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From: Sid Shniad
To: [EMAIL PROTECTED]
Subject: The casino crumbles
Date: Tuesday, October 13, 1998 8:04PM
The Guardian Tuesday October 6, 1998
The casino crumbles
By Paul Foot
What is a hedge fund? A month ago, no one outside the City had a clue. Now
we discover that the collapse of a hedge fund is a threat to civilisation
as we know it. City explanations are cluttered up with words like
"arbitrage", "leverage" and "derivative", whose only purpose is to confuse.
The real story is quite simple. The fundamental freedom of the free market
is the freedom for a small minority to get rich at the expense of the
majority. In the past 20 years this freedom has flourished hugely, thanks
mainly to the curtailing of freedom for trade unions.
One awful consequence has been a plague of fat cats, or GBs (greedy
bastards) as they are now known, with far more money than they can ever
spend. Their problem is what to do with what's left over. Normal interest
from banks or building societies is beneath their dignity. Gambling on the
stock exchange is boring. They search around for something more exciting,
more lucrative. The energetic market-liberating of the last two decades -
the big bangs - has opened up exciting new possibilities for investor-
gamblers.
When there are no fixed exchange rates, you can bet on the rise and fall of
different currencies. When there are fewer price-fixing commodity
agreements, you can bet on the rise and fall of the value of commodities.
Irritatingly, much of this gambling has in the past been supervised by
government regulators. The founders of the hedge funds invented a way to
avoid regulators. Fully liberated from pestilential government control, the
hedge funds burst into the open sea of the free market.
The best minds of our generation, Harvard professors and Nobel
Prizewinners, were hired to conjure up likely "spreads" - gaps between one
currency or commodity and another - so the fund managers could bet on the
trend in their relative values. The funds advertised on the international
GB network for big bucks with which to place their bets.
An unimaginable torrent of money poured into the funds. The satirically
entitled Long-Term Capital Management, run by a speculator-genius
inevitably called Meriwether, is said to have been "exposed" to more than
$1,000 billion. Did the money come from "rotten apples", black marketeers
and GBs who would not be welcome in high financial society? Not at all.
Into the fund went $400m dollars from Europe's biggest bank, UBS, to which
fled John Major's friend and holiday host Tristan Garel-Jones when he was
sacked from government. The same sort of money was chucked in by Barclays
Bank, whose chief executive Martin Taylor is a pillar of New Labour and an
adviser to the government. Even the Italian state bank could not resist the
fat end of the hedge, and shoved $200 million of government money into what
should have been called Short-Term Capital Mismanagement.
In the best tradition of City language, the word which was chosen to
describe the new funds implied the exact opposite of the reality. The word
"hedge" suggests some sort of security, some insurance against losses. The
distinguishing feature of the hedge funds has been their carefree contempt
for all precautions. They are all risk, no hedge. So when the crash came,
as it was bound to do as more and more bets were placed on more and more
uncertain outcomes, there was nothing in the locker to sustain the losses.
The banks, whose directors are always telling us not to be sentimental
about closing loss-making factories which are producing something useful,
rushed to save their precious hedge, which produces nothing. Billions were
suddenly available to shore up the crumbling casino. Before long the rest
of us will be called upon to pay for all this recklessness - in slashed
benefits, reduced pensions and lost jobs.
The standard reaction to the collapse of LTCM has been a mixture of
embarrassment and complacency. Yes, yes, it has all been very irregular,
say the City columnists, perhaps even shameful, but nothing to worry about
in the long term and certainly nothing to shake our everlasting faith in
the free market. The great intellectual journals of modern capitalism unite
to defend their system from all comers. The inalienable right of greedy
bastards to gamble wealth produced by others, to imperil everyone's
security in the process and to get the hated "public sector" to bale them
out when they go bust cannot be put at risk.
The Economist whined the other day: "A particularly dangerous form of bad
judgment is abroad just now. It is the kind which says: 'See, this is what
free market capitalism does for you.' " In the light of such a grotesque
charade, what other judgment could possibly be more appropriate?
