New Financial Instruments and Institutions on the

International Financial Markets: Opportunities and Risks

Bucerius Law School, Hamburg
16th October 2007

New Financial Instruments and Institutions on the

International Financial Markets: Opportunities and Risks
Bucerius Law School, Hamburg
16th October 2007
The main building
of the Bucerius Law School
in Hamburg
j
05
06
10
24
25
27
Preface
T
he international fnancial markets currently show signs of serious instabilities. An
unstable American real estate sector, credit crashes, bank insolvencies and the fall of
the US dollar continue to afect stock markets worldwide. After the Asian fnancial crisis
of 1997/98 and the bursting of the so called dot-com bubble in 2001/02, concerns about a
global fnancial crisis remain omnipresent among politicians as well as fnancial experts.
Once again, new asset sets and stock market practices have put the global system in danger
with unforeseen consequences not just for investors. Not surprisingly, doubts about the
regulatory framework for international fnancial activities have increased. Do we need more
regulations and who could enforce them? These questions deserve close attention.
It was the idea of the former Chancellor of the Federal Republic of Germany and Member of
the board of our foundation, Helmut Schmidt, who raised the question and encouraged us to
have a deeper discussion on this topic in a setting that is conducive to a rigorous debate.
A few months ago, he published an essay on the structure of the international fnancial mar-
kets in the weekly DIE ZEIT that was widely discussed in the German public. We have decided
to reprint it in this booklet.
The ZEIT-Stiftung Ebelin und Gerd Bucerius is delighted to host this meeting of high-ranking
political and fnancial experts who have agreed to come together in search of answers.
Hamburg, September 2007
Prof. Dr. Michael Gring
President
Dr. Markus Baumanns
Executive Vice President
Contents
Preface
Programme
Helmut Schmidt
The Global Financial Markets Need Regulation
The Foundation
Glossary of Terms
Imprint
6
Programme Welcome
9.00 a.m. Prof. Dr. Michael Gring, President,
ZEIT-Stiftung Ebelin und Gerd Bucerius (Hamburg)
Introduction
9:05 a.m. Helmut Schmidt,
former Chancellor of the Federal Republic of Germany (Hamburg)
Opening Lectures
9.20 a.m. Die Herausforderungen bleiben Transparenz und Stabilitt der
internationalen Finanzmrkte wirksam frdern
Peer Steinbrck, German Federal Minister of Finance (Berlin)
9.50 a.m. Financial Innovation: Evolving Opportunities and Challenges
Robert M. Kimmitt, Deputy Secretary of the Treasury (Washington, D.C.)
10.20 a.m. Discussion
10.50 a.m. Cofee break
New Financial Instruments and Institutions on the International
Financial Markets: Opportunities and Risks
Heinz Nixdorf-Hrsaal, Bucerius Law School
16th October 2007
The Auditorium maximum at the heart of the
Bucerius Law School Campus
8 q
The Role of the Politicians:
do we need more regulation?
Panel discussion
17.00 p.m. Pervenche Bers, Chair, Committee on Economic and Monetary
Afairs of the European Parliament (Strasbourg)
Prof. Dr. Martin Hellwig, Managing Director, Max-Planck-Institute for
Research on Collective Goods (Bonn)
John Kornblum, Chairman, Lazard & Co. Germany (Frankfurt)
Prof. Dr. Karl-Heinz Paqu, Leader of the FDP in the
Landtag of Saxony-Anhalt (Magdeburg)
Moderator: Dr. Uwe Jean Heuser, DIE ZEIT (Hamburg)
Summary
18.30 p.m. Prof. Dr. h.c. Manfred Lahnstein, Chairman of the Board,
ZEIT-Stiftung Ebelin und Gerd Bucerius (Hamburg)
19.00 p.m. Close of day
20.00 p.m. Dinner (Banqueting Hall berseeclub)
The Future of the International Financial Markets
Opportunities and Risks for the Global Economy
11.15 a.m. Rethinking the Bright New World of Globalized Finance
Paul Volcker, Chairman of the Board of Trustees, Group of Thirty
(Washington, D.C.)
11.45 a.m. Die internationalen Finanzmrkte im Spannungsfeld von Erfolg,
Problemen und Kritik
Prof. Dr. Otmar Issing, former Chief Economist at the
European Central Bank (Brussels)
12:15 p.m. Discussion
13.00 p.m. Lunch
The Practitioners Viewpoints: what are the new trends
on the capital markets, and what are the opportunities
and risks for the global economy?
