McCreevy downplays talk of hedge fund regulation

EU internal market commissioner Charlie McCreevy has never been noted for his enthusiasm for intervention in the capital markets. True to form he is quick to absolve them of blame for the recent financial turmoil (is it a crisis, yet?). I blogged earlier this week about some political appetite to look at hedge fund operations, McCreevy clearly isn't onside.

From today's Times:

Charlie McCreevy, the European Internal Market Commissioner, said yesterday that hedge funds had been particularly active in troubled structured credit markets, but absolved them of any blame for this summer’s financial turbulence.

Conceding that many hedge funds and their “wealthy private or institutional investors” may have incurred heavy losses in recent months, he maintained that this was no reason for regulators suddenly to intervene.

“Financial markets function on risk. I do not criticise those who make fortunes when times are good. I’m not going to shed any tears now if there are losses,” he told the European Parliament in Strasbourg.

As MEPs debated the consequences of the events sparked off by the sub-prime mortgage crisis in the US, Mr McCreevy insisted: “As much as some people want to demonise hedge funds, they are not the cause of the difficulties in the market.”

Instead, these had been provoked by poor-quality lending, compounded by securitisation of loans in off-balance sheet vehicles, whose associated risks few understood.

It was these issues, he added, that prudential authorities and supervisors would now need to address.

The Commissioner’s dogged opposition to regulatory action was in marked contrast to the many calls from European legislators for tougher measures against financial operations that had been largely conducted outside traditional regulated markets. Led by socialist MEPs, these calls attracted support from across the political spectrum.

Ieke van den Burg, the Dutch socialist MEP, gave warning that the absence of regulation for new, highly complex financial products meant a proliferation of risks for individuals and markets. “We really have to think where these blind spots are leading to and need to look at the possibility of regulation,” she said.

Poul Nyrup Rasmussen, a socialist MEP and former Danish Prime Minister, described the financial crisis as “a wake-up call for all of us, but especially Mr McCreevy”. He challenged the Commissioner to bring forward appropriate legislation.

From the centre-right, Karsten Hoppenstedt, a German Christian Democrat member, insisted that the failure to assess the risks of the new financial instruments was the source of the crisis. He argued that hedge funds should be covered by existing EU legislation on capital requirements, risk management systems and internal controls.

While defending hedge funds, Mr McCreevy conceded that the spotlight should be turned on credit rating agencies.

He reminded MEPs that he had already criticised the agencies for being slow in downgrading their ratings for structured finance backed by sub-prime lending.

He raised the question of potential conflicts of interest when agencies advise banks on how to structure their offering to gain the best mix of ratings, while at the same time providing assessments on which investors rely.

Mr McCreevy confirmed that he would be discussing with European securities regulators and with countries such as the US how to inject more transparency into the credit rating agencies’ operations. The discussions will also investigate whether the agencies were responsible for unwarranted rating inflation for structured products.