are agressive in their strategies, and use fairly high leverage, others are more reserved than a lot of Asset Managers (pensions funds). They are always flagged as a bad aspect of financial markets, but in fact behave in very much the same ways as banks. They have capital, which they leverage to make money. The main problem is that they are largely unregulated in comparison to Banks. However, this doesn't mean that they can operate in an illegal manner, and the still have to work within the parameters set out by the regulatory authorities in the markets they operate. The authorities are also trying to encourage them to participate in some of the plans to take toxic assets off banks balance sheets, so in fact they could help to be part of the solution. As with all news, it is written to be interesting, and provoke reaction. At times of stress, a lot of news is sensationalist and inaccurate. A bit like politicians.

[allanb]

[quote user="cooperlola"]I confess that hedge funds are a bit of a mystery to me yet they do seem to influence the world economy far more than is healthy.  These are the times when I really miss Gluey who used to explain such things really well.

But the tail really does appear to be wagging the dog now and high stakes gamblers (which is truly all these people are) are milking the common man, who's just trying to keep his head above water, for all he is worth.[/quote]Here we go again, bashing the hedge funds: but they are the wrong target.  Do you actually know a common man who has been milked by a hedge fund? 

No, I thought not.

A hedge fund is a high-risk investment for people who can afford the risk.  Investing in one is a bit like betting on a series of horses: if you know a lot about the horses, you have a reasonable chance of making a decent profit, but there is also the risk that you will lose a bundle.

Suppose for example you give me money - as a trustee to look after your pension fund, or as a banker to look after your savings - and I put it all on a series of horses and lose the lot.  You would be fully justified in blaming me, but you wouldn't blame the bookies or the race organisers, would you?

A lot of the money lost by banks was lost by means of contracts with hedge funds that turned out to be unsound.  (If you want to know more, google "credit default swaps" as an example.)  In my opinion, FWIW, it's fair to blame a large part of the crisis on incompetent bank management and ineffective bank regulation.  But the hedge fund investors are just people who made a risky bet and lost.

[Quillan]

Watching C4 News last night where they interviewed Mme Christine Lagarde and Mendalson. According to her Sarkozy has resigned as joint head of state for both Andorra and Monaco which now means their tax havens are about to come to an end. There was something about the Channel Islands as well and France withdrawing their special status. I can only assume that this refers to French subjets as I thought they where part of the UK.

You can read more HERE and watch the interview. According to Mendalson the same will be happening to all UK tax havens as well i.e. Isle of Man, Channel Islands and those funny places out in the Caribbean whos' names escape me this early in the morning. There is also a lot of pressure being put on the Swiss as well.

Could be back to stuffing money in to the mattress for many.

[Chancer]

[quote user="allanb"][quote user="cooperlola"]I[/quote]

 But the hedge fund investors are just people who made a risky bet and lost.

[/quote]

No it was the investors, common and not so commen men that lost, the hedge fund managers still made their fees.

[allanb]

[quote user="JRs gone native"]No it was the investors, common and not so common men that lost...[/quote]That's what I said:[quote user="allanb"]But the hedge fund investors are just people who made a risky bet and lost.[/quote]But I repeat: how many "common men" invested in hedge funds?   

When you put money in a bank, the bank is supposed to maintain adequate assets to cover its liability to you.  If it indulges in risky investments (such as hedge fund contracts) and as a result can't pay you, that's the bank's fault in my opinion.  Bankers should know that hedge funds are risky; they are experts, aren't they?  Hedge funds don't pretend to be safe investments - quite the opposite.  

I agree that hedge fund managers got their fees, just like pension fund managers, bank risk managers, insurance managers, etc.  But I don't think fees are part of the problem, even though some of them may be too generous.

[Chancer]

Semantics really AllanB, I must have my pedant hat on today.

I meant the difference between "that lost " and "and lost" ergo the hedge fund managers made the risky bets "that lost", using "and lost" intimates that they suffered financially from the deal which never seems to happen.

I note that president Sarkozy has announced a moritorium on pay rises, bonuses, share options and free shares for the dirigeants of banks and car companies etc that have received state aid.

