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They are designed to be nothing more than a humorous
compilation of commonsense things men are expected to do. Edicts such as “all injuries can
be treated by walking it off” or “No man shall ever tuck a team
jersey into his pants” seem obvious to anyone who has ever witnessed a
sporting event. Created by the Miller Brewing Company, the Man Laws from the
Men of the Square Table represent a tongue-in-cheek list of do’s and
don’ts designed to guide men through such difficulties as when it is
acceptable to leave a game (never before the end), when it is okay to date a
dumped friend’s girl (six months) and whether or not you should carry
an umbrella (okay but never twirl it).
But there are another set
of man laws being passed that have the same ironic nature with not so
frivolous consequences. The President’s Working Group recently decided
that, in good old boy financial tradition (women seem to be conspicuously
absent from this moneyed conversation) that hedge funds are doing just fine.
With more than a passing relationship with hedge fund industry,
distinguished alumni from Goldman Sachs such as Treasury Secretary Henry
Paulson, former chairman of the investment firm, his number one deputy,
Robert K. Steel and Joshua Bolton, White House Chief of Staff announced their
findings recently about the nature of private equity and how it could affect
the average investor.
Hedge funds were, without a doubt involved in the events of the past
week. The Yen carry trade, a
sophisticated financial maneuver that involves the borrowing of one currency
available at low rates (the Yen can be purchased for 0.50% - significantly
off its low of zero percent), converted to dollars and then used it to buy
risk in the form of high yield debt.
This works as long as the currency stays cheap; the spread between
what is owed and what is received, as yield is worth the risk and of course,
the dollar remains weak. It was
the unraveling of this so-called carry trade that began the landslide effect
around the world.
Hedge fund investing has created increased risk for the average
investor. Requests for additional transparency have been resisted by the
industry for a number of valid – at least to those that run hedge funds
-reasons. Now the President’s Working Group has agreed that additional
oversight is not needed.
Hedge funds assume often-outsized risk to reap rewards for their
investors. Hedge fund managers, many of whom were former mutual fund managers
celebrated for their accomplishments in that well-regulated industry, often
use a wide variety of investment tools to create and protect the wealth of
their clients. Transparency
would, many claim, hinder that pursuit and jeopardize their efforts. Any
additional regulation, of which there is very little, would, as Treasury
Secretary Henry Paulson suggested stymie innovation and create an environment
of calculated risk.
Joining this group and siding somewhat characteristically with Wall
Street was Christopher Cox, the Securities and Exchange Commissioner. His predecessor, William H. Donaldson
has been an outspoken opponent of this somewhat shadowy industry strongly
disagreeing with the status quo.
Mr. Donaldson has been central in this push for regulations accusing
regulators of failing to clearly understand how the behind the scenes
manipulation of certain markets trickles down to all investors. Mr. Donaldson has gone so far as to
call this $1 trillion industry a “dark corner”.
The result of this recommendation from this group of top economic
advisors reveals a shockingly benign attitude toward the industry.
The growth of hedge funds has changed the way Wall Street conducts
business. Catering first to these
private pools of capital, the Working Group agreed with Wall Street
suggesting that hedge fund investors knew the risks they are taking and
embrace the sophistication of the investment. The complexity of these funds and
their use of often opaque and illiquid techniques to generate income for
their investors demands more from those who put money into these funds.
Seeking to avoid the kind of requirements forced on mutual funds, the
decision to allow hedge funds to operate without the watchful eye of
regulators was hailed by agencies such as the Securities Industry and
Financial Markets Association. Hedge
funds, they contend, operate best in a flexible and efficient marketplace.
Micah Green, co-CEO of SIFMA called the
Group’s guidelines thoughtful.
SIFMA, it should be noted, represents the shared interests of more
than 650 securities firms, banks and asset managers.
One question remains unanswered. The average
investor did not fuel the sudden rush for the exits last week. Yet, it was the individual investor
who bore the brunt of those losses.
How do you oversee an industry whose narrow focus for their own
clients result in a scattershot result for all investors?
Citing secrecy as an indispensable tool, hedge funds
have pointed to the in-place regulations lovingly referred to as principles
practiced by the financial institutions they do business with as sufficient
protection for all investors. What
the Working Group has rejected is healthy skepticism.
Hedge funds have their advocates on both sides of
the pond. Former accountant and
head of the European Union Charlie McGreevy recently weighed in on the
subject agreeing with the Working Groups recommendation to leave well enough
alone. He believes that principles can guide the industry better than
rules. Al Capone once quipped
that, “it's strange that men should take up
crime when there are so many legal ways to be dishonest.”
The financial markets have an obligation to all of its
participants. Risk is
necessary. Unfortunately, not all
money managers are created from the same highly principled template. Imagine
sports where the only rule was based the principles of the participants.
At the heart of
what the Working Group recommended is the suggestion that we just “walk
off” the almost six hundred point drop in the Dow as a minor injury on
the path to growth. Some rules
simply make playing with the big kids more equitable and fair.
Paul Petillo
www.BlueCollarDollar.com
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