From Volume 4, Issue Number 28 of EIR Online, Published July 12, 2005

World Economic News

Schroeder Calls Again for Control of Hedge Funds

German Chancellor Gerhard Schroeder, in an interview with Tagespiegel July 6, on the eve of the G-8 meeting, continued to demand the regulation of hedge funds, and was backed by European Central Bank head Jean-Claude Trichet, and the Association of German Banks (BDB). Trichet, speaking in Paris, said that it was necessary for the United States and Europe to come to a consensus at the meeting to regulate hedge funds; though lacking any specifics, Trichet's statement did serve to underline that the hedge funds and their crisis potential is the underlying subject of the G-8 meeting.

BDB spokesman Harald Noack, speaking in Berlin, was more specific in support of Schroeder's summit objective. Noack said transparency was needed, so that building risks can be recognized early and countermeasures taken. He added "regulation of international financial markets should not be ruled out. According to him, this regulation only made sense at the international level, and should include regulation of offshore financial centers as well," cited RP Online.

In an article for today's issue of the Berlin daily, Der Tagesspiegel, Schroeder wrote:

"The rise of oil prices is not only related to increased consumption. According to experts, only a small volume of trade at the international exchanges serves the supply of crude oil. The bigger volume is, meanwhile, driven by financial markets, [and] is therefore, purely speculative. That is why we need more transparency on the oil markets. We want more exact data on how the relation between supply and demand is influenced, intensified, and accelerated. I am convinced that with the planned creation of a world oil data bank, an effective contribution is made in this respect. Because where there is more transparency, there is less room for speculation."

Schroeder also reiterated his call for hedge-fund controls: "There are other important themes that imply a considerable burden for the world economy. All G-8 countries welcome foreign investors, including so-called financial investors, in our national economies. What is important, however, is that all players respect fair rules. Meanwhile, hedge funds control more than a trillion dollars. In Germany, the more short-term engagement has caused developments that pose a threat to companies. The stability of the financial markets must not be threatened by such funds. That is why I call for a worldwide, efficient supervision. The most important objective of such a supervision must be improved transparency of the hedge-fund markets. Therefore, I want to propose at the G-8 summit in Gleneagles that internationally unified minimum standards for hedge funds are defined."

Four-Fifths of the World's Hedge Funds Registered in Cayman Islands

Of the world's 8,000 hedge funds, which have brought the world financial system to the edge of systemic meltdown, 6,472—or 80% of the total—are registered in the Cayman Islands, a British Crown colony, according to Cayman Islands Net News Online. The Caymans, along with Bermuda and the Bahamas, has long functioned outside the law of the British Commonwealth for illicit money flows, particularly drug-money laundering.

The Cayman Islands in 1993 passed a Mutual Funds Law, to enable the easy incorporation and/or registration of hedge funds in a deregulated system. According to a firm that incorporates hedge funds, "The Mutual Fund Law was established ... to position the Cayman Islands as a hub in the financial industry." Within a few years of the law's passage, with direction from the City of London, the number of hedge funds exploded: Since 1998, when the number of funds registered was 1,326, the number has grown fivefold.

According to representatives of Charles Adams, Ritchie & Duckworth, a Cayman law firm involved in the hedge fund business, the Caymans offer prospective hedge funds:

* "No regulatory restriction on investment policies or strategies, commercial terms, ... or the choice of service providers....

* "Speed of formation....

* "Tax neutral environment with no direct corporation, capital gains, income, profits, or withholding taxes applicable to funds."

The Cayman Islands is home to only 55,000 people, but there is an entire infrastructure of administrators, trust companies, accountants, and lawyers to support the hedge funds. Meanwhile, foreign commercial banks hold $1.1 trillion in assets in the Islands, according to the Cayman Islands Monetary Authority, some of which are funnelled into the hedge funds. Any serious move to shut down the hedge funds would close down the Cayman Islands operation.

Will Bank of England Hold Emergency Session on Interest Rates?

The Bank of England could hold an emergency session on interest rates, as it did right after 9/11, predicted a "respected economics research company," the Centre for Economics and Business Research, the Times of London reported July 7. The Bank of England held interest rates steady, at 4.75%, despite widespread demands for a rate cut, as the City reacted to the terrorist bombings that day.

The only time the BoE has held such an emergency meeting was Sept. 18, 2001. The BoE reported its interest-rate decision just as the events surrounding the day's attacks in London were unfolding.

The Centre for Economics and Business Research said: "Given today's events in London, it is possible that the MPC [Monetary Policy Committee] will meet again over the next few days for an emergency session. If the impact on the FTSE and, more importantly, the pound worsens, the Bank may consider cutting rates so as to prevent additional negative pressure upon the UK's consumer slowdown. Today's decisions will not have any impact on the markets which will continue to be driven by today's events. However, expectations of a rate cut, even in the next few days, will increase."

The BoE has confirmed that there is a provision for an emergency meeting, but would not say one would be held.

The Times quoted Confederation of British Industry chief economic adviser Ian McCafferty saying: "While the economic situation is not desperate, it is clear that manufacturing is teetering on the verge of recession, the retail sector is under considerable pressure and the housing market is stagnant. As there seems little risk of inflation, a cut in interest rates would be welcome, sooner rather than later."

House-price inflation for the year to end-June has fallen to only 3.7%, the lowest since March 2001, according to the biggest mortgage lender, Halifax. A CBI report last month showed the worst fall in retail sales in 22 years. And last week, Britain's Office of National Statistics unexpectedly had to revise downwards its figures for first-quarter GDP growth. Quarter-on-quarter growth was just 0.4% rather than 0.5%, and year on year growth 2.1% rather than 2.5%. This is the lowest since the last quarter of 2002.

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