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New York (HedgeCo.Net) – If Treasury Secretary Timothy Geithner gets his way, hedge funds and private equity firms will be placed under the supervision of the federal government.
“Over the past 18 months, we have faced the most severe global financial crisis in generations,” Geithner said at the House Financial Services Committee hearing on Thursday, adding that “comprehensive reform” is required. “Not modest repairs at the margin, but new rules of the game.”
Geithner supports a mandatory requirement for hedge funds and other large money management firms to register with the Securities and Exchange Commission, an issue that has been at the forefront of political debate recently. Hedge funds would also have to keep the SEC updated on their trades and strategies.
A systemic risk regulator would be imposed that could force these firms to raise capital or halt borrowing. The regulator may also seize hedge funds or other non-bank entities if they felt it was necessary, though it was unclear which agencies would be responsible for handling that task.
“You don’t want to vest in any single institution such broad powers,” he explained.
The Obama administration has been vocal about their desire to regulate the $1 trillion hedge fund industry. After two massive hedge funds within Bear Stearns collapsed in the summer of 2007, eventually leading to the demise of the bank, many members of Congress started supporting regulation with the notion that hedge funds have a direct impact on our economy.
Also backing the argument was the monumental damage caused by credit default swaps and the lack of regulation behind them, as was the case with American International Group.
“The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers much end,” Geithner added, referring to the AIG debacle.
Under the proposed regulation, the market on which these credit default swaps and other derivatives would be regulated for the first time.
The SEC has tried previously to impose a registration requirement on hedge funds, only to have it overturned by a federal appeals court in 2006.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
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TPMCafé – Last November, Ken Griffin told investors in his Citadel Hedge Funds that they couldn’t withdraw their money, but he was still going to charge a 2% management fee on their trapped funds. Oren Kramer a rival hedge fund manager said, "It’s like telling someone at a hotel that they can’t check out and then charging them for the privilege of staying."
Things were bad for Citadel, but this evening we learned that Ken Griffin isn’t really the hyper-capitalist he’s always portrayed as–he’s just another corporate socialist, passing his losses off on the public. It turns out that $200 million of taxpayer dollars have been turned over to Ken Griffin by AIG for his speculation in Credit Default Swaps. As I said last week, there is no good reason for this to happen.
Bloomberg – Intercontinental Exchange Inc.’s bid to be the top U.S. guarantor of credit-default swap trades won Federal Reserve approval, leaving the Securities and Exchange Commission as the futures market’s final regulatory hurdle.
Intercontinental and larger rival CME Group Inc. are among four clearinghouse owners vying to back the $27 trillion credit- default swap market, with the winner standing to gain as much as $400 million a year in revenue, according to estimates by Wachovia Capital Markets and Keefe Bruyette & Woods Inc.
“I don’t think the SEC will have any issues” signing off Intercontinental’s clearing plans after the Fed approved them yesterday, said Brian Yelvington, an analyst at CreditSights Inc. in New York. “I hope it’s a rubber stamp, because given the new regulatory regime I would hope this has been a carefully coordinated process.”
Regulators on both sides of the Atlantic are developing separate plans to stabilize the derivatives market after American International Group Inc., once the world’s largest insurer, almost went bankrupt last year from its use of credit- default swaps. The unregulated, privately traded contracts stymied government efforts to assess bank credit risk because the full range of trades between dealers was unknown.
SEC spokesman John Nester said he didn’t know when the agency will make a decision. “The proposal is under active consideration,” he said in an interview yesterday.
BloombergThe financial wreckage of 2008 has left no part of our country untouched. It exposed the bankruptcy of business models employed by mortgage companies, investment banks, and rating agencies as well as the flaws of innovations such as structured finance and credit default swaps. It also highlighted regulatory gaps and failures at almost every level of oversight.
In 2008 Bear Stearns Cos. and Lehman Brothers Holdings Inc. imploded, Fannie Mae and Freddie Mac were placed into conservatorship, mainstay Wall Street firms like Merrill Lynch & Co. Inc. were forced to merge with other companies, and giant institutions such as American International Group Inc. clung to existence on federal life support.
More painfully, too many Americans face the twin perils of home foreclosure and job loss as frozen credit markets signal an increasingly deep economic slowdown.
