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February 22, 2007
Hedge Funds Get A Regulatory Stay
After months of reflection, the overseers of the U.S. financial system have concluded that current regulations, administered carefully, are sufficient to prevent hedge funds, private-equity investors and other "private pools of capital" from threatening the stability of the broader financial system.
The report by the President's Working Group on Financial Markets -- the heads of the Treasury, Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission -- is their first comprehensive statement on hedge-fund risks since a study that followed the near-collapse in 1999 of giant hedge fund Long Term Capital Management.
The "principles and guidelines" released Thursday said that while hedge funds "present challenges for market participants and policymakers," the risks can be maintained through a combination of "market discipline" and limiting the private pools of capital to wealthy investors. It urged policy makers to scrutinize hedge fund counter-parties, such as banks and mutual funds, and rely on investors and their financial advisors to help mitigate risks.
...Mr. Paulson said. "What we've emphasized is market discipline."
Of course, it ain't over until it's over...
Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, said his panel will hold hearings on hedge funds this spring. He called the working group's report "a first step in addressing questions presented by the significant growth of hedge funds," but added "further study and monitoring" of systemic risk and investor protection were needed.
... but for now, the view is that the players are big boys and girls and that the exposure of banks, for example, are being contained through the prudent exercise of current oversight. Or, in the workds of the headline writers at Forbes.com: Caveat Emptor.
February 22, 2007 in This, That, and the Other | Permalink
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» San Diego County pension fund from Econbrowser
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Tracked on Feb 23, 2007 8:54:40 AM
Comments
Posted by:
zinc |
February 22, 2007 at 09:37 PM
I'd quickly side with those who believe in "market discipline" and "caveat emptor" along with this IF ONE responsible party would assure us the carnage will be limited to the emptor and the greater public will not be left with the bill. But, what are the odds of that?
This was an IDEAL opportunity for BB to address banking interests as separate from those of securities pushers.
It was an ideal opportunity for BB to call for single-body regulatory control of our wildly out of control financial sector.
It was an ideal opportunity for the FED to restore its independence from our executive branch.
It was another opportunity lost.
Posted by:
bailey |
February 23, 2007 at 10:53 AM
M,
Just another sad example that the principle of 'might is right'.
Posted by:
Martin |
February 24, 2007 at 02:54 AM
I believe EVERYONE would benefit if more Economists would use the WEB (a little more productively) to hone their arguments.
We've had plenty of time to evaluate the growth of unregulated hedge fund industry, so much so that it should no longer be a matter of opinion whether they present a real risk to our economy that the FED will surely have to jump in with both feet to resolve.
So, why aren't we seeing an academic argument among our best & brightest to address the concerns of Dean Baker & afew others? Why in 2007 are we STILL left to the unquestioned decision of six or so representatives without a national discussion of this most important topic and why is Henry Paulson issuing a decree on this without first airing it out in a public forum? Where's the FED argument to support BB's position & why hasn't it been challenged by more Economists?
I think Dean Baker makes some WONDERFUL points, is the problem that it's just not rewarding to ALWAYS being on the outside? I would guess FED has within its staff & contractees MANY of the best & brightest Economic thinkers in the country. Is independent thinking not encouraged in BB's FED? http://www.prospect.org/deanbaker/
Posted by:
bailey |
February 24, 2007 at 02:45 PM
From Forbes: "Despite all the hand-wringing then and now about the 'dangers' of hedge funds to the markets, regulators have been reluctant to clamp down on them."
Yep.. Could it be that the reluctance comes from the high probability that even a whiff of regulatory furver would bring the houses of cards down immediately?
"'One of their key characteristics is that they are very nimble ... and that is good for the economy, because they help to create liquidity in markets, they help to spread risks around more broadly, and a regulatory regime that inhibited that flexibility and nimbleness would eliminate a lot of the economic benefits,' Bernanke said in Congressional testimony earlier this month."
I would agree with Bernanke, had not the Government set themselves up six ways to Sunday for Moral Hazard in this mess. So I have to agree with Bailey.
Too bad the US gov didn't set up a real "caveat emptor" at or just after the LTCM mess. The next time around the fallout will likely be much greater.
Dave, you or someone from the FED ought to read Michael Panzner's "Financial Armageddon" sometime soon and tell us why Panzner, (along with Doug Noland, Peter Bernstein and others) have it all wrong. Panzner's book scares the hell out of me, and I've been following these events for a bunch of years, even attempting to blog some of it on my site.
Posted by:
Dave Iverson |
February 24, 2007 at 07:22 PM
Dave,
Bernake seems to prefer 'liquidity' to 'stability'.
