Why the euro is an economic absurdity

I REALLY wasn’t sure what to expect when I went to meet Bertrand des Pallieres. This is the man, after all, who lightened the gloom in the middle of the financial crisis with the story that his £80,000 Maserati had been towed, but that he was “too busy” setting up his hedge fund, SPQR, to go and collect it. The tone of the reports suggested that he was a lunch-is-for-wimps, greed-is-good sort of chap, all red braces and Jeroboams of champagne in West End nightclubs. In the flesh, though, he is not like that at all. Charming, thoughtful, friendly and polite, he even laughed when I asked him what car he has these days. “I don’t do a lot of driving,” he smiled, somewhat ruefully.

More recently, des Pallieres has been in the news because he was burned by the pre-pack administration of Hellas II, the parent company of Greek telecoms company Wind Hellas, in which his fund was an investor. Months later, he’s not happy about the money that SPQR lost. He reels off facts and figures, dates and names in his quick, elegantly-accented English, and it is evident that he is not ready to accept what Wind Hellas’ management did. The facts are complicated and there is clearly bad blood here.

Much of his ire, though, is turned on the British legal system. He points out that Wind Hellas changed its centre of main interests from Luxembourg to the UK, and three months later filed for a pre-pack bankruptcy in a deal that lost its unsecured investors their money, and then returned the company to its previous owners. It was all legal, but des Pallieres is filled with righteous anger.

“Orderly bankruptcy is one of the foundations of Western market capitalism and it is terrible that the UK, which was one of the founders of this system, allows this to happen.” he says. So-called jurisdiction shopping “doesn’t serve anybody, certainly not the UK economy, the reputations of the UK, or the capital markets.” He finds it incredible that, in theory, a company with just “one desk and one computer” in the UK can make use of the British courts’ bankruptcy laws. In his case, he says, “the judge seemed to argue that the fact of the case taking place in a British court is connection enough. That is a massive circularity.”

“The law tolerates that one group of the creditors decides what happens to the other creditors. This is extremely dysfunctional. And the court is not even obliged to deal with the rights and wrongs of the case, but just with the technical facts of the administration.” Justice, he feels, is not served, or even addressed in these cases. “There is not even a duty to demonstrate that the company wasn’t insolvent when it moved. This is not just a law that serves no social purpose, but a negative social purpose. One of the founding countries of modern capitalism has a fundamentally deficient bankruptcy law. It is staggering.”

The whole system, he believes, is distasteful: “There is a lobby of people who have turned bankruptcy into a business and say: ‘You can go to the UK and clear your debts’. That is the face of finance that is unacceptable to anybody.”

Des Pallieres also has strong opinions about Greece and the troubles in the single currency. “The euro has a fundamental flaw that it needs to address, which is that it is an economic absurdity: you have one currency with no adjustment mechanism and there is little tax and labour transfer across Europe.”

The problem of contagion, he says, is real and dangerous (we were speaking a few hours before S&P downgraded Spain). The reason is simple: anybody who has been burned by their exposure to Greece will have to cut exposure to other risky countries. “There is going to be contagion automatically, as a function of basic risk-management.” He says that the Northern European banks ought to act quickly. “I don’t understand Angela Merkel’s position. Her banks have the most to lose and I don’t think they can suffer another slam. Those banks will stop lending again to businesses in Germany, and there will be unemployment.”

The solution? In the short-term, devalue the euro. “You should lean towards the weakest country in the union. If somebody overheats in northern Europe, well, they can take more taxes and pay off some of their deficit.” And in the long-term, they need to create an “IMF-like” European mechanism, to find a politically acceptable way to transfer funds to Greece.

Being a former derivatives trader at an investment bank, des Pallieres has also been closely following the Goldman Sachs controversy over the Abacus CDO and its Senate appearance this week. The bank he says, is seriously mishandling this moment. “Wall Street firms tend to fight for too long. They are losing with the jury of public opinion. It’s an injustice, because they are among the better investment banks, when it comes to ethics and compliance, but they have more to lose than the SEC now if they blink first. This is not just a legal case, but also a PR one, and now winning the legal case won’t help them. Even if they win, it is in a way that public opinion will not tolerate. They come across as people who don’t get it. They have to come across as decent guys who accept their mistakes.”

Whatever happens in the Goldman case, he thinks that it highlights a problem with the derivatives market in which he cut his teeth. Like many who worked in derivatives i­n the 90s, he “believed in innovation in derivatives, and that it could be a force for good. I was a huge believer in the social utility of what I was doing.” But now? “I have to admit that I was wrong and that there has to be some regulation.”

“Greed is what makes it go wrong. If it is not abused, then it works, but in bull markets the reckless ones do better and in the bear market the reckless don’t suffer. At JP Morgan we were intellectually honest, but idiots who do bad business take the market away from those sorts of people. There is a race to the bottom. Regulation is necessary, to stop recklessness, but it has to be agile.” What about the problem of persuading bankers to become regulators? Surely talented people will never take the job, when the rewards will be so much smaller than those on offer in investment banks? “It’s worth paying people properly,” he shrugs, “look at the cost of the misbehaviour. And the industry can afford it. It’s the best of two bad choices.”

Des Pallieres is clearly too happy running SPQR to ever jump the fence. But I couldn’t help thinking that if they are looking for a man with deep knowledge and a crusading zeal to do the right thing, a regulator could do an awful lot worse.

Born: Paris

Education: ESSEC (Ecole Superieure des Sciences Economiques et Commerciales)

Family: Divorced, with three children from his marriage

Lives: Between Geneva, Rome, Paris and London

Career: 1996-2005. Worked in derivatives at JP Morgan, eventually becoming a member of the European market management committee, and global head of structured credit, with 500 front-of-office staff beneath him.
2005-7: Global co-head of principal finance at Deutsche Bank, and member of the global market leadership group
2007: Founded the hedge fund SPQR, of which he is CEO and CIO.