This was sitting in my in-box when I got back from the dentist this afternoon:
"New Hedge-Fund Rules Discouraged
Bernanke Says Discipline By Traders and Investors Is Most Effective Constraint
By GREG IP and KARA SCANNELL
May 17, 2006
WASHINGTON -- Top financial regulators advised against additional regulation of the booming hedge-fund industry, with Federal Reserve Chairman Ben Bernanke warning that direct regulation could weaken market discipline over the fast-moving entities.
Representatives of the Federal Reserve, the Commodity Futures Trading Commission, the Securities and Exchange Commission and the Treasury Department told Congress Tuesday that at this point, there didn't appear to be a need for additional regulation. "
Wow.
I mean, there was zero regulation of hedge funds until Donaldson passed the limp-wristed requirement for US hedge funds to register with the SEC this year. And what has that accomplished - I mean, how hard is it to evade that feel-good panacea?
Well, you can change the redemption time from one to two years, and you don't have to register.
Or you can create a fund that is sub-$25 million and you don't have to register.
Or you can domicile your fund offshore and you don't have to register.
Basically, if you don't feel like it, and have a functioning cerebral cortex, you don't have to register.
So how can this group of august experts stand around and conclude that the current, virtually voluntary registration scheme is adequate to prevent anything?
Beats me. Then again, these are the same people that feel that self-regulation is a good idea - in spite of the many billions stolen by provable larcenous activity from those engaging in the self-regulation.
Now, the Federal Reserve Banks are partially owned by some of Wall Street's biggest names, so it is hardly surprising that those folks are against clamping down on their biggest customers.
And the SEC also thought that it was a good idea to allow REFCO to go public even as their senior management was being sanctioned for engaging in a market manipulation scheme involving naked short selling - so it is questionable what they WOULDN'T green light, at this point.
In fact, it sure sounds like a get-together of those entities most likely to favor little or no regulation of the single most powerful force in the market today.
Because the market is so good at righting wrongs and policing itself.
Consider this statement from another article covering the proceedings:
"The Fed chief suggested that financial institutions and others that do business with hedge funds make sure they are doing all they can to sufficiently blunt their risks. "Continued focus on counterparty risk management is likely the best course for addressing systemic concerns related to hedge funds," Bernanke said. "
Just look at how well that approach worked for the S&L's - deregulated in the early 80's, collapsing the financial system 6 years later. Very nice. That was a good experiment in lack of regulation. Thank goodness we learned from that. And recall how well Wall Street and the other counterparties who were the supposed checks and balances for the S&Ls managed the risks. Is anyone fooled by this idiocy? I mean, really? Is anyone? An industry that is founded in unbridled greed, and which has been shown to be capable of the most elaborate sorts of crookery ever conceived, is supposed to be the first line of defense against those who compose the lion's share of their business?
Who is buying these fairy tales? It is absolutely confounding. Recall my last column, where I clearly indicated how easy it is to launder money using a hedge fund - how precisely does counterparty risk management, and the supposed collective wisdom of the market, stop that from happening? Answer: It doesn't. And now we are seeing some of the most prominent hedge funds sued for alleged stock manipulation - gasp, how unheard of on Wall Street by stock pool operators! Who could have imagined that unregulated entities operating on the honor system might be tempted to do what they have for the last hundred years? I mean, there are rules, I say! Just as there are rules against driving over 55 - that worked admirably. And there are rules against stock parking, and front-running, and insider trading...just ask Milken and Boesky about those rules and how well they worked on the honor system.
Every day I sit down to write this column, and it is literally with mouth agape that I read my emails to determine a topic for the day. I couldn't make this up.
Carol Remond had a column on the Whistler case being tossed today, and focused on the letter from the SEC in response to the NASAA brief - where the SEC basically said, "Never mind the legal arguments advanced in that brief, if you let the state securities folks fight fraud in their states by making entities doing business in those states liable for their actions, it will undermine the federal system we, the SEC, control." Again, this from the folks that OK'd REFCO going public even as their swindling management was being sanctioned. And which totally ignores that even though that sentiment sounds compelling, it disagrees with the case law, and intent of Congress - as articulated in the briefs.
I wake up every day now and wonder aloud just how much worse this can get. How much more egregious does the wholesale violation of the country's economic system have to get before someone - anyone - elected to protect the country's interests stands up on their hind legs and speaks up?
You have anonymous entities controlling nation-state sized money, free to launder and operate however their consciences dictate...you have laughable oversight that amounts to meaningless cosmetic efforts wholly lacking in any substance (shades of Reg SHO there...)...You have the SEC simultaneously unable to effectively deal with its clearing and settlement SRO - the DTCC - as it is unable to meaningfully deal with its other SROs (hey, I know, let's let the gangs police themselves, and the rapists, and the murderers!) and yet simultaneously arguing that the state right to prosecute fraud should be abrogated...You have the states literally declaring civil war with the SEC over the naked short selling issue that the SEC has been able to do NOTHING to stop - OSTK on the SHO list for 278 straight days being an example....
But tut tut, we will have none of that "stifling" regulation here.
No, maybe we should allow the hedge fund industry to become 1/10 of the world's entire annual GNP before we do anything more stringent than requiring pretty much only the funds who feel like it to sign up to some theoretical examination and audit which has yet to ever take place, presumably overseen by the agency that complains it lacks the resources to even police the participants in the market, much less this new, megaclass of threat.
Some days I shouldn't get out of bed. I think this is one of them...