Posted by:
Martin |
February 25, 2007 at 03:53 AM
Guys --
Let me be big clear that I don't think this is a settled issue. But much of the discussion seems to me to be imbalanced in exactly the opposite way you all suggest. Let's think about starting the conversation from the other direction: What are the benefits of hedge funds to the functioning of financial markets, and how can regulation be best constructed to ensure safety and soundness while preserving those benefits. The answer just isn't that obvious to me, and I think the current appproach makes a lot of sense -- conditional, of course, on the expectation that there will not be 1980s-style forebearance in the case of a big failure.
We do have some experience with hedge fund default and systemic risk, after all, in the form of LTCM and Amaranth. The former remains controversial, of course, but is it not fair to take the more recent Amaranth case and suggest that the larger issue in that case may have been the global currency crises -- or at least that big fund failures are like the failure of any other important financial concern: Of limited moment except when combined with excessive volatility on the broader stage?
Posted by:
Dave Altig |
February 26, 2007 at 08:25 AM
Dave, I'd love a real discussion on this issue, from ANY side. But, this Administration has only 20 months remaining (arguably less) - the discussion is OVER!
Let's face facts - Paulson was one of the fiercest traders on Wall Street, there aren't many people he couldn't run over. What's inexplicable is why BB wouldn't have extracted TREMENDOUS concessions for signing on.
I have no idea how this is going to play out, but let's be absolutely clear - there may be 6 or 7 signatures on Paulson's decree but the only one Wall Street cared a hoot about was BB's.
Posted by:
bailey |
February 26, 2007 at 11:14 AM
Dave,
You are a much better economist than I am, so when you write,
"What are the benefits of hedge funds to the functioning of financial markets, and how can regulation be best constructed to ensure safety and soundness while preserving those benefits. The answer just isn't that obvious to me,"
I'm not exactly filled with confidence.
Posted by:
Martin |
February 26, 2007 at 04:29 PM
bailey -- I think you are being a little hard on BB. For one thing, the issue is very much in the sights, and really good people within the system are paying attention. Second, as the regulatory framework exists now, the Fed's authority essentially stops at the banking waters' edge, and it takes a lot of people signing on to move that authority onto shore. It's really not the sort of thing that could be pulled out as a bargaining chip in a job interview.
Martin -- Everyone is right to be asking questions, and to be concerned that we don't yet have the answers. All I am sayng is that I hope we ask the right questions, and be careful about the babies in the bath water.
Posted by:
Dave Altig |
February 27, 2007 at 07:41 AM
Dave, Yes I am, very glad to hear it, I have no doubt of that (or I wouldn't be incessantly haranguing about it), & if I didn't strongly believe single regulatory control didn't belong with the FED I'd have moved on long ago.
Obviously, I see this as the DEFINING issue for BB's FED so I'll sincerely apologise for my glibness; this is serious enough that it should not be minimalized in any way.
No one easily relinquishes such enormous power as was grabbed in our recent financial deregulation. Without a meltdown it will require an enlightenment tsunami within Congress to move the idea forward. BUT, how about a single sign from the FED to encourage us it's aware of, let alone up to the task? To date, BB has resolutely conformed to AG-like rhetoric that's way too easily interpreted as politically based (highlighting enormous costs of future entitlements while ignoring enormous costs of recent fiscal profligacy & the benefits of the deregulation over the costs.) I'd argue this tact back in the early days of this Administration when every sign of independence provoked a severe response, but times have changed.
While this Administration is adamently opposed to single-body regulatory responsibility, I'd expect the next one (whichever party wins) will not be so predisposed. So why not extend an olive branch to demonstrate openness & independence?
Posted by:
bailey |
February 27, 2007 at 11:40 AM
I for one would be against single body regulation. Which regulator do you pick. The SEC has been a terrible regulator over the years. They seem to be three steps behind. The SEC would destroy the futures industry. The CFTC has been a good regulator, especially since the CMFA act in 2000.
There certainly should be ways for these guys to interact with each other, and int he case of a financial crisis work together, but one regulator doesn't make sense to me. There are too many idiosyncracies in each market place for that.
Hedge funds are not a bad thing. If mismanaged and allowed too much leverage, they can bring about pressure in places that we may not want it. Amaranth was a classic bust, and most of its positions were in regulated futures. They were just able to manipulate settlements to give them good equity day after day.
LTCM was a different animal. It was given funding by Wall Street, and Wall Street was forced to bail them out. Of course, Goldman made a tidy profit in the bailing ; ).
I like the way they are proceeding on hedge funds. They are becoming an integral part of the flows of funds. It would be a shame to over regulate them for emotional reasons.
Posted by:
jeff |
March 03, 2007 at 05:25 PM
I'm very reassured that Henry and Ben have vowed to protect the big money, overleveraged, high stakes gamblers they represent.
How about the rest of us?