The Business - Patrick Hosking on the return on George III

For the first time in more than 70 years, Americans may regulate business again. They have woken up

Americans have spent the past two centuries legislating to ensure that their politicians can never wield too much power. The Enron scandal has made them realise they have been reining back the wrong people. All the time, the real power and money was being seized by business people, and specifically by executive directors of publicly listed corporations.

One American complained to me the other day about the shift from employees and shareholders towards the CEO. "For Chrissakes, we've woken up to find we've got George III running General Motors." This was no radical, but a private shareholder and adviser to the big pension funds, a man who owns a substantial chunk of Exxon. Even Alan Greenspan, chairman of the Federal Reserve, has talked about a "CEO-dominant paradigm". Translated into English, this roughly means that chief executives call the shots and get the gravy however badly they perform.

In many cases, the checks intended to keep executives on the straight and narrow have proved utterly inadequate. Non-executive directors turn out to be poodles. Auditors are happy to rubber-stamp any numbers, however fictional. CEOs who were happily tolerated as benevolent dictators when the share price was going up are revealed as venal, dishonest and incompetent.

The usual ABC of a disaster aftermath (Arse-covering, Buck-passing and Closing of stable doors) is now unfolding. But some useful legislation may eventually get on to the statute books, not least controls to restrict the investment of people's pensions into the shares of their own employer.

US financial scandals usually blow over quickly and it is soon business as usual. The last disaster that really spurred the legislators into action was the great crash of 1929. My Exxon investor believes Enron is the financial equivalent of Pearl Harbor, the moment when the US woke up to the reality of the Second World War. The voters are demanding action.

There aren't many British companies that can claim to be the biggest in the world in their sector. Mobile phone services (Vodafone), glass (Pilkington), football clubs (Manchester United) - er, that's about it.

Man Group now joins their ranks. Yes, the same Man that has taken over the Booker Prize and upset the London literati by wanting to open it to American authors. It is paying an Alp-sized pile of money to take over a Swiss rival, RMF.

Man Group used to be a piddly sugar-trading firm. It is now the biggest hedge fund manager in the world, looking after $20bn of investors' money. Hedge funds are those exotic, unregulated beasts that gear up and take bets on arcane financial outcomes. George Soros's hedge fund famously made $1bn punting against Norman Lamont as he did his Canute impression with the pound in 1992.

The stock market seems to like the deal. The fees from running hedge funds are fat, and Man has been highly accomplished in persuading the well-heeled to hand over their money.

But the secret of hedge funds is to be small and nimble. The real money is made spotting and exploiting the tiny mis-pricings between related financial instruments. Try to make too large a punt and the market moves against you. The more money that floods into hedge funds, the harder it is to see how they can make money. The doomsayers argue that the industry is heading for trouble.

It is less than four years since John Meriwether's Long-Term Capital Management went bust, bringing the western financial system to the brink of catastrophe.

When is an apology not an apology? When it comes from an investment banker in a deep hole. The formal mea culpa from Merrill Lynch's chairman, David Komansky, in the affair of its tarnished investment advice is a masterpiece.

Merrill has agreed to pay $100m in fines after the New York attorney general found that some of its analysts had recommended that investment clients buy high-tech companies' shares which they privately regarded as rubbish - allegedly to win favour with the companies and bring in lucrative investment banking business.

The smoking gun was a number of private e-mails written by the analysts describing the shares as "shit", "piece of crap", "junk" and so forth.

Merrill has chosen to say sorry, not for the bad advice but for the e-mails, thus misrepresenting what the scandal was really about.

There was absolutely nothing wrong with the e-mails. The shares recommended were shit and crap. The problem was that the analysts chose not to communicate this trenchant and wholly accurate analysis to their clients.

Merrill hasn't said sorry for that. Nor will it, while the potential class actions from burnt shareholders mount up.

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