Panel discussion
15.00 p.m. Dorothee Blessing, Managing Director Investment Banking,
Partner M & A and Corporate Finance, Goldman Sachs Group Germany
Reinhard Gorenfos, Partner, Kohlberg Kravis Roberts & Co. (London)
Prof. Dr. Christoph Kaserer, Chair of International Capital Markets,
Business School, University of Technology (Munich)
George Quinn, Chief Financial Ofcer, Swiss Re (Zurich)
Jochen Sanio, President, Federal Financial Superiorty Authority (Bonn)
Moderator: Dr. Uwe Jean Heuser, DIE ZEIT (Hamburg)
16.30 p.m. Cofee break
ro rr
Like banking and share trading, funds that today operate worldwide and in an uncon-
trolled fashion, need regulation and control. The case to be made is both a rational and
a moral one.
Last year, the New York investment bank Goldman Sachs paid out 16 billion dollars to its
board members and employees; the fve largest American investment banks together paid
out a total of 36 billion dollars. Any normal German citizen will fnd such sums impossible to
grasp; they are on a par with the annual government borrowing requirement of the German
fnance minister. One is inevitably led to question whether all is fair and above board in the
fnancial markets. Here, the former fnance minister of Germany, Helmut Schmidt explains the
bigger picture, the interdependencies and inherent dangers in international fnance.
By the end of World War II, the great majority of the Chinese, Russian, Japanese and
German populations lived in far greater poverty than during the frst decades of the 20th
century. By contrast, at the beginning of the 21st century, most people in these countries are
enjoying better economic conditions than ever before. Even though in the intervening sixty
years the world population has more than doubled, the greater part of mankind has experi-
enced unprecedented economic growth. One of the reasons behind this development is the
accelerated rate of technological advancement, especially in transport and communications
technology. Nations have opened their markets to enable the transfer of knowledge and
technology as well as trade in products and services across national boundaries. As a result,
these government decisions have created new global markets that are no longer centred
on a few natural resources, but incorporate practically all goods and services. It has to be
said, though, that across the globe the rate and extent of the engagement with this process
(which has since been termed globalization) varies from country to country. In terms of scale
and speed, Germany and Japan, for example, were, and still are, far ahead of China, with
Russia emerging still later.
The Global Financial Markets Need Regulation
(The need to know: who controls the global financial markets?)
By Helmut Schmidt
r: r
The globalization of the fnancial markets only began in the 1970s and was slow to take
of. In the wake of the continuing Arab-Israeli confict, some oil-exporting nations began
to use OPEC as an instrument of geo-political leverage. This coincided with the end of the
leading role the American currency had hitherto played as an anchor for global currency
exchange rates. The consequence was a worldwide economic recession. Today we are faced
with the threat coming from the key players on the global fnancial markets who are in a
comparable position of power. The power no longer lies with nations or governments but
with private fnancial institutions.
There are only a few international centres of fnance, where every day, every hour even,
these players make decisions that have a deep impact on the economic processes in the
greatest part of the world. Whereas OPEC represents a threat as an economic cartel of govern-
ments seeking to exercise a stranglehold on the global oil trade, in the global fnancial mar-
kets the dangers lie in the tendency of many fnancial managers to follow the herd in times
of crisis. So far, China has relatively little involvement in the globalization of the fnancial
markets, and Russia even less. But the national economies of Germany and other European
states, as well as some Southeast Asian and South American economies, are increasingly
falling under the rule of the private equity managers operating in the international centres of
fnance in New York and London.
On the one hand, the German economy today ranking immediately behind the US and
Japan is the third-largest in the world. Of its national product, 40 per cent is exported;
millions of jobs in Germany depend on these exports. Imports including crude oil repre-
sent an almost equal part of Germanys national product. Germanys involvement in the
global economy is far greater than that of, for example, the US, Japan, or China. On the other
hand, the most important decisions that concern the business community are not taken in
Frankfurt, but in New York and London. The reason for this lies in the fact that the formerly
leading German banks have not grown at the same rate as the German economy overall, the
Deutsche Bank being the notable exception.
What are the risks in the global fnancial markets?
