From Volume 6, Issue 21 of EIR Online, Published May 22, 2007

World Economic News

London Resists German Push for Hedge Fund Control

May 10 (EIRNS)—As noted prominently by leading international media, the German government is aware of the fact that its proposal for international transparency of hedge fund activities has little chance of being realized at present, because of British obstruction. Germany's Finance Minister Peer Steinbrueck said yesterday, on the eve of today's meeting of G-8 finance ministers in Potsdam, that he is optimistic that a first step towards better supervision of funds will come by the end of this year. He said that resistance to fund transparency comes mainly from London, and also from New York financial circles, but that on the American side, there is support for the German initiative, notably by the Securities and Exchange Commission. An agreement signed between the SEC and its German counterpart BAFIN, on cooperation and exchange of information on "risk cases" among banks and funds, has to be seen in this context.

Steinbrueck also received backing from several labor unions in Germany, today, including the nation's largest, the metalworkers, as well as the banking sector and services unions. Fund control also has become a hot issue in the ongoing communications workers' strike, addressing the cost-cutting drive of the Blackstone Fund, the third-largest shareholder at Deutsche Telekom.

EIR has learned from discussions with representatives of individual equity funds and their national association BVK, that the latter distances itself from aggressive hedge funds, but that it also notes a radicalization of the debate on fund control, which has had its impact on the German government. The national legislation that Steinbrueck plans, has to be taken seriously, as it cuts deeply into the ability of funds to act on the financial markets. The BVK is not really in favor of it, because in their view it goes too far back to the harsh polemics in 2005 against the "locust" funds, but it also sees that resistance from London, where most of the hedge funds are located, is making even voluntary regulations on an international scale impossible.

Top German Regulator Warns of Financial 'Bloodbath'

May 15 (EIRNS)—Jochen Sanio, head of the German financial regulatory agency BAFIN, chose blunt language yesterday to warn of a "bloodbath" caused by the over-leveraged hedge funds, according to today's German newswires. "I hope those who are playing with fire there, know what they are doing before their fingers get burned." There is absolutely no transparency; no one knows how big the risks really are—apparently including those who are directly exposed to them. Proof is the fact that risk premiums are extremely low, which just boosts the explosive growth of credit derivatives. BAFIN is extremely alarmed over these developments, Sanio said, and he supported the initiative for fund transparency which the German government is trying to get through the Group of Eight over British opposition.

On the closely related question of junk bonds, Dan Fuss of Loomis Sayles Bond Fund told Bloomberg today that "I haven't felt this nervous about a market ever." He said that high-risk securities are showing unmistakable signs of a bubble, with sales of the riskiest bonds increasing 39% from last year.

More than half of the junk bonds sold this year were used to pay for leveraged buyouts and mergers and acquisitions, according to Barclays Capital. A new development is that some contracts allow borrowers to choose to make their interest payments in additional junk bonds, instead of cash! "This is fantasy land for corporate treasurers," said Edward Altman, a professor of finance at New York University's Stern School of Business.

There have been ten sales of such so-called toggle bonds this year, amounting to $5.14 billion. There were five sales totaling $4.05 billion last November and December. Only one such issue was ever sold before November 2006.

Chinese Workers' Living Standards Unchanged in 50 Years

May 17 (EIRNS)—A Chinese scholar from a leading Beijing think tank has confirmed to EIR that, despite the popular opinion in the West that China's general population is rapidly getting richer, the standard of living of the industrial, blue-collar workforce, supposedly at the center of the booming Chinese economy, has not changed over the past 50 years. Combined with the continued extreme poverty of the agricultural workforce, there is a dangerous potential for economic and social instability across China in the case of a breakdown of the imports to the U.S., or a similar economic crisis.

The scholar also indicated that this problem is at the center of President Hu Jintao's intention to shift the underlying economic structure of China over the next year, from a primary focus on exports, to enhanced domestic consumption and a general welfare orientation, with a broad safety net.

Abbott Labs to Thailand: Pay or We'll Kill You

May 15 (EIRNS)—Abbott Labs, the producer of the HIV/AIDS drug Kaletra, is retaliating against Thailand's move to use a generic version of the drug, by withdrawing applications to introduce seven new drugs in Thailand, including a heat-stable version of Kaletra. More than 1 in 100 adults in Thailand is infected with HIV, and AIDS has become a leading cause of death.

Thai Health Minister Mongkol na Songkhla last week received the support of former U.S. President Bill Clinton for his move, perfectly legal under international law, to override drug company patent protections in cases of life or death. Clinton's move marked a decisive public break with the genocidal AIDS policy of his former Vice President, Al Gore.

The Thai patent override procedure is known under World Trade Organization regulations as compulsory licensing. Abbott Labs is offering to reduce the price of Kaletra, only if Thailand gives up the compulsory licensing. Health Minister Mongkol na Songkhla said yesterday that he would not cancel his policy unless the drug companies lowered their prices to less than those for generic copies. The drug company is also implicated in a slanderous public relations campaign, led by neo-con Kenneth Adelman, against Thailand.

Brown's Chancellory Website Promotes UK as Tax Haven

May 14, 2007 (EIRNS)—British Chancellor of the Exchequer Gordon Brown, in line to replace Tony Blair as Prime Minister in late June, has, during his ten years at the Chancellory, developed a notorious reputation among opponents of offshore tax havens and tax evasion.

Now a British government website under Brown's purview—The UK Trade and Investment website—is promoting the UK as a tax haven, by highlighting its unusually generous tax treatment of foreign residents, according to the May 14 Financial Times. These "non-domiciled" residents—often wealthy individuals, born outside the UK, who have been living in Britain for many years—escape taxes by listing their "work" as done in another country, or in some offshore center. Hedge funds, for example, which have such non-domiciled residents as partners, can shield profits from taxation in that way.

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