UPDATE 3-Britain cornered as EU backs hedge fund crackdown

* Osborne shouldered aside as EU backs hedge fund rules

* Germany’s Schaeuble – determined to up pace of regulation

* UK Chancellor blames previous government for hospital pass

(Adds comments from George Osborne, Schaeuble)

By John O’Donnell

BRUSSELS, May 18 (BestGrowthStock) – European Union finance
ministers backed stricter controls for hedge funds and private
equity groups on Tuesday, handing a defeat to Britain’s new
coalition government at its first EU meeting.

The draft rules will control pay and borrowing at hedge
funds as well as forcing them to disclose extensive information
to watchdogs about how they are investing or short-selling,
breaking a taboo for the secretive industry.

The regime, which puts hedge funds under the eye of a
pan-European watchdog for the first time, is part of a wider set
of pledges by world leaders to create a more stable financial
system after the global economic crisis.

“We are determined to accelerate the pace of regulation,”
Wolfgang Schaeuble, Germany’s finance minister, told reporters
after the meeting.

“Up until now this was not regulated,” he said of the hedge
fund and private equity industry. “This hole will now be

Spanish Economy Minister Elena Salgado announced an
agreement, despite acknowledging some concerns were removed.

Britain had fought hard to water down the law and was still
hoping to overturn a provision that refuses a single licence for
foreign funds to do business across Europe, something U.S.
Treasury Secretary Timothy Geithner has also objected to.

But London’s objections were overruled in a rare break with
an unwritten rule of Brussels diplomacy that says no country
should be bullied into accepting a law it does not want.
British diplomats put a positive gloss on developments,
described by hedge fund lobbyists as disappointing, saying they
had reached the “best possible” outcome with a footnote to the
ministers’ statement that flagged their worries.

But experts see the new rules — likely to take effect
around 2012 — as a decisive political victory given the
symbolic importance of the industry for London.

Other political leaders played down any impression that
Britain might have come off badly in the negotiations.

“Today, with goodwill and agreement from Britain and after
very hard struggle in recent weeks, we have succeeded … to
rein in hedge funds,” said Austrian Finance Minister Josef


Britain is worried the new law will drive its financial
services elite out of London’s West End, home to eight out of
ten European hedge funds, to cities like Geneva.

But it is isolated. Only the Czech Republic backed it in
opposing the approval of the new rules by the finance ministers,
a weak alliance in the face of heavyweights France and Germany,
who pushed for rigid restrictions.

George Osborne, the 38-year-old British chancellor, blamed
the country’s previous, Labour government for giving the new
government a “hospital pass” — a sporting term for a dangerous
pass that the receiver cannot take without being hurt.

“I came here given a challenging position bequeathed to me
by the previous government,” Osborne told reporters after being
outvoted at the first meeting with his peers. Officials said he
did not speak during the deliberations on the issue.

Osborne now hopes to win a last-minute concession in
negotiations with parliament. Late on Monday, its economic
affairs committee approved its version of the draft law, backing
the idea of a passport or EU license for foreign funds.

Hedge funds have been accused of exacerbating Greece’s
borrowing difficulties by betting against its debt, although
there are few trading records to prove that how much such
betting took place.

The planned legislation would change that, proponents say,
making it easier for supervisors to see what is happening as
well as intervene by curbing short-selling, for example.

The hedge fund clampdown is part of a broader revamp of
financial services in Europe, spanning curbs on banker pay to
demanding lenders put aside more for unpaid loans.

On Tuesday, Germany’s Schaueble also flagged a possible
financial transaction tax.

“Agreement on a European initiative would come at the
earliest if there were to be no such agreement at the G20,” he
said, referring to the meeting of developing and industrialised
nations in Toronto in June.

(Reporting by John O’Donnell, Huw Jones, Gavin Jones, Sumeet
Desai and Brian Rohan; editing by Stephen Nisbet, Ron Askew)

UPDATE 3-Britain cornered as EU backs hedge fund crackdown