Snow: Sort Out The (Hedge Fund) Mess Yourself

Thursday, June 16, 2005

US Treasury Secretary John Snow opposes a regulation of hedge funds, preferring to let market forces impose discipline, Reuters reported. As hedge funds have been the focus of the Federal Reserve, which has increased its frequency of serious concerns about market imbalances and has voiced warnings that banks should step up their efforts in terms of risk management, one wonders if Snow is sending a message that speculators are left on their own when sorting out problems created by hedge funds on a slide.
I am still looking to find the source again (UPDATE: it is Richard Daughty in this highly entertaining article), but I read today that CNBC reported about a mysterious buyer of index futures worth 300 billion dollars in the last days. This would be roughly 2 percent of the US market capitalization.
This is what Snow told Reuters:
"Unless there is a demonstrated market failure, I think there should be a heavy burden of proof on people seeking regulation," the U.S. Treasury chief said.
German Chancellor Gerhard Schroeder has said he wants next month's G8 summit in Scotland to consider setting up minimum standards for hedge fund activities.
Snow's comments indicated that the Bush administration was unlikely to support any such proposal and that it prefers to let markets operate as freely as possible.
Snow pointed out that the U.S. Securities and Exchange Commission already has proposed rules requiring hedge funds to register with it and made it clear that he felt that was adequate regulation.
Asked to define what he would consider to be light regulation, Snow replied: "Not getting in the way of the market."
Snow is touring four countries in continental Europe to discuss reducing regulatory barriers to trade in a bid to boost growth in Europe that will also benefit the United States and the global economy.
He was in Paris on Wednesday where he will meet French Finance Minister Thierry Breton late in the day before traveling on to Frankfurt for additional meetings on Thursday.
In response to questions, Snow said part of his opposition to more regulation of hedge funds was that it might dilute the discipline that participants in the funds normally displayed.
"Putting them into a tightly regulated market carries with it a big moral hazard issue from the loss of private-sector oversight," he said.
"Regulators have a very hard time keeping up with dynamic markets."
Snow said he felt that simply having hedge funds register their activities was preferable to trying to set standards of behavior for them through new rules and regulations.
"The other thing that is important is the self-policing role of the market itself," Snow said, adding that counterparties in hedge fund deals typically exercised oversight, due diligence, and monitoring that could not be substituted for by rule-making.
The noise around hedge funds seems to get louder with every day. A lot of hedge funds who had achieved stellar performances in the past years have declined 20 percent this year only. For highly leveraged fund operators such losses must become a problem once their creditors lose their nerves and wants their money back.
The reasons for Snows European tour before the G8 summit next month were not discussed in the Reuters dispatch.
On Tuesday Snow had warned the EU that it would would risk losing US investment if anti-business sentiment goes unchecked, Reuters reported.
"American business people are going to put capital where they feel they are welcome, where capital is honored and where they can get good returns," Snow told Britain's Financial Times newspaper.
"It is not so much the language that is used, it is the policies that get embraced. And if policies get embraced that make capital feel unwelcome, capital won't come."
It does not sound as if Snow is on a tour to make new friends, telling from the language he uses himself which could be seen as an intervention in the political discourse after the rejection of the EU constitution.

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