Financial Regulatory Forum

ANALYSIS-Wall Street still in the hedge fund game

By Svea Herbst-Bayliss and Matthew Goldstein

BOSTON/NEW YORK, June 25 (Reuters) – It appears Wall Street investment banks can stay in the highly-profitable hedge fund business after all.

An overhaul of financial regulations hammered-out by U.S. lawmakers after weeks of negotiation would permit Wall Street banks to continue to manage and sponsor hedge funds along with private equity funds, according to lawyers and Wall Street officials familiar with the massive bill.

For months Wall Street bankers and hedge fund managers have worried that the legislation, which could be signed into law by President Obama within two weeks, would prohibit investment banks from running hedge funds and possibly force them to sell these often very profitable businesses.

But the version of the bill agreed to by lawmakers on Friday morning would not force the draconian changes sought by some critics of the financial industry, said sources familiar with the bill.

Still, Wall Street is not quite ready to celebrate.

That’s because a final language of the financial regulatory reform bill in not yet public and must still be voted on by Senate and the House of Representatives before going to Obama.

COLUMN-Carried interest and the big lie: James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

Greensboro, Alabama, May 31 (Reuters) – As an investment strategy, making private equity and hedge fund managers rich is a probable loser. As a tax policy, it is a guaranteed one.

The U.S. House of Representatives passed a bill last week that would raise the taxes that private equity and other investment managers pay on “carried interest,” their share of the takings when a holding such as a startup or turnaround is sold at a profit.

Carried interest is currently taxed at the lower capital gains rate, meaning that many private equity barons can pay less in tax than the people who clean their swimming pools or mind their children. This is patently unjust. Carried interest is compensation for labor, earned income in other words, rather than gains on capital that might be lost.

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