Firms gear up to fight new regulations
WASHINGTON ---- Congressional leaders are proposing new government oversight of Wild West corners of the financial markets that operate largely in secrecy and have been pinned as potential threats to stability. Fresh targets are hedge funds and the $60 trillion global market in credit default swaps ---- a form of insurance against loan defaults.
But powerful financial interests, representing industries battered by the crisis though still deep-pocketed, already are pushing back against new restrictions.
New proposals for financial regulation are coming from all corners, including the Obama administration, lawmakers, state securities regulators and the congressionally chartered panel overseeing the government's $700 billion bailout program.
Their efforts have become more urgent as the crisis has plunged economies worldwide into recession. Proponents in the new Congress see enhanced prospects for stricter regulation provided by the changed financial environment and Barack Obama, a Democrat, in the White House. What could emerge from Capitol Hill are the most sweeping changes to the financial regulation system since the 1930s.
"We look forward to being a part of that conversation," said Roger Hollingsworth, executive vice president and managing director for government relations at the Managed Funds Association, the hedge fund industry's trade and lobbying group. "We will engage" on those issues, he said Friday.
The one-year prohibition on lobbying for Richard Baker, the Managed Funds Association's chief executive, expires next week. Baker, a Louisiana Republican, was a longtime senior member of the House Financial Services Committee.
On Thursday, Sens. Carl Levin, D-Mich., and Charles Grassley, R-Iowa, formally proposed legislation to stiffen regulation of hedge funds, vast pools of capital holding an estimated $1.5 trillion in assets that operate mostly outside of government supervision. As the market crisis deepened in recent months, the selling of hedge funds was widely cited as one of the reasons for the increased volatility that pounded stocks and bonds.
The senators' bill would put hedge funds under the supervision of the Securities and Exchange Commission ---- an authority the agency sought several years ago. It was stymied in that effort by a federal appeals court in 2006.
"There wasn't much of an appetite for this sort of legislation before the financial crisis," Grassley, who proposed a similar measure two years ago that went nowhere, said in a statement. "I hope attitudes have changed and that Congress takes up this important legislation without delay."
Hedge funds suffered huge losses last year, notably from investments in securities backed by subprime mortgages.
In the House, the chairman of the Agriculture Committee, Rep. Collin Peterson, D-Minn., has circulated a draft bill with a provision that would prohibit trading in credit default swaps in cases where investors don't own the underlying bonds.
Credit default swaps have been partly blamed for stoking the financial and credit crises.
The swaps are commonly used contracts to insure against the default of financial instruments such as bonds and corporate debt. But they also are bought and sold as bets on bond defaults.
They played a prominent role in the credit crisis that brought the downfall of Lehman Brothers Holdings Inc., a government rescue plan for giant insurer American International Group Inc., and Merrill Lynch & Co. selling itself to Bank of America Corp.
The banning of so-called "naked" credit default swaps under Peterson's draft proposal would effectively gut the market for the swaps and hamper efforts to restore the credit markets, the industry's trade group said Thursday.
"This bill would increase the cost and reduce the availability of essential risk management tools while failing to address the true causes of the credit crisis," Eraj Shirvani, the International Swaps and Derivatives Association's chairman and an executive at investment bank Credit Suisse, said in a statement.
ISDA is one of many industry groups that have talked with Peterson and his staff about his proposal, a congressional aide said.
But powerful financial interests, representing industries battered by the crisis though still deep-pocketed, already are pushing back against new restrictions.
New proposals for financial regulation are coming from all corners, including the Obama administration, lawmakers, state securities regulators and the congressionally chartered panel overseeing the government's $700 billion bailout program.
Their efforts have become more urgent as the crisis has plunged economies worldwide into recession. Proponents in the new Congress see enhanced prospects for stricter regulation provided by the changed financial environment and Barack Obama, a Democrat, in the White House. What could emerge from Capitol Hill are the most sweeping changes to the financial regulation system since the 1930s.
"We look forward to being a part of that conversation," said Roger Hollingsworth, executive vice president and managing director for government relations at the Managed Funds Association, the hedge fund industry's trade and lobbying group. "We will engage" on those issues, he said Friday.
The one-year prohibition on lobbying for Richard Baker, the Managed Funds Association's chief executive, expires next week. Baker, a Louisiana Republican, was a longtime senior member of the House Financial Services Committee.
On Thursday, Sens. Carl Levin, D-Mich., and Charles Grassley, R-Iowa, formally proposed legislation to stiffen regulation of hedge funds, vast pools of capital holding an estimated $1.5 trillion in assets that operate mostly outside of government supervision. As the market crisis deepened in recent months, the selling of hedge funds was widely cited as one of the reasons for the increased volatility that pounded stocks and bonds.
The senators' bill would put hedge funds under the supervision of the Securities and Exchange Commission ---- an authority the agency sought several years ago. It was stymied in that effort by a federal appeals court in 2006.
"There wasn't much of an appetite for this sort of legislation before the financial crisis," Grassley, who proposed a similar measure two years ago that went nowhere, said in a statement. "I hope attitudes have changed and that Congress takes up this important legislation without delay."
Hedge funds suffered huge losses last year, notably from investments in securities backed by subprime mortgages.
In the House, the chairman of the Agriculture Committee, Rep. Collin Peterson, D-Minn., has circulated a draft bill with a provision that would prohibit trading in credit default swaps in cases where investors don't own the underlying bonds.
Credit default swaps have been partly blamed for stoking the financial and credit crises.
The swaps are commonly used contracts to insure against the default of financial instruments such as bonds and corporate debt. But they also are bought and sold as bets on bond defaults.
They played a prominent role in the credit crisis that brought the downfall of Lehman Brothers Holdings Inc., a government rescue plan for giant insurer American International Group Inc., and Merrill Lynch & Co. selling itself to Bank of America Corp.
The banning of so-called "naked" credit default swaps under Peterson's draft proposal would effectively gut the market for the swaps and hamper efforts to restore the credit markets, the industry's trade group said Thursday.
"This bill would increase the cost and reduce the availability of essential risk management tools while failing to address the true causes of the credit crisis," Eraj Shirvani, the International Swaps and Derivatives Association's chairman and an executive at investment bank Credit Suisse, said in a statement.
ISDA is one of many industry groups that have talked with Peterson and his staff about his proposal, a congressional aide said.
Congressional oversight is a must
The debate on this proposed regulatory issue will prove to be a test of the strength and resolve for the new administration and the Democratic majority in Congress. Effective oversight, if not banning altogether, Hedge funds and their companion Credit Default Swaps is essential if the financial markets are to stabilize any time soon.
The greed and gullibility of national and international institutional investors has come close to destroying free market principles. The ebb and flow of reasonable profits and losses are part of a stable financial environment. To believe that one can hedge against losses to the extent touted by some of the purveyors of these exotic instruments is to believe in the tooth fairy. Unfortunately, when institutional investors fall for such malarkey, they jeopardize the future of their trusting constituency, as we are now witness to with the dramatic reduction in 401K retirement accounts of thousands upon thousands of unsuspecting hopeful retirees.
Recent actions by what seems to be tone-deaf Wall Street executives, lining their own pockets with exorbitant salary increases and bonuses is clear evidence that they cannot be left to their own devices when it comes to accountability and fair play. Whatever constraints are ultimately meted out by congress and the administration will be well desered and long over due.
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