Thursday, November 13, 2008

Hedge fund chiefs face D.C. hearings

Top performing hedge fund managers have been summoned to Washington D.C. to face questioning from a congressional oversight committee on hedge funds and the credit crisis.

Rep. Henry Waxman, who chairs the committee, seems peeved about the perceived lack of hedge fund regulation and the high earning power of successful hedge fund managers.

"Currently, hedge funds are virtually unregulated," said Rep. Henry Waxman, D-Calif., chairman of the House Committee on Oversight and Government Reform, in opening statements. "They are not required to report information on their holdings, their leverage, or their strategies. Regulators aren't even certain how many hedge funds exist or how much money they control.

"Waxman said the industry is "growing rapidly," increasing five-fold over the last decade to exceed $2 trillion. He said he was concerned that hedge funds, like other sectors in the financial market, could "blow up."

Yeah, the funds could blow up, like any other firm in a capitalist economy (remember... that was back when firms were allowed to fail?). Hedge funds have been starting up, thriving, and failing ever since A.W. Jones launched his first hedged fund back in 1949.

It's true that the possibility of a hedge fund blowup seems scary to most because of the interconnected nature of the financial system.

But as John Paulson and Kenneth Griffin just pointed out in their answers to Waxman's questioning, the problems in the current financial crisis have largely centered around issues at highly leveraged, and regulated, investment banks.

John Paulson also pointed out that, to date, none of the public bailout funds for troubled firms have found their way to hedge funds. These US taxpayer funds have largely been directed at propping up failed investments at commercial and investment banks. Programs such as TARP amount to a transfer of wealth from US taxpayers to banks and other struggling firms, and have been enacted without sufficient safeguards of these taxpayer funds.

As for the claims that hedge funds are unregulated and not required to report their holdings, I'll let those with a closer view of the industry respond to these accusations.

But if the regulators are, as Waxman claims, uncertain as to how many hedge funds exist and how much money they control, they might want to check out some of the available hedge fund databases to get a lead on that kind of information.

Live video of the hearings, with testimony from John Paulson, James Simons, Philip Falcone, George Soros, and Kenneth Griffin, can be found at the House website (Hat tip to Infectious Greed).

C-SPAN video archives (these are Real Media files) document the testimonies from witness panel one (academics) and witness panel two (hedge fund managers).

Written testimonies from these fund managers, and others, can also be found at the House webpage for the committee on hedge funds and the financial market.