Too easy money
by Éric Le Boucher
Le Monde, 29 janvier 2007
It can't last? The past year was a golden one for the world of finance. Many stock exchanges broke records, banks' profits were magnificent, the volume of mergers and acquisitions was larger than that reached in the climax year of the Internet bubble, in 2000, the new financial instruments like the hedge funds were so successful that they managed thirty times as much assets as fifteen years ago ($1400 billion) with unheard of returns and a new star, the Private Equity, carrying out spectacular acquisitions (a total of $750 billion in 2006).
Bankers, investors, analysts are elated: it looks like 2007 is going to be as shiny. But what lies beyond? Small warning lights began to blink in the heads of the wiser: isn't that too easy? Isn't there too much liquidity in the world, allowing to take all the risks we wish, that is too much risk? Thanks to the end of inflation and to interest rates kept low by central banks, money is cheap and plentiful. One just has to pick it. It becomes possible to finance anything, even the most perilous operations which yesteryear would have found no capital.
Emerging countries, to whom the faucet of private investments was turned off after the Asian and Latin American crises of the 1990s are once again able to raise funds, and the premium they have to pay grows thinner and thinner.
The question is this: heady with success, pushed by competition and equipped with ever more sophisticated mathematical tools, aren't investors too confident? Doesn't their hubris push them too far? When will a new hedge fund go belly up, done by a sudden upturn in the prices of oil or copper? And a fund such as a Private Equity be simply sucked down in a collapse of the economic environment that would make the repayment of its debt unmanageable?
The "real" world economy develops rapidly, at a yearly rate above 5% in recent years. Global finance follows this trend, feeds it, doubtless amplifies it. But, even though it sends every day zillions of dollars swirling around the planet with huge profits, this merry-go-round cannot go on forever. Then what?
Requests for better controls are voiced regularly, even demands to curb the growth of the financial planet. This week, the ex-boss of AXA and prominent figure of the French financial establishment, Claude Bébéar, called for a law that would force hedge funds to more transparency and would cap the loans they can get to undertake their operations. A way, at least, to limit the risks.
Claude Bébéar is far from alone. At Davos, Angela Merkel declared on Wednesday : "I expect efforts from financial markets to display more transparency." She explained :"What could I say to a wage earner who, his life long, set aside some money to put into a retirement fund and would see all his savings vanish?" Her coalition partner Hans Münterfering, president of the SPD, had called the funds of Private Equity "grasshoppers" which zero in on a firm, empty it and discard it. His declaration took place after the announcement of Blackstone's surprise climb up in Deutsche Telekom last April.
The Germans, who are at the forefront of the fight against this new finance - considered "Anglo-Saxon" -, found numerous allies, at the European Central Bank or at the SEC in New York, the authority in charge of regulating the stock exchange. And in the trade-unions. "Unhappiness is swelling", said, on Friday 26 January at Davos, Philip Jennings, General Secretary of the Swiss UNI, talking about the funds from Private Equity. He stigmatized their "short-termism" and their "lack of ethics". Mrs Merkel, who heads the G8, put transparency of hedge funds at the top of next summit's agenda in June.
Too easy money? Are investors taking too much risk? Should we reinforce control procedures? These were the themes of many of this year's debates at Davos. Howard Davies, head of the London School of Economics, acknowledged that the financial regulatory bodies date from an epoch when this new finance didn't exist. They are constantly trying to catch up with the creativity of investors without always understanding how the new products function. Furthermore, finance is global, whereas laws and regulations by and large remain national, in spite of the efforts made by central banks to cooperate and harmonize their actions.
To bankers, the question of transparency is not the right one: funds will never accept to divulge their sophisticated recipes, since these are at the heart of their trade. But banks which lend them their money must now pay much closer attention, and they are controlled.
So how should we go about it? That financial creativity cannot be curbed, we shan't dispute. That part of the trade must of necessity remain secret, so be it. That many lessons where drawn from past failures, such as that of LTCM in 1998, this is unquestionable.
New finance offers huge advantages, it takes risks traditional bankers are reluctant to take. But when money flows like a tidal wave, the temptation is strong as long as it allows - as it encourages - crazy risks. Whence the warnings in the heads.Éric Le Boucher
Traduction : André Cabannes