Of course, it cannot be proved that hedge funds contributed to the financial crisis, as the Department of the Treasury said last week. However, it's more than likely that the top-performing hedge fund managers, those earning a staggering $1 billion a year in 2006, 2007 and 2008, were invested in the mortgage-backed and leveraged instruments that brought the economy to its knees.
Even after a federal appeals court in 2006 tossed out a controversial Securities and Exchange Commission rule that would have required hedge funds to register with the agency, the SEC and Congress have continued to talk about requiring hedge funds to register-to no avail.
Treasury said last week it will propose legislation that would require all hedge funds and private capital pools with $30 million or more of assets under management to register. Hedge funds would also have to reveal how many assets they have under management, whether they engage in leveraging or borrowing, and if they have any off-balance sheet exposure. They would also have to comply with strict capital, liquidity and risk management rules.
While hedge funds were not at the center of the current crisis, said Michael S. Barr, assistant secretary for financial Institutions at the Treasury, their deleveraging and lack of transparency contributed to the crisis. "These firms continue to present unknown risks, and that lack of transparency is no longer tenable," he said. "We need a system that's flexible enough to adapt to the emergence of other institutions that could pose a risk to the system."
Barr continued to say that innovation is critical to the financial services industry and the people and businesses it serves, but it "demands a system of regulation that protects our financial system from catastrophic failure, protects consumers from widespread harm and ensures that consumers have the information they need to make appropriate choices."
Let's see if President Obama has enough influence over Capitol Hill and Wall Street to put this much-needed safeguard, finally, in place.
Remember, the start of the crisis first became evident in July 2007, when two Bear Stearns hedge funds with a combined $1.6 billion of assets, went bankrupt due to subprime bond exposure. Hedge funds were some of the biggest investors in the real estate feeding frenzy. Had they opened their books, we would have known that.
(c) 2009 Money Management Executive and SourceMedia, Inc. All Rights Reserved.