Be careful what you wish for. The SEC regulated investment banks, and look what happened to that industry, Similarly, Madoff was registered, had a written roadmap from Harry Markopolos in terms of the issues that merited investigation, and did nothing.
Without a serious change in priorities (and likely an upgrade in staff skills) at the SEC (and financial regulators generally), moves to expand regulatory umbrella are mere window-dressing.
From Bloomberg:
The Hedge Fund Transparency Act, sponsored by Senator Carl Levin, a Michigan Democrat, and Charles Grassley, an Iowa Republican, would require hedge funds to register with the SEC, file an annual disclosure form, comply with SEC record-keeping standards and cooperate with SEC investigations.
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This is a proper measure for taming the free market power of the financial industry.
We must not forget that this regulation is design to punish the frauds not stifle innovation. As much as innovation can strangle a financial industry it also can create tremendous value. We should not be afraid of innovation but should simply “harness” it.
Please. Yes, Madoff was registered. But RIAs are barely regulated compared to broker-dealers.
We need lots more regulation. Lots and lots. And lots more regulators. Tons. It is hysterical to listen to the free marketeers use the collapse of an underregulated system as an opportunity to warn not to overregulate. As if.
Reminds me of the 300-pound people in my gym who make an appointment with a trainer and say, “Now, I don’t want to look like a muscleman.” LOL.
Markel,
I don’t disagree. The proposal as written is no more than having hedgies registered as investment advisors and regulated as such. That does not have enough teeth.
And we have a bigger issue, as you allude, that the “fixes” for the economy are too much at the macro level. No one is willing to look at the micro issues. But the securities regulations of 1933 and 1934 played a big role in making the markets safe for investors again, although it took a lot longer than that to regain their trust.
I am all for regulation and oversight, however the problem is that the government tends to let the pendulum swing too far (in both directions). Too much regulation is just as bad as too little. It doesn’t appear that what the Senate is proposing right now is too much, but any time Congress gets involved it isn’t a far stretch to think that this proposal may change and end up making things worse.
The measure in question looks like it would increase transparency, but it wouldn’t regulate operational practices. For example, leveraging up to 30+ times, purchasing thinly traded risky assets, and then insuring your portfolio with CDS and other derivatives without regard to counterparty risk and systemic effects would still be acceptable. This mirrors in some ways the ideology that led to the current approach toward the banks – the gov’t doesn’t want to “pick winners and losers” but can’t afford the consequences of these institutions failing, so it just shovels money at them (to be paid out in bonuses and dividends).
So the US can no longer have the deepest, most liquid financial markets because the SEC is poulated with the scum of the earth slackers. Fire them and hire new ones.
Transparency isn’t regulation.
Probably polling shows the electorate ‘wants’ hedge funds reined in. Or calls, letters, emails to representatives’ offices have this as their theme, now that it’s very, very late in the game.
Could Levin/Grassley be trying to fend off more substantive action with these milquetoast requirements?
The problem is not the extent of regulation but the wide latitude that regulators have in interpreting and enforcing the law. Thrifts and others are highly regulated, but you wouldn’t know that from the behavior regulators permitted during the last Administration (with the complicity of Congress).
As I understand it, the quid pro quo for the taxpayer-funded bailouts of banks and investment banks is regulation — more and better regulation. Something like that. Does this mean that taxpayers will in the future be bailing out hedge funds?
In this little banana republic where corruption and incompetence reign supreme. Good Luck.
I am all for regulation and oversight, however the problem is that the government tends to let the pendulum swing too far (in both directions).
No, the problem is the global financial system and the economy of the entire planet is collapsing, possibly to Great Depression levels, possibly for even worse, and possibly for years, at a severe costs that will include death on a significant scale in the most economically precarious nations, because government did worse than nothing while private parties recklessly exposed the world to lethal systemic risks for obscene, short-term personal gain.
That’s the problem.
Don’t worry. No one will make you look like a muscleman.
Yves is precisely spot on. Regulatory proposals to date remain in the realm of vague exhortation. Imposing a gloppy obligation on hedge funds to put client interests first will prevent nothing and operates against RIAs only in retrospect, post-meltdown. Which doesn’t help.