[Gluestick]

Cooperlola wrote:

 

[quote]MBK, I was reading a related article in the Grauniad some weeks ago.  I confess that hedge funds are a bit of a mystery to me yet they do seem to influence the world economy far more than is healthy.  These are the times when I really miss Gluey who used to explain such things really well.

But the tail really does appear to be wagging the dog now and high stakes gamblers (which is truly all these people are) are milking the common man, who's just trying to keep his head above water, for all he is worth. [/quote]

Let's see if I can help JE! 

Hedge Funds:

In their original conception, hedge funds were financial investments, which sought to offset risk by “ Hedging” investment positions.

In all commodity markets, investors hedge their positions by attempting to invest in a contrarian way: the modern incarnation of hedge funds, tends to try and accomplish this by short selling. Thus in order to understand hedge funds one must firstly understand short selling.

Short Selling:

A short seller takes a position in a stock which they expect to be selling in the future for more or less than the current market price.

Normally, short sellers are able to leverage a short position by only placing 10% of the total value into the transaction. If the stock moves away from their forecast, however, they are then subject to what is known as a Margin Call. This simply means that they must keep to a 10% stake as the market moves.

Example: a stock currently trades at 500 pence. A short trader believes the stock will drop in the near future; they contract to sell the stock for 400 pence in one month.

Before the month is out, the stock is trading at 300 pence; the trader commits to buy enough stock to cover his position and sells that stock to the contract counter-party at 400 pence, which is the agreed price. The trader has then made 100 pence per share profit.

Short trading may be used to speculate on the market going up or coming down.

One of the recent core problems with hedge funds is since circa 2000, is that they have behaved very much as private equity funds, mainly since they have taken in such vast amounts of capital. Private Equity funds, are simply an updated version of the LBO (leveraged buy out) operations seen in the 1980s, which funded their operations mainly using what were called Junk Bonds. Both LBO's and junk bonds created significant market pressures, perhaps the worst being the investment bank called Drexel Lambert run by one Michael Milken who finished up in jail!

Another significant problem with hedge funds is simply the larger operations have tended to base offshore, and thus outside the ambit of regulation by central banks and other regulatory authorities such as the SEC in the USA and the FSA in Britain.

Additionally, their actions during the financial meltdown in many cases can only be described as venal depredations: the funds speculating on the Northern Rock collapse, for example, did nothing to help in its disposal, rescue or bail out.

One final aspect of hedge funds is that must be mentioned is their overuse, recently, of derivative financial products. Perhaps the best illustration of quite how things can go so seriously wrong in a fairly short time, and threaten the stability of the whole financial and banking market is given by the collapse of a firm called Long Term Capital Management.

http://www.sjsu.edu/faculty/watkins/ltcm.htm

At the time of the meltdown of LTCM, Paul Volcker, then head of the Federal Reserve, stated that if he had not stepped in, then the ultimate domino effect of bank collapse would probably have occurred.

Perhaps the most significant aspect of this fiasco was the singular reality that LTCM included in its management team, two Nobel Laureate economists!

A simple greed had outweighed intellectual prowess.

Logically, why should Hedge Funds know more about the market than other major players, who enjoy massive research and analytical departments? Clearly they cannot and do not.

That said, at times they verge on the very edge of Insider Dealing: and perhaps worse, effectively manipulate the market by the size of their positions in one stock.

Back in the bad old 80s, again, there was a hostile raider called T Boone-Pickens. In the end, his simple presence of buying up a significant stake in a business was enough to make the executives buy him off! This was called, euphemistically, Greenmail.

Not much difference in what hedge Funds have been doing.

 alanb wrote:

 [quote]

Here we go again, bashing the hedge funds: but they are the wrong target.  Do you actually know a common man who has been milked by a hedge fund? 

No, I thought not.[/quote]

Strangely enough alanb, yes!

And I am sure most members of this forum do! All they have to do to meet this person is look in the mirror!

Anyone with a pension, life assurance and investment (Mutual such as M & G, a PEP, an ISA etc), has invariably had their investment impacted by Hedge Fund activity, since Funds Managers have uses such as part and parcel of their holistic portfolio: which is indeed, one of the problems.