In the 1960s, the US Federal Reserve abolished its pledge to pay the equivalent in gold
for every dollar presented there. As a result, the dollar lost its role as the anchor of the global
system of fxed rates of exchange, and ever since the 1970s, exchange rates increasingly have
undergone a series of crises.
Anyone who, for example, in the 1990s, had money outstanding on an export loan to a
customer in Southeast Asia in the currency of the importing country, might suddenly be
confronted with a signifcant loss in value of the loan as the currency in question collapsed
on the exchange. If the creditor in turn had taken out loans with a bank, this might lead to
trouble not only for himself but also for the bank in question. Other banks, alerted to the situ-
ation, would call in their debts. In this way several Southeast Asian currencies entered into
an accelerated downward spiral. One result was the collapse of a number of banks. Another
result was that those who had speculated on the decline in value of the particular Southeast
Asian currency were able to make signifcant gains because they had sold large sums of this
currency at the old, higher price at a set date but without actual ownership and could
now provide this currency at a much lower exchange rate.
The Southeast Asian currency and banking crisis was by no means the frst of its kind, but
in terms of its volume it was one of the largest currency crises the world has experienced
since the 1970s. The situation might repeat itself in the future. It could be caused by a variety
of factors. For instance, a nation might undermine the trust in its currency through an
infationary monetary policy. An excessive foreign debt might lead to its insolvency on the
foreign exchange, thereby undermining domestic trust in its currency. The world has seen
several instances of this, for example in the GDR in the late 1980s.
r rj
A state might mismanage its balance of trade its imports by far exceeding its exports
thereby driving its exchange rate into decline. In all these cases, the responsibility lies squarely
with the nations government. Natural disasters, but above all political events and wars can
also have a profound efect on the rates of exchange. OPEC, for instance, under Saudi leader-
ship in the 1970s, put a number of currencies under pressure through the spiralling oil prices
that were part of its foreign policy strategy. The oil-importing nations were suddenly forced
to pay signifcantly higher prices in dollars, thus depleting their foreign exchange reserves.
When, conversely, a government increases the value of its currency on the exchange,
other nations without exception will not regard this as a crisis; one example was the continu-
ous upward revaluation of the Deutschmark between 1970 and the end of the 1990s. An
upward revaluation makes exporting more expensive, at the same time as making importing
cheaper. In view of their export-dependent labour markets, China and Japan for years have
been keeping the value of their currencies artifcially low by buying mainly American dollars
(but also euros) through their central banks, thereby accumulating immense foreign reserves.
On the one hand, this process stabilizes the exchange rate of the dollar. On the other hand,
the Chinese and Japanese export surplus to a certain extent deprives their own economies
of their own goods, adding instead to a growing mountain of foreign currency reserves. For
the time being, the gigantic sums that make up these reserves serve no real purpose. But the
watchword is 'for the time being': potential risks and dangers lie ahead.
Fluctuating exchange rates and currency crises are not the only possible causes of de-
velopments and events leading to instability on the global fnancial markets, but they have
been the focus of much speculation since the 1970s.




r6 r
Hedge funds and private equity funds are on the rise across the globe
In the 1970s no-one spoke of hedge funds and fnancial derivatives. At that time, the
worldwide system of fxed exchange rates linked to the dollar became obsolete; since then
speculation on options and futures in foreign exchange have come to the fore. Concurrently,
the national fnancial markets have become more globalized and complex. Today, interna-
tional hedge funds manage far more than 1000 billion dollars. The greater majority of these
more than 9000 hedge funds is legally registered on tiny islands that are sovereign territories
with no functioning tax authority or other bodies to regulate fnancial dealings. Most of
the managers not only in hedge funds, but also in real estate and private equity companies
are accountable neither to a board of directors nor to a shareholders AGM. The managers
of these new fnancial companies are as free to follow their speculative interests and personal
gains as were the Condottieri in medieval Italy.
In many ways, the large banks are players in this game. They grant the fund managers
immense credits, enabling them to maximise the volume but also the risks of their hedge
funds. Many banks have set up hedge funds of their own, and many fund managers are
former bank traders. Almost daily, bank managers together with fund managers invent new
speculative fnancial derivatives, the risks of which cannot be adequately assessed by their
own board, let alone the private client. The collapse of Enron illustrated this perfectly.