New Deal legislation, by contrast, was extraordinarily well thought out, and in many cases the fruit of years of academic debate on needed regulation. Most of it was based on imposing two principles: transparency, and the insulation of the banking system from speculative risk. But these were not vague exhortations, but principles embodied in extremely specific rules. Which prevented another meltdown until, oh, they got repealed.
Tax leverage, or restrict leverage as an inverse of size. Or both.
Done.
Wait, one more.
Tax hedge fund managers’ income at the same rates as everyone else’s income.
A much, much smaller hedge fund industry can be in our future.
I saw the woman in charge of SEC enforcement on C-Span the other day and she did not inspire confidence. One more incompetent Bush appointee I suppose, and no doubt grossly understaffed.
These SOBs need to have the fear of God instilled in them.
The well-chosen heads of a few, artfully placed on the ends of sticks and paraded down Wall St. – metaphorically speaking, of course – might go a ways toward having them respect their broader obligations.
I suspect there’s even less to this bill than Yves has mentioned. I read the bill. (You can too), and here are my thoughts:
1) Basically, I think it attempts to re-define the type of financial entity that falls under the scope of SEC registration requirements. There is no actual change in the disclosure requirements themselves. Seeing as how plenty of SEC regulated entities went bust, as Yves mentions, I’m not sure how Levin / Grassley think this is enough to keep hedge funds from mischief. Not being familiar with the financial regulation part of the US Code, please take my interpretation with a grain of salt; anyone with more expertise in the arcana of The Investment Company Act of 1940, please pipe up :-)
2) Interesting section:
4. ANTI–MONEY LAUNDERING OBLIGATIONS.
(a) PURPOSE.—It is the purpose of this section to safeguard against the financing of terrorist organizations and money laundering.
???
Does every bill have to have an obligatory token GWOT piece?
3) The meat of the legislation runs to 7 pages (excluding the anti-terrorism part and several pages of technical corrections). Pretty slim for regulating a trillion dollar industry.
4) Regardless, the sponsors are Levin and Grassley. Neither are on the Banking cmte which has jurisdiction over SEC and banking regulations (remember that that cmte was where TARP was debated). The cmte system in Congress is highly parochial and the chances of a bill from a non-cmte member getting more than a passing glance is close to zero.
In summary, I’d bet good money this is one of those bills that Senators routinely put out merely to get some press with no real intention of actually passing. Real reform of the hedge fund industry will have to wait a while yet…
The SEC tried to regulate hedge funds a few years ago and promptly lost a court case – the court ruled their attempts were unconstitutional. Now in what way are hedge funds responsible for the financial crisis? In many ways they were the whistleblowers/naysayers that called a duck a duck by shorting Lehman, etc. I agree that investment and commercial banks need to be more highly regulated. But if a hedge fund goes under, as many have, there is no “systemic risk” to the system. Yes, we should seek out frauds, but they are going to happen no matter how much regulation we have. So yes, let’s enforce the laws on the books and do it more competently. But adding bureaurcacy for the sake of window dressing, as you say, is silly.
Senate Wants SEC to Regulate Hedge Funds
Ah, let’s see. Commercial Banks were regulated. Then Investment Banks became Commercial Banks and became regulated. Fannie, Freddie, and many other Financial Institutions were regulated.
What all the above Institutions have in common is that once regulated they then can be BAILED OUT, RECEIVE FREE AND UNLIMITED TAXPAYER DOLLARS!!!!
So, “regulation” means that you can commit numerous sins, crimes, frauds and stupidities and then not suffer any consequences, continue to live in the style to which you are accustomed and receive unlimited taxpayer dollars.
So, then, when the Fat Cat Senate even more corrupt and sleazy than the less patrician House, says it wants the SEC to “regulate” Hedge Funds, which are in the main the purview of their constituent Fat Cats, doesn’t that mean the Hedge Funds will just be Bailed Out like all the other “regulated institutions”?
“Your job, Hedge Fund Manager, should you choose to accept it, is to keep this Bankrupt Puppy alive until we can be TARPed.”