[quote]

A hedge fund is a high-risk investment for people who can afford the risk.  Investing in one is a bit like betting on a series of horses: if you know a lot about the horses, you have a reasonable chance of making a decent profit, but there is also the risk that you will lose a bundle.[/quote]

Excellent analogy! And that’s much of the problem, since instead of seeking shall we say a  value investment a la Berkshire Hathaway (Warren Buffet’s investment fund), funds managers have been gambling.

And without firstly truly ascertaining and knowing the true risks!

[quote]

Suppose for example you give me money - as a trustee to look after your pension fund, or as a banker to look after your savings - and I put it all on a series of horses and lose the lot.  You would be fully justified in blaming me, but you wouldn't blame the bookies or the race organisers, would you?

[/quote]

Once again, the Gambling Act 2005, enjoys potential compliance powers, delegated to the Gambling Commission.: at present, however and sadly, the legislation lacks teeth, very much as does UK regulation of financial institutions and in particular, banks, after this task was taken away from the B of E by NuLab. Yet another triumph for the BLiar-Brown carnival perhaps.

Having experienced personal business losses from a compulsive gambler, I believe bookies and etc urgently need to be faced with clear liability, where they continue to take bets from psychologically disturbed and self-destructive gamblers: very much as the old licensing acts made it a criminal offence for a licensee or their servants to continue to serve a customer who was obviously intoxicated.

[quote]A lot of the money lost by banks was lost by means of contracts with hedge funds that turned out to be unsound.  (If you want to know more, google "credit default swaps" as an example.)  In my opinion, FWIW, it's fair to blame a large part of the crisis on incompetent bank management and ineffective bank regulation.  But the hedge fund investors are just people who made a risky bet and lost. [/quote]

No they are not!

They are venal and wholly immoral financial pimps, who parasitically sponge off silly institutional investors (And all of us) on the one hand: and on the other, represent the greed focus of very wealthy people trying to rig and beat what is laughing called a Free Market!

It has to be remembered that circa 85% of the funds at risk in both Wall Street and the City of London are the little guy’s; invested vicariously by the institutions.

 On the original point, when government ministers and presidents was lyrical about "Tax Havens" they neatly seem to forget that such places arise for two reasons: first, because the developed global states have all signed Dual-Taxation Treaties with one another: and second, since wealthy people and more critically multinational corporations seek to base their activities outside the grasp of greedy and profligate countries.

To try and suddenly say "Non !", whilst it makes a good soundbite for the ill-informed, in reality if the EU (e.g.) tried to erect anti-tax haven barriers then it would be no different to trade protectionism and protecive tariffs: it would trip a trade war.

Politicians fail to understand the raft of tax avoidance which has sprung up only due to their greed to waste money.

London, for example, is a Tax Haven. Depending on the circumstances: as are most major states.

Taking away (if it works!) such benefits from -e.g.- Andora, Channel Isles, Isle of Man, Gibraltar, Canaries etc, would simply mean vast sums of investment would migrate somewhere else: like Bermuda, The Bahamas etc.

 

 

 

 

[allanb]

[quote user="Gluestick"]...in order to understand hedge funds one must firstly understand short selling...[/quote]Yes, but I don't think you do.[quote]A short seller takes a position in a stock which they expect to be selling in the future for more or less than the current market price. [/quote]No he doesn't.  A short seller sells stock that he doesn't own; in order to do this, he borrows it, hoping that it will be cheaper when he has to buy to replace it.

Maybe you're confusing a short sale with some kind of option. 

Bu anyway, speaking of hedge funds:[quote]They are venal and wholly immoral financial pimps, who parasitically sponge off silly institutional investors...[/quote]Now there's a piece of thoughtful and intelligent comment...

Actually you've missed my point. The people making foolish and risky investment decisions included just about every kind of financial institution: hedge funds, investment banks, commercial banks, insurance companies, etc.  They all, for instance, gambled on the notorious credit default swaps, which formed a large part of the problem.  And I would argue that the hedge funds were the only ones who had a perfect right to do this: their customers are the kind of people who accept high risk in the hope of high rewards. 

In a nutshell: hedge funds don't pretend to be safe investments; the others do.