In the 1990s the world witnessed how, as a result of successful speculation, the fund man-
ager George Soros was able to force the British government to devalue its sterling currency.
We witnessed the US central banks intervention to save the large hedge fund LTCM from
bankruptcy because its knock-on efect would have led to he collapse of a number of banks.
At the end of that decade, we witnessed the new-economy-psychosis that was rife amongst
international fnance managers. There followed public inquiries that revealed a multitude of
unethical and unlawful practices, even in companies with a worldwide reputation for probity.
Shortly before, the Southeast Asian currency and banking crises had been compounded by
those in Brazil, Argentina and Russia.
All these cases point to global risks. Financial managers operating transnationally might
be prone to hysterical over-reactions with knock-on efects, which multiply a single miscalcu-
lation on a global scale. Only a few fnance ministers across the globe today are in a position
to assess and limit these fnancial risks for their national economies.
Germany lacks large international banks
Germany faces considerable risks to its economy on the global fnancial markets. There is
a rising number of cases where private equity funds or their managers act as investors to buy,
merge and even demolish manufacturing companies. This often happens in medium-sized
manufacturing companies where the heirs to a family business cannot agree on the way
forward and prefer to cash in on their inheritance. But the same thing also happens in large
joint-stock companies as was the case in Blackstones engagement with Deutsche Telekom.
To protect themselves against a hostile takeover, public companies put themselves under
a lot of pressure to drive up their share prices and keep them at a sometimes artifcially
infated level, often to the detriment of the company in the long term.
Since immediate proft is the sole aim of the so-called investors, research and long-term
development and of course the jobs that go with it! fall by the wayside in many of the
acquired companies. In this debate, the watchword 'shareholder value' served to muddy the
waters for only a short time, while Franz Mnteferings simile of the 'locusts' was certainly not
without foundation.
Looking at the range of private fnance companies today, it is apparent that the boundar-
ies between banks on the one hand and, on the other hand, investment funds, hedge funds,
private equity funds, real estate investment trusts, funds of funds, and others have become
blurred. The speculative risks that many fnancial managers and traders are willing to take as
a matter of course now present signifcant risks to banks and insurance companies. But pen-
sion funds, charitable foundations and even local councils these days are increasingly willing
to engage in highly speculative ventures.
r8 rq
One example that may serve to illustrate the efects of fnancial globalization is Germanys
largest private bank: the Deutsche Bank, number one fnancier of German industrial enter-
prise in the last century, today achieves the bulk of its profts from investment banking in
New York and London. Ownership of the majority of its shares is presently foreign.
Half a century ago, Chancellor Adenauer could call upon the director of the Deutsche
Bank to represent Germany in London during the negotiations on the German pre-war debt.
Barely a quarter of a century later, in the wake of the global recession caused by OPECs
policies, the Germans again entrusted a representative of the Deutsche Bank with the task
of setting up the frst world economic summit, allocating what was coined a 'sherpa' as a
facilitator to each of the participating states. In the frst instance, this was Hermann J. Abs, in
the second Wilfried Guth, and in any case, the German government could literally bank on
the patriotic sense of duty that was fundamental to the Deutsche Bank. Since then, the bank
has immersed itself in the process of globalization. In the event of a transnational emergency
which bank could the present federal government turn to for advice and positive action?
Germanys economy today lacks large private banks that operate internationally with a
sound reputation, but are just as deeply rooted in the domestic economy. The consolidation
of Germanys banking landscape, an uneven terrain resulting from complex structures, has
not kept pace with the nations growing economy. Compared with France, Spain, the Nether-
lands or Austria, to name but a few, Germanys interdependency with global fnance is there-
fore far greater than necessary, whilst the US and Britain are in a diferent league altogether.
Here might be a rewarding task for the consortiums and boards of Germanys savings
banks, federal state banks, and co-operative banks. Germany has a healthy attitude to private
saving, quite the opposite of the US where the overall rate of private savings is nil! But our
large companies depend to a signifcant extent upon foreign investors, while smaller com-
panies are sufering from the efects of credit reduction under the so-called Basel-II rules. At
least the German public still has a justifable trust in its local savings banks and their reputa-
tion for solid reliability. It helps to remember that unlike the international funds based in
the Caribbean whose volume may be a thousand times greater every German savings bank
is subject to strict supervision.
