The pensions, savings and jobs of ordinary people are being threatened by hedge and private equity funds, warns Poul Nyrup Rasmussen, President of the Party of European Socialists and former Danish Prime Minister. The unforeseen effects of the sub-prime crisis in financial markets already include an unstoppable demand for greater transparency. One part of the financial market not subject to the rules of transparency and disclosure concerns hedge and private equity funds. Unless better regulated they are likely to trigger financial crises due to their reliance on huge accumulated debt. Ordinary families' pension funds, savings and jobs will pay the price in the end. Once relatively small, today the five biggest private equity deals have involved more money than the annual budgets of Russia and India. Assets in hedge and private equity funds stand at $3 trillion today and are expected to reach $10 trillion by the end of 2010. Private equity funds, often involved in "leveraged buy-outs", are a menace to healthy companies, to workers' rights and to the European Union's Lisbon Agenda. In a typical pattern, a company is bought with borrowed money, then saddled with the debt and interest payments, workers are laid off and assets are sold. A once healthy company is milched for short-term profits – benefiting neither workers, nor the company's long-term prospects, nor the real economy. In Britain, the Automobile Association was bought by private equity in 2004. The AA had made a profit of £75m and was providing an expanding service with 10,000 staff. Annual profits have gone up to £190m while 6,000 workers have been laid off, and both costs and waiting times for AA members needing its vehicle repair and recovery services have increased. In Denmark, the TDC telecommunications company was taken over by a group of private equity firms in 2005, with 80% of the purchase financed by borrowing. The company's assets-to-debt ratio leapt from 18% to 90% as company reserves for long-term development – essential in the telecoms industry – were used to pay the debt! These funds are largely exempt from paying tax, often because they are registered offshore although of course they have to operate from the world's major onshore financial centres. In the US, it has been calculated that the funds involve a tax loss to the country of $2-3bn – three times the EU budget for humanitarian aid. Trade unions in the UK, Germany, Canada and elsewhere have for long spoken of the damage caused by leveraged buyouts. So have such senior politicians as Germany's former Vice-Chancellor Franz Müntefering, who described private equity funds as "locusts". The European Parliament's Socialist Group, the House of Commons in the UK and the Australian parliament have all investigated these private funds. At the EU's Autumn summit in Lisbon the three heavyweights of European politics – Gordon Brown, Angela Merkel and Nicolas Sarkozy – agreed in a joint statement that more transparency is needed in financial markets. It is important to be clear that nobody wants to ban or unnecessarily restrict private equity and hedge funds. By using private money to invest in innovative and high-risk companies, they could have a useful role to play. Their critics want to ensure that they honour the transparency and tax rules of the financial markets. Ultimately private funds should be regulated globally. But coordinated action by the European Union and the US would be a realistic start. There are at least two possible solutions; first, set a limit on the amount of debt that a company can accumulate, and, second, change acquisition and merger legislation to include leverage. Hedge and private equity funds are presenting an unacceptable face of today's global economy. Serious discussions are needed at EU level to reach agreed European and inter-governmental actions, and to encourage the US to move in the same direction.

Text is based on the article by Poul Nyrup Rasmussen in the Spring 2008 issue of Europe’s World www.europesworld.org