In an earlier post I used the analogy of someone who bets on horse races, but a better analogy for hedge fund customers would be someone who invests his money in buying racehorses. The "common man" should not have been exposed to that kind of risk, and it wasn't the hedge funds that exposed him to it.

Of course there are bad apples in every barrel, like Michael Milken, whom you mentioned.  But Milken went to jail for violations of securities law, not for making, or offering, risky investments.

[Gluestick]

[quote]

A hedge fund is an investment fund open to a limited range of investors that is permitted by regulators to undertake a wider range of investment and trading activities than other investment funds and pays a performance fee to its investment manager. Each fund has its own strategy which determines the type of investments and the methods of investment it undertakes. Hedge funds, as a class, invest in a broad range of investments including shares, debt, commodities and so forth.

As the name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling

A hedge fund is an investment fund open to a limited range of investors that is permitted by regulators to undertake a wider range of investment and trading activities than other investment funds and pays a performance fee to its investment manager. Each fund has its own strategy which determines the type of investments and the methods of investment it undertakes. Hedge funds, as a class, invest in a broad range of investments including shares, debt, commodities and so forth.

As the name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling

[/quote]

Def. Wikipedia.

I'd write to them then and tell them how wrong they are!

"Taking a Position" in any commodity market means by whatever means: buying; options; borrowing; or indeed, any other form of forward commitment.

[quote]Naked short sale

Main article: Naked short selling

A naked short sale occurs when a security is sold short without first ascertaining that one can borrow the security. In the US, making arrangements to borrow a security before a short sale is called a locate. In 2005, to prevent widespread failure to deliver securities, the U.S. Securities and Exchange Commission (SEC) put in place Regulation SHO, which prevents investors from selling some stocks short before doing a locate. More stringent requirements were put in place in September 2008, to prevent the practice from exacerbating market declines.[/quote]

[quote]allanb: No he doesn't.  A short seller sells stock that he doesn't own; in order to do this, he borrows it, hoping that it will be cheaper when he has to buy to replace it.[/quote]

The new regs on Naked Shorts only came into play last September: by which time it was too late; far too late!

If you know someone who will lend me a block of stock for nothing, then I'd love their address!

"Borrowing" stock comes at a cost: and it is an option; in essence.

The investment in CDOs and other Derivative products was a new phenomenon. You imply that CDOs were the majority of Hedge Fund activity: clearly not correct: the most worrying component (Which still progresses) is their becoming highly predatory Private Equity Vultures!

http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1227

Consider:

"And the bulk of the growth in the past five years has been
attributable to the entrance of institutional investors
into the space."

David Friedland
President of the Hedge Fund Association

And Institutional Investors gamble with the average Joe's cash. Not their own.

 

 

[velcorin]

I use Hedge Funds for our currency hedging, it's more important for us to have a fixed budget than currency volatility, Absolutely no issues with them whatsoever, it's been a pleasure to do business with them. It's also worth remembering that without CDO and CDS no company would have had access to funding over the last 30 years, and we're not talking back street garages or corner florists, BP, Shell, Daimler, EdF, Michelin, Vodaphone, BHP, Ineos mega-billion business. Banks need to insure their loans, without it they are valueless. Saying the system is wrong is useful, but the alternative is no loans (ring an bells, like now!), or I'm open to suggestions...........we need EUR 2.3billion 01 June, which I suppose either Sarkozy or Merkel will give us.

NB NAKED short selling is not the same thing as short selling. With short selling you "rent" the shares from the owner for a fee, sell them and buy more shares at a later date to satisfy the original owner, and hopefully make a profit. Naked short selling is just plain suicide.

[Gluestick]

[quote]also worth remembering that without CDO and CDS no company would have had access to funding over the last 30 years, and we're not talking back street garages or corner florists, BP, Shell, Daimler, EdF, Michelin, Vodaphone, BHP, Ineos mega-billion business. Banks need to insure their loans, without it they are valueless.[/quote]

Interesting.............

Just over 30 years I know, but in 1974-5 I worked as a Dealer for the then largest global money market broker.

And none of the Corporate Finance deals were done with any form of backstop guarantee in place: anymore than was inter-bank lending.

