Hedge Fund Regulation

The New York Times reports that the SEC has approved new rules forcing greater disclosure by hedge funds. Oh sorry – only the largest ones. And we don’t really know if it’s true; the report says the SEC is keeping it secret until the Commodity Futures Trading Commission decides whether to approve it too.

So, maybe, the really big hedge funds will have to start reporting, six months from now and far after the fact, how much of their investments have been made on borrowed money.

Thirteen years after the multibillion-dollar collapse of hedge fund Long-Term Capital Management and a few years now after the collapse of so many banks due to risky derivatives trading, the hedge fund business is still totally opaque and unregulated.  

The value of derivates trading overall (not just by hedge funds) is still, today, nearly 10 times all the GDP in the world. Borrowed money used for trading, like any borrowed money, must be either paid back, written off, or passed around. If it is written off, society (in the form of creditors, taxpayers, someone) needs to absorb it somehow, as we have seen. Right now a lot is being passed around. What happens when the music stops?

While the Commodity Futures Trading Commission mulls over whether to require the largest hedge funds (according to the current watered-down, lobbied-down version of the rules) to report that huge percentages of the money they are trading with is really borrowed money they don’t actually have, the Commission has a distraction to deal with. It is having to open an investigation into MF Global, the bankrupt brokerage firm where $600 million in client funds went missing. The Commission’s chairman, Gary Gensler, won’t participate in the investigation due to his dealings with MF Global’s CEO Jon Corzine. But the Commission will go ahead and investigate anyway, and even admit it publicly! “The commission has determined it is in the public interest to confirm the existence of this particular investigation,” the agency said in a statement. Off to a good start?

p.s. This wonderfully transparent agency is the Commodity Trading Commission. Do we really want world food prices to be in the hands of clubby Genslers and Corzines?