I suppose it is only fitting that my first blog deals with banking regulation. As most of us know, the discovery of scams and scandals is counter-cyclical....one can get away with a really clever scam during a public economic spectacle. It is only when the walls come tumblin' down, and those annoying investors suddenly want their money, that the scandal comes to light.
I am, of course, trying to lead into the current Madoff mess. It is horrible and sad that so many people lost their money in the collapse of his hedge fund. Of COURSE, however, these investors realized that hedge funds are speculative, dangerous, and unregulated investments, right?
Apparently not. One of the UK's most famous investors was utterly and completely unaware of this fact, if you believe her wild rantings about lack of US regulation. Exactly why the regulator is to be blamed for not regulating an unregulated investment vehicle is not discussed. Certainly, UK's “Superwoman” is not attempting to shift blame from her own funds' decisions to make massive investments into an unregulated hedge fund?
Ah, this blame game is a tricky animal. Those “wildcat” American investment vehicles, they scream. You surely cannot trust them at all.
True statement. But why, then, did you invest in them?
This regulation game is not an easy one. There is a certain purity in the logic behind leaving hedge funds unregulated. Investors in hedge funds(like Superwoman) are considered to be sophisticated, and thus subject to “buyer beware”; mutual fund investors are considered to be less sophisticated and in need of a regulator's benevolent hand.
The first assumption has been burned to the ground. The majority of “sophisticated” investors are just as likely to be scammed as myself, or you, or my grandmother, or my 3 year old German Shepherd. Perhaps more so – my Shepherd has no interest in constant 1% monthly returns.
Ok – first assumption gone. The bigger question remains: who cares? Suppose sophisticated investors are just as likely to lose their money through stupid investments in hedge funds....why should we spend tax dollars to prevent it? Fair question.
My answer is twofold:
funds, 401ks, and mutual funds.
2) These unregulated hedge funds are knee-deep in
counterparty agreements with your friendly neighborhood
regulated bank. It may do the reader (or lawmaker)
well to brush up on the last “hybrid” banking system of
this sort: the Trust Companies in 1907.