Monday, February 02, 2009

Congress’ New Motto: 220 Years and Still Not Listening!

Legislators Seek Hedge-Fund Disclosure
—by Jenny Strasburg, the Wall Street Journal

Sen. Grassley in a statement last week called for "some sunlight" to be shed on hedge funds and their investors, adding that both groups have fought hard to retain secrecy. The bill he and Sen. Levin introduced also seeks stricter controls to prevent money-laundering through hedge funds.

The first United States Congress opened for business almost 220 years ago—on March 4, 1789, in fact.

218 years later, we were invited to testify before Barney Frank’s House Financial Services Committee, along with several, more distinguished representatives of the hedge fund business.

The subject was, in effect, what should be done about this hedge fund thing.

The Congresspeople asking the questions ranged from the earnestly inquisitive (North Carolina’s Mel Watt) to the fatuously brainless (New York’s Almost-Senator Carolyn Maloney).

Are hedge funds too big?, they asked. What if a big hedge fund failed?, they wanted to know.

Nobody asked about Lehman Brothers, or Fannie Mae, or AIG.

The collective answer from our side of the table was, generally speaking, that while hedge funds were indeed big, it didn’t seem much would happen if a big one failed.

After all, since Long Term Capital nearly brought down the system a decade ago, the hedge fund business had grown so broad and deep that a $10 billion hedge fund (Amaranth) had recently gone down without so much as a ripple—thanks to hedge fund counterparties with the capital and the desire to take Amaranth’s positions, at discounted prices.

The various Congresspeople might have listened to what we said, and could have maybe learned something, except that most were in the room for the time it took to make their statement, look serious for the cameras, and then run out to another meeting.

Which may be why, two years later—after the world financial system has been brought to its knees not by hedge funds but by the investment banks and mortgage providers whose donations helped all these Congresspeople get elected, and re-elected—we find that Congress is thinking maybe it should regulate those darn hedge funds more closely.

So we suggest a new motto for Congress: 220 Years and Still Not Listening!

Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Ben said...

Good article. Nero plays the fiddle while Rome burns. The dysfunction of Congress is amazing and infuriating.

a said...

i am confused - a liberal disenchanted with gov't?

With any hope - the current dysfunctional congress will have about the same impact that our duly elected and dysfunctional congresses have had for 220 some odd years on America's prosperity.
I think this is the complete list (on a net basis):

Reginald said...

The lack of donations is probably why Congress is so interested in regulating hedge funds - nothing lost from attacking them. Once regulated, the hedge funds will make donations to keep Congress off their backs or rid themselves of some competition. Afterwards, Congress will then move onto the next group who isn't donating like they should.

BlackLab said...

Why is so much ink spilled over Congress?

No one would ever accuse me of being favorably disposed towards politicians. Most come with significant baggage, but the bigger problem is the system itself.

No human being could ever develop and maintain the knowledge necessary to properly legislate a dynamic economy like that of the U.S. This isn't some third world country where you only need to understand sugarcane and how to beg from the WorldBank.

The men and women of Congress have impossible jobs. Plain and simple.

To help get a handle on the sheer volume of information, they involve industry experts. That those experts are paid shills for the industries they represent is no surprise, to you or to them.

Over time, you learn who is [mostly] truthful and who blows smoke. You do the best you can with what, and who, you have to work with.

It's not unlike managing a portfolio. Sometimes you get it right. Sometimes you don't.

For those who insist politicians get in wrong most of the time, I'll point out the U.S. is still on top of the world, 220 years of Congressional meddling notwithstanding.

Hedge Fund Lawyer said...

The actual text of Grassley's new legislation is very interesting (Hedge Fund Transparency Act text). It will require hedge funds to publicly announce the names and addresses of investors in the fund - I can bet that hedge fund investors will not be happy about this requirement. Who wants everybody seeing what hedge funds they invest in?

williambanzai7 said...

The hedge fund industry played its own supporting role in this financial soap opera. Among other things, they were positioned to suck up the massive leverage and magnificent shlock cooked on Wall Street.

Jeff Matthews said...

Thanks to "WilliamBanzai7" we see first-hand the lack of knowledge of what actually transpired to bring the financial system down.


Jeff Matthews said...

And with his use of Yahoo-Message-Board-Style ignorant name-calling, "a" wins the award for least useful comment of the day.


Dan Danielle Ethan Nick Thorn said...

Where to begin?
First of all - the whole premise of your post is silly if indeed its accurate. you say that you were asked to testify before a congressional committee about hedge-funds, then you are surprised that you are asked questions about hedge funds and not about insurance companies, GSOs and IBs.
I mean seriously you first say the subject was to discuss 'this hedgefund thing', and then your next breathless observation is that questions were asked about hedgfunds.

then in your rebuttal to comments about your post you anoint williambanzai7 as ignorant for observing that hedgies played a supporting role. really they didnt play a supporting role in the financial soap opera? that is rich. not a single hedgfund had anything to do with the mess our financial system is in? what about those bear stern sponsored hedgefunds and other funds that the large public firms started, for starters? did they possibly contribute to these firms being under-capitalized?

and finally you consider the label liberal as yahoo message board name calling? my read on the point you were trying to make is that congress was taking misplaced action subsequent to an event. how is this news? this is what congress has always done and the news story would be if they actually did something different. as far as you being a liberal, i dont see why that is off limits or useless and frankly i think your political bias informs the content of this post as well as most of your posts.
and finally a more general comment, i appreciate your blog is free and i can simply choose not read it, so i suppose there is a certain irony in my having taken 15 minutes of my day to respond. oh well.

Jeff Matthews said...

"Dan etc..." Thank you for a Non-Yahoo-Message-Board response!

Excellent point about the Bear Stearns hedge fund blow up that signalled the start of the collapse...however, that hedge fund was buying bad junk. That hedge fund was not selling it to others. Nor, like AIG, was it insuring the junk.

And it was quite reasonable to point out the fact that in a hedge fund hearing, Congresspeople shouldn't be expected to ask about AIG and Lehman. But that misses the real issue we were raising, which is that these clowns weren't looking where the danger was.

The danger was in the balance sheets of AIG, Lehman, Fannie, Freddie.

And the reason those clowns weren't looking where the real danger was is that, as "Reginald" noted, the institutions that got us into this crisis by what Warren Buffett called "dumb lending and dumb borrowing," are the same institutions who fund all these clowns when they run for office.

Glad you took 15 minutes!