The full repercussions of the financial crisis triggered by bad mortgages in the United States are still unclear, but the unforeseen effects already include an unstoppable demand for greater transparency in financial markets, and better regulation.
One part of the financial markets not subject to the transparency and disclosure rules that apply to, say, banks and mutual funds, are hedge and private equity funds. Once relatively small, the five biggest private equity deals now involve more money than the annual budgets of Russia and India. Assets in private equity and hedge funds stand at $3 trillion today and are expected to reach $10 trillion by the end of 2010. The funds now rely heavily on investment from pension funds, and on money borrowed from banks and other non-private sources.
Indeed, these private funds account for about two-thirds of all new debt. So, if there is a debt problem, as in the US mortgage crisis, one must also look at private funds’ role in creating it. They are, in short, a major challenge to financial stability, and, unless regulated, they are likely to contribute to future crises.
The big private equity funds have proven to be a menace to healthy companies, to workers’ rights, and to the European Union’s Lisbon Agenda (aimed at making Europe the world’s most competitive economy). Typically, they take over companies with borrowed money – often more than 80% of the price. These “leveraged buy-outs” leave the company saddled with debt and interest payments, its workers are laid off, and its assets are sold. A once profitable and healthy company is milked for short-term profits, benefiting neither workers nor the real economy.