Blinking left, driving right: Germany's flirtation with anti-capitalist populism.

• Author: Engelen, Klaus C.

Recent rhetorical attacks against international corporate investors from the top echelons of Germany's governing Social Democratic Party, coupled with the crashing defeat of the Red-Green coalition in the latest state elections and the German chancellor's unexpected move to call a national election a year earlier than scheduled--all these developments can be seen as part of an "end game" for Gerhard Schroder and the Red-Green coalition.

In a major speech on the future SPD agenda at the party headquarters on April 13, party chairman Franz Muntefering zoomed in on "international profit-maximization strategies," "the increasing power of capital," and moves toward "pure capitalism." Encouraged by the favorable response his anti-capitalistic rhetoric produced among party followers and confronted with ever more alarming polls from the Ruhr, he escalated the war of words. "Some financial investors spare no thought for the people whose jobs they destroy," he told the tabloid Bild. "They remain anonymous, have no face, fall like a plague of locusts over our companies, devour everything, then fly on to the next one."

When a so-called "locust list" of financial investors leaked from the SPD headquarters to the press, the "droning buzz" of the locust plague became louder, reaching major financial centers. The list included among others U.S.-based investment firms Kohlberg Kravis Roberts, Goldman Sachs, and Blackstone as well as several German private equity firms and hedge funds, all of which have bought and restructured German companies in recent years. Was Muntefering, by starting a debate about the evils of capitalism, trying to make political capital by attacking international capital?

The media buzz rose to the slander level when Bild came up with a giant locust and the Union Jack flag superimposed on the Frankfurt stock exchange and when an insect with a Yankee Doodle hat and the headline "U.S. Companies in Germany: The Bloodsuckers" appeared on the cover of an IG Metall Union magazine.

AN ISSUE OF CREDIBILITY

What soon became an embarrassment for Muntefering and his governing Red-Green coalition and undermined their credibility is that some of the financial investors badmouthed as locusts were much sought-after buyers of state firms and state assets that had been put on the market by Schroder's finance chief Hans Eichel. Even Muntefering was thought to have made deals with firms that he now considers a "locust plague." Shortly after the Red-Greens took over the government in late 1998, none other than Muntefering, then minister of transportation, sold Autobahn Tank & Rast, a major chain of service stations, to Apax Partners. Later on, Apax sold Tank & Rast to Terra Firma Capital Partners, another locust firm.

And to give the German public a taste of how Anglo-Saxon corporate raiders operate in today's world of globalization, a group of foreign investors, led by Christopher Hohn, managing partner of The Children's Investment Fund (TCI), a British-based hedge fund owning 8 percent of Deutsche Borse, succeeded in ousting Werner Seifert as chief executive of Deutsche Borse and forcing its supervisory board chairman, Rolf Breuer, to resign at the end of this year. Disgruntled investors lead by Hohn forced Seifert, who was managing the world's largest publicly listed exchange, to drop plans to take over the London Stock Exchange with an informal offer of 1.35 billion [pounds sterling]. As the Economist sarcastically noted: "Mr. Breuer also chairs the supervisory board of Deutsche Bank, which acted as adviser and financier for Deutsche Borse's bid for the LSE--a conflict of interest that would beggar belief in Britain or America." And the magazine continues: "In forcing out Mr. Seifert and Mr. Breuer, Deutsche Borse's shareholders have thrown a spotlight on the cozy and tight-knit club that operates at the top of German business."

Then Germany's financial supervisors joined the act. The financial supervisory agency BaFin saw "indications that some hedge funds acted in concert when they blocked Deutsche Borse AG's plans to take over the London Stock Exchange." According to BaFin, this has called into question the legality of international investors' actions in ousting Deutsche Borse AG's top management. BaFin president Jochen Sanio announced that his agency had written to some hedge funds abroad and asked them to provide certain information within a specific time. According to Sanio, BaFin will base its investigation on a recent court ruling that "shareholders that set up a backdrop of threats in order to influence decisions are acting in concert." Under the German takeover code, any party holding at least 30 percent of voting rights in a company is required to make a public offer for all of that company. Some shareholders try to circumvent the 30 percent threshold by arranging for third parties buy shares on their behalf. In order to prevent companies from doing this, the acting-in-concert rule was included in the code. Shareholders who jointly discuss their decisions concerning the company--not just takeover issues--are liable to fall within the scope of the acting-in-concert rule.

STILL GERMANY, INC.?

What happened to Deutsche Borse is putting pressure on German policymakers to think about the nature of what remains of "Deutschland AG"--and thus German capitalism. So far, calls for imposing a longer holding period on hedge funds investing or buying German companies haven't gone far in spite of Eichel's...