The Sketch: Financiers struggle to find right words for their solution

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The Independent Online

The banking crisis inquiry at the Treasury Select Committee – noble MPs vs the mysterious, short-selling, greed-mongering hedge funds. Whose side are we on?

"Hedge funds challenge stability and are ripping the heart out of the economy," John Mann gave us the case for the prosecution, from a German denunciation. Mann pointed his meatpie face at the hedgers and demanded: "Do you exacerbate stability?"

Do what, John? Exacerbate stability? And what stability, exactly, were they "exacerbating"? Did he mean the last decade in which bankers all over the world operated a criminal conspiracy to Ponzify their industry, creaming off bonuses while trading insolvently? Such stability could have been exacerbated quite a lot more, frankly. The hedge fund "challenge" to banks was well meant, well made, and did what politicians didn't dare do.

The various representatives of the sector didn't say anything as aggressive. They have understood their best posture before John McFall's mighty committee is humility. Between them they made a gentle, slightly incoherent but tantalising series of remarks to justify their position. Hedge funds didn't deal in those complex instruments that have brought mass destruction on our heads. Banks did. Hedge funds are more lightly regulated than banks and have fewer compliance officers. But it's been banks not hedge funds that have brought the system to its knees.

It's the heavily-regulated banks that have bankrupted us. Hedge funds' leverage dropped from 1.7 to 1.4 in recent months. Banks were leveraged 40 or 50 times their value. Banks were wild – out of control.

Hedge funds sold banks short and bank prices fell. But when short-selling was banned the share prices fell faster and farther. It wasn't just that banks were vulnerable to being raided – it was morally and technically essential they were.

Hedge funds made £270m in the first four months betting against banks when taxpayers were putting billions into them. "What PR message do you have for that?" one of the committee asked, meatily.

The message (that they couldn't find the words for) was: "We were right." And, "Hedge funds are better judges of value than prime ministers." And, "Politicians are making this recession longer and harder because they want to soften and shorten it." And, "The PM shouldn't have put any public money in. He should have guaranteed savers' funds and let the hedge funds loose to tear those bloated, septic, walking corpses to pieces and save what was healthy."

Yes, that was the message. For all their compliance, regulation and public funding, it's the banks who are up to their rotting hocks in toxic instruments they still don't understand. And if all that's true, it's the banks that are the problem and hedge funds the solution. I'm not sure the committee quite summarised it like that.

simon.carr@sketch.sc

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