Once again, regulators and legislators have proved that they know very little about the role of hedge funds in financial markets. Toings and froings about new regulation from both camps are simply a waste of time that could be spent in much more worthwhile pursuits.
European Central Bank president Jean-Claude Trichet’s statement that “the current crisis is a loud and clear call for extending regulation and oversight to all systemically important institutions – notably hedge funds and credit rating agencies” is misplaced.
Think back just a few months to when Dick Fuld railed against the malign influence of hedge funds that were supposedly dragging down Lehman Brothers’ share price. The sellers of Lehman stock, short or otherwise, were right. The bank went bust. As trillions of dollars of losses pile up in the banking system, those that blamed hedge funds really ought to offer up an apology.
Perhaps Trichet can explain exactly what he thinks hedge funds have to do with the banking crisis. If he cannot, perhaps Mike Castle and Mike Capuano of the US House of Representatives can. In the second half of February they introduced a bill to force hedge funds to register, file an annual disclosure form, comply with SEC record-keeping and cooperate with SEC investigations. Perhaps Castle and Capuano are ignorant of the fact that Bernie Madoff’s $50 billion fraud fund was registered with and investigated by the SEC, and we know what happened there.
Then there are politicians with an axe to grind. The French and German authorities, with no hedge fund industry of their own, have always been desperate to eradicate the ‘locusts’; now a broad financial crisis gives them a chance to do just that.
Jumping on the bandwagon is the State of Connecticut, the hedge fund capital of the US. State lawmakers there have proposed a trio of bills to tighten up hedge fund oversight, including increasing requirements for minimum investments in hedge funds, fee disclosures, state licences and independent financial audits. Congressmen Chuck Grassley and Carl Levin have also introduced legislation to create a regulatory regime for hedge funds called the hedge fund transparency act of 2009.
Central banks and governments, it seems, are becoming obsessed with focusing attention on the regulation of hedge funds as a means of pacifying nervous investors.
To complicate matters further, Treasury secretary Timothy Geithner announced in February vague plans for hedge funds to buy up banks’ toxic assets, sending a message that hedge funds could be the saviour of the markets. So which is it to be? Are hedge funds causing the problems or are they going to solve the problems? If they are deemed to be the solution, then prohibitive regulation is the last thing that should be discussed.
If anything, governments should be working to encourage investments in hedge funds in order to prevent redemptions and increase assets that could then be put to use buying up banks’ mortgage books.
Regulation is not the answer – due diligence is.
