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.