Info War: Turning The Regulators Back Against The Hedge Funds

Posted by John Carney, Jul 09, 2008, 12:50pm

If your memory stretches past last summer, you might recall that before the current debacle settled on Wall Street there was a lot of sound and fury raised about hedge funds. The rise of hedge funds was said to create systemic risk, where the collapse of one or more hedge funds would somehow topple the financial system. There were cries of anguish when early attempts to harass and regulate hedge funds were thrown out by the courts. Right up until the mortgage mess began to tear through Wall Street, there were plenty of new schemes being hatched with the aim of tying down hedge funds.

Now we all know that the real systemic risk to our financial system wasn't created by a few guys with offices in Greenwich but in the office towers of our biggest and well-established investment banks. It wasn't some hedge fund wildcatter that forced the Federal Reserve to step into the breach. It was Bear Stearns. The hedge fund alarmists had been looking in the wrong direction, crying wolf while the wolves packaged subprime CDOs and called them triple-A.

Which is why we've been surprised that it has once again become fashionable to allege that the danger to the financial system is coming from hedge funds.

You can read about in the pages of Vanity Fair and the New York Times. Wall Street honchos like Jamie Dimon and Dick Fuld will tell you all about it.

Let's put aside our concerns about the veracity of the new alarm or the motives of those sounding it. Let's just admit that it would be nice if this were true. If our investment banks were on the edge of financial abyss because of lies told by profiteering speculators rather than because of mismanagement, bookkeeping chicanery and too many blind-eyes turned away from risk for the sake of profit...well, that would be reassuring. Lock up a few bad apples and we can get the money making machinery going once again. Don't we all miss the sound of 40 trumpeteers announcing the birthday of Blackstone founder Steve Schwarzman?

That's the real attraction of this story line. If not for those conniving short-sellers, we could have all gone on having such a damned good time together. It's pretty to think so, at least.

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Comments

Posted by guest, Jul 09, 2008 1:00PM

I'm not your friend, guy!

Posted by guest, Jul 09, 2008 1:18PM

I'm not your guy, buddeh!

Posted by Anal_yst, Jul 09, 2008 1:23PM

Anyone read that article in yesterday's WSJ about the fury thrown at speculators for the Onion price fluctions back in the 50's (or whenever)?

As 1-2 and I were discussing the other day, its a shame that those who have the most to gain (read: Most potential to f&ck up) from learning about history are the same one's least likely to read (about) it...sigh

Posted by guest, Jul 09, 2008 1:27PM

I dont think there is any question that Hedge Funds need to be regulated and the big banks need increased regulation.

This is a money driven business and anytime money driven businesses are not regulated they run amuck.

There is no reason not to increase regulation all around and include Hedge Funds in regulation, it is not such a huge "burden" to hedge funds as many would like us to believe.

Posted by guest, Jul 09, 2008 1:28PM

There are a lot of sick people in the Hospital. There are a lot of doctors in the Hospital too...
Gee I guess doctors make people sick...
jackass

Posted by guest, Jul 09, 2008 1:30PM

@1:28

To whom is your ramble directed??

Posted by miami, Jul 09, 2008 1:32PM

'I dont think there is any question that Hedge Funds need to be regulated'

why don't you say -

"I am an idiot who is too ignorant to realize that many of the experts on this matter think the opposite of me, so there is a rather large question, and on top of that, Hedge Funds are regulated by several gov't agencies as it stands.

Instead, I shall broadcast my MR-status far and wide via teh Interweb series of tubes!"

Posted by guest, Jul 09, 2008 1:36PM

Your claim that "hedge funds" weren't the problem but that firms like BS were is confusing.

Isn't what triggered/foreshadowed the whole mess the collapse of the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund, both of which are referred to as "hedge funds"?

Is a "hedge fund" a strategy, an entity, a commission schedule, what?

Posted by guest, Jul 09, 2008 1:38PM

Haha Miami you rock

Posted by guest, Jul 09, 2008 1:40PM

Miami-

Hedge Funds are now only regulated by the fiduciary rules of the SEC and the criminal justice system. 206-4(b) which regulates Investement Advisers does not apply to hedge funds.

Any hedge fund that is worth a grain of salt runs its shop in accordance with 206-4(b), therefore Hedge Fund regulation would only be an issue to those funds which are doing things that would violate the rules of this business.

You clearly do not have a very good grasp of hedge funds and rely on the " experts" (who have their own agendas in all of this) to form your opinions.

Posted by guest, Jul 09, 2008 1:41PM

@ 1:30
see 1:36
The logic here is flawed

Posted by guest, Jul 09, 2008 1:41PM

Gee.....Don'tyou think the collapse of the Bear Stearns Hedge Funds had anything to do with their ultimate demise????

Or has everyone forgotten about that now?

Posted by guest, Jul 09, 2008 1:48PM

Keep on laughing at those who criticize the hedge funds, but like it or not, HFs are in Washington's crosshair, and HFs will feel a 'tightening in the chest' soon. You can try to reason all you want, but Wash needs a bad guy, and you can be damned sure that it will be Wall St and the HF's.

Posted by guest, Jul 09, 2008 1:48PM

I believe the need to regulate hedge funds was recognized after the implosion of LTCM. And the Fed did have to bail those guys out. The problem, as Michael Lewis has pointed out, is that with increased regulation comes increased transparency. With enough regulation and involvement from the Fed, any investment firm ends up functioning like a commercial bank.

Posted by guest, Jul 09, 2008 2:02PM

Regardless of whether it is hedge funds, Investment Banks (and their funds), or Joe Mortgage 6 Pack, can we reasonably agree that most of our recent financial debacles have been due in large part to improper/properly wrong mark to market accounting?
[Didn't FASS 133 get amended or something] -C

Posted by guest, Jul 09, 2008 2:14PM

There is an old saying that goes,"Search for the guilty, and punish the innocent". In this case, the old saying will read, "Search for the guilty, and punish the guilty". Hahaha.

Posted by guest, Jul 09, 2008 2:57PM

Agreeing with @2:02. There are too many challenges in valuing synthetics.

The problems are the instruments themselves, not whatever enterprise might be trading them.

Posted by Anal_yst, Jul 09, 2008 2:58PM

@ C

Do you mean fas 157?

Also, for those of you proporting to know that everything would be better with increased regulation of hedge funds, please, enlighten us as to
1) what regulation you propose.

2) how that regulation would improve things, and improve for whom

3) What historical precedent do you have to support your claims that your proposed regulations will improve anything?

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