By necessity, the ability and duty to exercise control over banking and share emissions
lies with governments. The fnancing of private enterprise should be the prerogative of
banks that are not state-owned. Instead of a limited number of large banks, Germany has far
too many very small fnancial institutions (including savings banks and co-operative banks),
some of which have already been taken over by large international houses. Mergers within
the German banking landscape would be a commendable way of taking responsibility, but
so far there seems to be a sad lack of initiative.
The US an exceptional case giving cause for concern: how long before the crash?
Since the beginning of the millennium, the American budget defcit has reached gigantic
proportions. This defcit, and the adverse efect on the foreign trade balance, has increased
further because private households in America make practically no savings. Both these
defcits are covered by the foreign trade partners of the US, driving the national economy
into debt abroad. The sum total of the American debt in dollars in the hands of most of
the worlds central banks as well as in the hands of foreign private banks, companies, and
persons has reached 7700 billion dollars. This sum is about the equivalent of two thirds of the
annual national product of the US (if one deducts Americas international lending, one is
still left with a net debt of about one quarter of the US national product).
Because most foreign central banks and other foreign creditors in turn re-invest their dol-
lars in the US, and because foreign companies and private individuals follow suit with their
fnancial surplus, we see huge-scale capital imports into the US and great liquidity in both
Anglo-Saxon centres of fnance. The net capital imports (minus American capital exports) of
the US today have reached the size of about seven per cent of the American national product.
This is the extent to which the American economy which includes investment bankers and
fund managers is founded on the surplus imported from other parts of the world. This begs
the question of just how long the US can aford to live with this level of debt. Or, to phrase it
diferently, for how long will the foreign trade partners remain able and willing to maintain
their capital exports to the US?
:o :r
The answer comes in two parts because there are two very diferent contributing factors:
the mechanism will work for as long as the world places its trust in the political and eco-
nomic leadership of the US, but it appears unlikely that a process that unfairly benefts the
Americans will forever remain in operation. It is impossible, for instance, to rule out future
American foreign policy disasters, which would inevitably undermine this trust. It is for this
reason that in the US and beyond, warnings are being raised to exercise caution and limit the
American politics of debt.
In the meantime, China alone has amassed 1000 billion dollars - and counting - of foreign
currency reserves. It cannot be ruled out in future that these might be used for quite difer-
ent investments than American government bonds as has been the case so far. In any case,
arguments over the bilateral trade defcit of the US vis--vis China are unlikely to have an
efect on the continuing depreciation of the dollar compared with the Chinese renminbi or
the euro. If the Europeans had not agreed on the monetary union of the euro nowadays the
worlds second most important currency at present international fnancial managers would
be engaged in intense speculation with what used to be our small European currencies. The
euro, though, has proved to be stable, and because of the weak dollar, there is an inherent
trend towards upward revaluation.
But neither the stability of the euro nor, of course, the immense economic growth of
China, India, and the oil-exporting nations can save the US from the necessity of recalibrating
its balance of trade. In todays economic situation, the dollar attracts multifarious transna-
tional speculation, especially by hedge funds. America is a great and powerful nation, but it
is not economically invincible. Seen as a whole, the global network of the fnancial markets
is just as vulnerable. A dramatic depreciation of the dollar might lead to an international
fnancial crisis.
The new fnancial institutions need transparency and supervision
Ever since the 1970s, when large-scale currency speculation took of, fnancial speculation
has become a growing trend in many other areas. Large stakes are placed on the future value
of natural resources, share prices, stocks and bonds, real estate and interest rates. Many trad-
ers at investment banks, investment funds, hedge funds et al. have to work through the night
to calculate price fuctuations in other far-fung corners of the globe, where the working day
may be ending when it is just about to begin in their own time zone. Hand in hand with this
frenzy of speculation goes a loss of integrity and a decline in moral values. Hostile takeovers
fnanced on credit of proftable companies are the order of the day. Displays of exces-
sive greed are common. In their new role as owners, fnancial managers all too often look to
their own immediate profts with no regard for the established company and its workforce.
Germany has become a key target area for hostile takeovers Mannesmann was not an ex-
ceptional case. Across the globe, the rate of growth for private equity institutions is far higher
than economic growth in general. It seems appropriate to talk of predatory capitalism. And
German banks, too, advertise to their private clients funds, fnancial derivatives and certif-
cates where risk assessment is impossible.