Anyone in business (Me included) over the years, has evaluated such as Trade Indemnity's products and in the main dismissed them as far too expensive, therefore most businesses take the del credare risk on the chin.

What derivative products have done, is to encourage investment bankers to take insane risks, and invariably at reduced spread, which prudent lenders not too long ago would describe as "Unbankable propositions".

Which is one of the core problems.

Furthermore, most major global businesses such as you cite have two seperate further funding realities: the shares market and the bond market.

 

[Anton Redman]

As one of the few people I am aware of who told Enron to go forth and multiply when after two hours of pimping to my then MD they eventually revealed that they neither had futures contracts in place with our paper suppliers nor did they have future energy contracts in place with them. In short it was a gamble in which we paid a large insurance premium to them against a huge risk, which they did not the financial resources to meet.

I have no problem with banks operating off shore provided they tell you. I have no problem with the National Audit Office advising / telling local Government to invest short term in the best rates available. I have a huge problem when the realise the Gnomes of Iceland all 300,000 of them, save those who are sorting Clarkson of road, have a bigger banking business per head than the Medici’s.

If anybody can explain to me why every council in the UK has a treasury function when I am not aware of any UK Plc that does not have a central treasury I would be grateful / amazed.

[Gluestick]

[quote user="Anton Redman"]

If anybody can explain to me why every council in the UK has a treasury function when I am not aware of any UK Plc that does not have a central treasury I would be grateful / amazed.

[/quote]

They "Trustee Class" Obligors, Anton and in principle, if any Local Authority (LA) did become illiquid, then the Treasury become the Guarantor for their debts.

They must operate a Treasury Department in order to accord to the strictures of Local Government Accounting Rules which are onerous.

In normal times LAs are takers and lenders to the market: which might seem at first glance illogical; however like all who have varying net cash positions day-by-day, LAs are often "Long" on short terms funds, in any one day: or "Short on short terms funds: or visa versa; and have to balance their cash position by close of play.

Large companies are no different: they are often givers of (e.g.) Overnight money to the market: and takers of (e.g.) Overnight money to the market, again dependant on their net cash position.

What really used to amuse me was the biggest companies had facilities with most major banks: and if the Overnight rate was much higher than Base Rate and normal bank lending rate (I've seen it as high as 90% Offered: and 80% Bid!), and they were slack up to their agreed OD limits, then they would lend the bank's own cash back to them for a large overnight turn!

Anomolies of the money markets.

[:)]

[allanb]

I sometimes wonder whether Gluestick's outpourings are meant to be taken seriously, but I'll try once more.[quote user="Gluestick"]"As the name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling" - Def. Wikipedia.

I'd write to them then and tell them how wrong they are![/quote]

I have never said or implied that hedge funds don't indulge in short selling.  What you are doing is known as a "straw man" argument: you invent something that I didn't say, and then attack me for saying it.  It's a cheap trick.

[quote] "Taking a Position" in any commodity market means by whatever means: buying; options; borrowing; or indeed, any other form of forward commitment.[/quote]Yes.  But you were supposed to be explaining a short sale - remember?

[quote]If you know someone who will lend me a block of stock for nothing, then I'd love their address!

"Borrowing" stock comes at a cost...[/quote]You've done it again.  What I said is a correct description of a short sale.  I did not say that borrowing the stock is free. 

[quote]You imply that CDOs were the majority of Hedge Fund activity...[/quote]And again.  CDOs are collateralized debt obligations, which I never  mentioned. I did mention credit default swaps, which are quite different.  But even if you are confusing the two, you still misquote me.  I never said that credit default swaps were "the majority of Hedge Fund activity".  I said that hedge funds were not the only users of them.   

I think I've had enough of this.  In my honest opinion, most of what you post is nothing but regurgitated newspaper articles which I don't think you really understand.  Sorry.

[Devon]

Hedge funds: large sums of money, lack of regulation and greed. Is that a good combination? Not in my book it isn't. I can't see they contribute anything positive to western society (that can't be contributed by a transparent, regulated financial institution).

The worst of current crises has yet to unfold. I hope and expect there will be a good old fashioned witch hunt of all the conmen who visited the current crises on our societies.  Expect the Americans to lead the way as per usual.