A decade ago, derivatives trading was the hot new thing, and people began to worry about the harm it might cause to investors and the health of the financial system. It wasn’t long before someone proposed regulating the newfangled financial instruments. And just as inevitably, the affected industries worked themselves up into a lather about how regulation would stifle innovation, reduce market efficiency and drive the industry offshore.
The industry won. Then came the collapse of Enron, a big derivatives trader, prompting some to conclude that modest regulation might be useful after all.
Today, the hot new thing is hedge funds, and the same arguments and political dynamics are playing themselves out. The Securities and Exchange Commission promulgated a rule that would have required the hyper-aggressive managers of these private pools of capital to register with the commission, follow a few simple rules and open their books to periodic review. The industry sued, claiming that the agency had exceeded its authority. Once again, the industry won.