Consequently, it is not just the ordinary citizens but also the politicians who lack an un-
derstanding of the opaque global fnancial markets. The networks and interdependencies of
private-sector fnance are transparent to only a very small number of specialists. In contrast
to the government institutions that regulate banking, there is no supervision of hedge funds
and similar institutions and certainly no laws that are internationally binding.
This statement of fact should not give rise to panic, but it may serve as an appeal to
politicians to provide for more transparency and for government bodies to intervene where
abuses and incalculable risks are apparent. It borders on madness to subject small savings
banks to government controls on a daily basis, whilst vastly more powerful private fnancial
institutions go completely unsupervised.
:: :
The ideal solution would be to abolish the tax havens without regulating authorities, but
for the time being this is wishful thinking as these are sovereign or quasi-sovereign states in
the Caribbean, Europe or elsewhere. However, it would be possible for the governments of
the large OECD-member-states to prohibit their banks and insurance companies from granting
loans to private fnancial institutions that are based on these islands beyond jurisdiction.
Also, our governments could decide to limit credit for hedge funds and private equity funds
in general. It would be possible to force anyone who in the home country ofered shares
of funds, certifcates or similar fnancial products, to publish the risk associated with these.
In brief: the governments of the large nations of this world could impose regulations and
supervise their implementation. So far no-one seems seriously willing to set up a joint initia-
tive. It is commendable that Germany has decided to impose some domestic regulations, but
this cannot shield the German economy from an international fnancial crisis that might arise
from the dangerous accumulation of risks harboured by the new fnancial institutions in New
York and London.
Financial crises that extend beyond national boundaries could all too easily spill over into
the euro-zone and Germany. It is therefore in our vital interest to supervise the unchecked
growth of global funds in the same way that banks, insurance companies and the stock mar-
ket are subject to regulations. At present, there are no guarantees to prevent a single crash,
a single dramatic event, or a catastrophic political development in the region between the
Gaza Strip and Afghanistan from triggering a new oil price explosion or a fnancial crisis.
Some fnancial managers have indirectly admitted that there is justifable cause for con-
cern with regard to the new fnancial institutions. This may be seen in the "sound practices",
issued in 2005 by the private Managed Funds Association in Washington, as well as the
Corrigan-Report (named after a board member of Goldman Sachs in New York). Both initia-
tives recommended that the funds market should simply regulate itself. The US government
has set up the "Presidents Working Group on Financial Markets"; the British government has
published a White Paper on hedge funds. Following a German initiative, the fnance ministers
and governors of the central banks in 1999 set up a forum for fnancial stability, but so far
without tangible results. Clearly, Chancellor Merkel and her fnance minister are right to insist
that the issue needs to be on the international agenda.
We can expect to see resistance to this initiative from the governments in Washington and
London, because they regard the profts made by investment banking and hedge funds as
being in their national interests. It is likely that they would be willing to intervene only when
faced with imminent disaster which may be too late. Great tenacity is called for from Chan-
cellor Merkels government. In the same way that shipping and aeronautics are subject to
strict trafc and safety regulations, the global trafc of capital needs to be controlled in order
to prevent disasters. More than a rational requirement, this is a moral imperative.
Note on the text:
The ZEIT-Stiftung wishes to thank Helmut Schmidt and DIE ZEIT for kindly granting
permission to print the article which appeared 1st February 2007 in DIE ZEIT with the title:
Beaufsichtigt die neuen Grospekulanten!
: :j
Glossary of Terms
Hedge Funds: the term is originally derived from the verb 'to hedge', to ensure enclosure of
ones property. The word hedge fund now universally applies to international private fnan-
cial institutions which seek to maximise the profts of their shareholders in the short term in
high-risk speculative ventures. In contrast to traditional investment funds and similar forms
of investment, hedge funds invest mainly in the new fnancial derivatives (see below). Hedge
funds multiply their capital investments by taking out loans. Until the mid-nineties, hedge
funds were practically negligible; one of the reasons behind their establishment was the aim
to place themselves beyond the jurisdiction of banking regulations. Since the year 2000, the
capital managed worldwide by hedge funds has trebled to at least 1300 billion dollars; the
huge loans need to be added to this fgure. The vast majority of hedge funds is beyond the
reach of any regulating authority.
