Now that it appears that the financial system has escaped a Chernobyl meltdown, lines are being drawn in the sand to define the cast of characters who might be in a position to cause a financial nuclear winter in the future. It's no surprise that the hedgies are front and center in the debate over who could pose a systemic risk to the US and the global financial system. As regulators on both side of the Atlantic draft legislation to determine just how tight the vice will be for the hedgies going forward, at least one guy who has a pretty good idea of what happens when a hedge fund meets its maker is taking up the 'it's not us' campaign.
Former Long Term Capital Management partner and current GlobeOp CEO Hans Hufschmid argues that prime brokers would effectively act as regulators and ensure no one hedge fund winds up with the worst label that can befall any institution these days, too big to fail.
I find it hard to believe -- I don't think a hedge fund today is big enough to pose a systemic risk. Prime brokers would manage that -- they would say 'we're not lending you that much money'... The market regulates it to some extent, you couldn't have a situation where one hedge fund takes excessive risk with one prime broker.
A quick look at recent history shows that US hedge funds received the exorbitant, eye-popping, egregious sum of $0 from the government coffers to help prop up the ones issuing a distress call before they sunk. This is really hard to believe, but the funds that couldn't make the grade were allowed to fail. I know, it's shocking to be sure. Maybe there were widespread paper jams in Washington when the Hedgie Asset Relief Program (or HARP) was supposed to be drafted. But even though no one hedge fund ended us this time around, it doesn't mean it couldn't happen in the future and Mr. Hufschmid has probably jinxed the whole thing with his 'you couldn't have a situation where one hedge fund takes excessive risk with one prime broker' remark.
No hedge fund now poses systemic risk: LTCM partner [Reuters]