From hedge fund manager invective to EU veto
Hearing David Cameron’s justification for his rejection of last week’s proposed EU treaty changes on the basis that he was defending the City of London as a financial centre, I was reminded of a talk given back in April by Michael Hintze, the head of $11 billion hedge fund CQS and a major Conservative party donor. Ironically in the light of what happened last Friday, the talk was given in Paris, at an event called Global Derivatives. The audience mostly consisted of traders and quants from investment banks and hedge funds – an audience that you might think would be lapping up every word Hintze said.
In his speech Hintze launched a blistering attack on the regulation of derivatives and short-selling. He had armed himself with some statistics from the Bank for International Settlements, and noted that the outstanding amount of credit default swaps had declined significantly since reaching a peak of around $60 trillion in 2008. This was a bad thing, Hintze argued, because it showed how increased regulation was reducing market liquidity.
This left people in the audience scratching their heads. One of the few regulatory initiatives that derivatives bankers agree was unquestionably a good thing was the move in 2005 by the New York Fed and Financial Services Authority to crack down on the shoddy back-office paperwork underlying CDS contracts, and the needless profusion of trades designed to cancel each other out, which helped inflate the BIS notional to $60 trillion. The financial crisis would have been even worse had this not been done, and the efforts post-crisis to ‘tear-up’ or ‘compress’ CDS trades has made the system safer.
Hintze went on to lambast Basel III, restrictions on short-selling of European bank stocks and sovereign CDS and other responses to the crisis. When he finally relinquished the podium, the panel of industry worthies that took his place distanced themselves from the views he expressed. One of them, the academic Dilip Madan, a derivatives expert who has done a lot of consulting work for investment banks, went so far as to say that some derivatives regulation was actually necessary.
Hintze may have had reasons to vent that day. Shortly before the conference, CQS had launched a hedge fund with the help of investment manager Schroders that would take long-short positions in European corporate bonds and CDS within a tight EU regulatory framework called UCITS. Presumably, this fund would not have been able to use CDS to short European banks and sovereigns, trades which from today’s perspective would have been highly profitable. Although he was not personally responsible for managing this fund, perhaps the sight of colleagues jumping through those UCITS hoops had coloured Hintze’s views somewhat.
Of course, Hintze doesn’t think that all regulation is bad, and some of his arguments have been already made elsewhere. That said, Hintze’s stance on regulation seems extreme by City of London standards. However, I suspect that his views carry some weight in Conservative Party circles. This may go some way to explaining why Cameron wrapped himself in the mantle of the City as justification for exercising his veto last week, a move that many people in the City think will actually damage the UK’s regulatory interests in the EU.