Financial Derivatives: These are tradeable fnancial products such as options, futures or
swaps, the prices of which are based on the prices of traditional stocks, shares, bonds or com-
modities, for example crude oil and gas. Financial derivatives are basically saleable contracts;
for example, the purchase of an option would entitle the buyer to buy or sell a share at an
agreed price in the future. Trading in derivatives can help to counterbalance fuctuations
in interest and exchange rates as well as defaults, but the costs can be high; it is usually the
hedge funds, their investors and managers, who proft from fnancial derivatives. The volume
of derivatives currently in circulation is many times larger than world trade in goods and
manufactured products.
Private Equity Companies: Their main aim is to buy holdings in other companies in order to
sell them. The shares are to a large extent fnanced through loans. Private equity companies
usually operate on the basis of a temporary engagement; from the outset, the resale is a
mid-term objective. There is a growing importance of investment funds established by
private equity companies. Their aim is to achieve tax benefts for their investors, for example
in shipping, the media, and real estate, and through the tax-free sale of shares. Private equity
companies can exercise their infuence over the management of the companies they own
or partly own. As these investments are aimed at maximising profts, saving the company and
its jobs in the long-term often does not enter into the equation. On the other hand, these
investments can be very helpful for new companies and for family businesses to resolve
inheritance issues.
The liberal spirit of Hamburg and Gerd Buceriuss unfagging willingness to embrace the new
it is these two sources of inspiration that defne the ZEIT-Stiftung Ebelin und Gerd Bucerius.
Its activities are centred on research and scholarship, art and culture as well as education and
training. The fagship of the Foundation is the Bucerius Law School, founded in 2000 as the
only private university for law studies in Germany, and already a strong innovative force in
this academic discipline. The establishment of the Bucerius Kunst Forum in the heart of Ham-
burg underlines the importance the ZEIT-Stiftung Ebelin und Gerd Bucerius gives to the arts.
Since its opening in October 2002, four exhibitions each year have drawn substantial crowds.
After a decade of engagement in philosophical and historical projects mainly with focus on
Eastern Europe, the foundation is now focusing on new areas of scholarship and research
in the humanities, with a particular emphasis on cities and migration and interdisciplinary
projects in the felds of law and science. In the feld of education and training the Foundation
is active in supporting young journalists, particularly in Eastern Europe. The Bucerius LERN-
WERK in Hamburg is an educational initiative to promote reforms at selected secondary
schools. Intercultural dialogue is at the centre of the foundations international activities
spanning above all Central and Eastern Europe, the US, and Israel.
The Foundation
:6 :
Imprint
Editors
Dr. Markus Baumanns, Frauke Hamann
Graphic Design
Bro fr Gestaltung Helga Albrecht
www.bfg-albrecht.de
Translation
Nina Stedman
Printed by
LD Druck
Published by
ZEIT-Stiftung Ebelin und Gerd Bucerius
Feldbrunnenstrasse 56, D-20148 Hamburg, Germany
www.zeit-stiftung.de
Picture credits
David Ausserhofer, Corbis, Bodo Dretzke,
Ronald Frommann, Thies Ibold, Ulrich Perrey
Graphics
Dieter Duneka
Real Estate Investment Trusts (Reits): As the recently-coined term suggests, these are private
funds which focus on the acquisition and lucrative management of land and residential and
commercial buildings. Similar to private equity companies, the trusts act as 'investors' even
transnationally but actually the shareholders are the real investors.
Basel II: The abbreviation stands for the Revised International Capital Framework that sets
standards for capital adequacy for all credit institutions and investment banks, which was
proposed by the international Basel Committee on Banking Supervision and came into ef-
fect in all EU-member-states according to the EU-directive in January 2007. Basel II links the
capital requirement of banks to the associated risks, taking into account new developments
on the fnancial markets and in the risk management of the fnancial institutions.
The Bucerius Center for Graduate Studies
Deutsche Bank Hall
ZEIT-Stiftung Ebelin und Gerd Bucerius
Feldbrunnenstrasse 56
D-20148 Hamburg
Germany
Telephone: +49(40)41 33 66
Fax: +49(40)41 33 67 00
E-mail: zeit-stiftung@zeit-stiftung.de
www.zeit-stiftung.de