On Friday, New York Federal Reserve Bank president Timothy Geithner gave a speech on the question of whether hedge funds should be more tightly regulated. Then, in an exquisite display of timing, the financial press was immediately transfixed by a $5 billion trading loss suffered by the hedge fund Amaranth, whose chief energy trader made a really, really bad bet on which way natural gas prices were headed.
It would be easy to make the obvious connection: Amaranth's woes provide ample support for Geithner's thesis. Hedge funds are largely unregulated, but responsible for higher and higher percentages of trading activity. Sensible people should be nervous, right?
But buried fairly deep in the New York Times' third story on Amaranth today, a piece about a San Diego County pension fund that put billions into Amaranth (and other hedge funds) and is now licking its wounds, was a tidbit that reverses direction on the issue of hedge fund regulation. While sober bankers like Geithner are making sophisticated, cautious arguments that lean toward a mild tightening of screws on hedge funds, in actual fact, the restrictions on what hedge funds can do have been loosened.
Near the bottom of "Pension Fund Tallies Losses and Rethinks Its Strategy," reporter Mary Williams Walsh (who has done some good work on the hedge fund beat), dashes off a paragraph that should have been at the top.
"The industry lobbied for an amendment to the federal pension law that would make it easier for hedge funds to handle pension money without being held to the law's fiduciary standards. Such a provision was included in the pension measures signed into law by President Bush in August."
Rev up the Orwellian doublespeak monitor! The so-called Pension Protection Act was anything but.
Historically, if 25 percent of an investment fund's assets came from pension plans -- technically described as "benefit plan investors" -- the fund would be required to adhere to a strict set of legal responsibilities regulating how it invested those funds. But hedge fund traders don't like to be told what they can do with other people's money. Initially, the securities industry (the biggest campaign finance contributer to Republican Rep. John Boehner, who shepherded the "Pension Protection Act" legislation through Congress) wanted the trigger moved up to 50 percent. That resulted in fierce resistance from labor unions. In the end, the hedge funds got a different gift: With a wave of the pen, government-administered pension funds would no longer fall under the category "benefit plan investors."
If you look around the Web, you can find scads of lawyers analyzing the new rules, but very few voices raised in protest, outside of the usual suspects like the AFL-CIO. Maybe it's just too obscure. Maybe in August too many people were on vacation to notice. But here's what's going on: Instead of making sure that the fastest-growing, least-regulated sector of the financial industry proceeds with more caution, Congress gave hedge funds more money to play with, under fewer restraints.