When hedge funds embrace regulation

By Felix Salmon
April 3, 2009

Paul Singer, the ardent Bush supporter and laissez-faire capitalist who runs the $13 billion Elliott Associates hedge fund, has an astonishing op-ed in today’s WSJ:

Now we must create a new regulatory infrastructure that will meet three fundamental tests… finally, it must bring all investors and traders — regardless of whether the risk holder is a hedge fund, bank, private equity fund, individual or government agency — under the regulatory umbrella…
I understand the inclination among free-market conservatives to dismiss the government’s regulatory efforts as misguided. Some government actions over the past year have been reactive and incomplete. Yet these actions have been large and reasonably fast, which were the critical elements for the survival of the system.

The op-ed comes in the wake of the G20 meeting which agreed that hedge funds should be regulated, so maybe Singer is simply bowing to reality here. But this is still something of a watershed moment. Singer is one of the most politically astute hedge-fund managers in America, and where he goes the rest of the industry is probably likely to follow.
So if you thought there would be a lot of pushback from the hedge-fund industry against proposals to regulate it, think again. The industry will want a say in how any legislation is worded, of course. But it has also lost hundreds of billions of dollars over the past couple of years as a result of insufficient regulation of the global financial system. Maybe the hedgies are finally realizing that the only thing worse than too much regulation is too little.

Comments
4 comments so far

It’s an excellent post:

“But this crisis was primarily caused by managements and individuals throughout the financial system who exercised extremely poor judgment. The private sector, not the public sector, is where the biggest mistakes were made.”

Bingo!

“Government action could easily spill over into gross over-reach (like the bonus-tax fiasco). But a combination of private responsibility and practical government regulation will help ensure that the capitalist system continues to be a source of opportunity and prosperity for people throughout the world.”

Can you say “libertarian Democrat”?

Here’s a comment from long ago:

“Saturday, October 4, 2008
The Path To Re-Regulation
Gross on regulation resulting from this crisis:

“In the meantime, a surge in regulation of the financial sector will be unleashed, probably an inevitable result of the problems and rescues of recent months.

“Twelve to 24 months down the road, all of these high-flying investment banks and banks will be reregulated and downsized,” Mr. Gross said. “They won’t become arms of the government, but they will be supervised and held on a tight leash.”

The greater regulation should draw investors back to the market and away from what seems to be their current financial strategy — stuffing their cash in mattresses.”

One of the probable downsides of a crisis like this is the problem of over-regulation resulting, which is why I favor enough regulation to keep this kind of crisis from occurring. However, as even Gross admits, some regulation is necessary for investors to re-enter the market. Let’s hope we strike a better balance this time.”

In other words, you actually need regulation in order to:
1) Get people investing again
2) Get people to buy into our system at all

I also agree here:

“Reform must begin with a regulatory regime focused on “behavior” instead of “systemically important institutions.” Today, even small entities that trade complex instruments or are granted sufficient leverage can threaten the global financial system.”

Choose Human Agency Explanations over Mechanistic ones if you want to do some real good.

Finally, congratulations on your new venue. Reuters is terrific. For one thing, they had some of the earliest reporting on the possible social disruptions and dislocations in this crisis.

As well, their page on African news is the best I’ve found. Try it:

http://af.reuters.com/

I do think that regulation has long been needed, and looking at the people operating these funds will make it tough to do. Greed is a many headed snake and it is tough to watch all the heads.

I do think that investors may be much wiser than before and will want more concrete information and insurance before risking their money. I do think the silver lining to this recent shake out of investment funds and banks has been the training of investors.

Posted by Fred B | Report as abusive

Increased regulation sounds fine until you remember that
there was a massive failure by the banking regulators and it needs to be addressed much more explicitly. I am a former senior bank regulator and I spent many years in the investment banking world involved in risk management, risk reporting and risk technology. There appears to be a failure to recognize that the regulatory process can only work if there are good regulatory people looking at the matters every day. If I may let me offer the following comments:

1. The bank regulators had the authority to examine any aspect of a bank¹s activities. They had the authority to figure out what was going on at the banks and to limit it. The regulators did nothing. So all the new regulations on paper will mean nothing if the regulators cannot or will not do their jobs.

2. Consolidating regulators or setting up an international cooperative coalition will not likely achieve the desired goals. Sending a regulator who makes $50,000 dollars a year to examine the activities of sophisticated financial traders who make millions of dollars a year is not a fair battle. And if you have ever worked in a government agency, as I did for over 4 years, you will be intimately familiar with the viciousness of the turf battles among the senior officials. There is a lot of deadwood at the top of the agencies and it needs to be cleaned out. A Herculean task if there ever was one.

Posted by S. Hellinger | Report as abusive

I agree entirely with S. Hellinger. It’s absolutely correct.

Posted by S. Garrett | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/