Hedging on hedge funds

In October, a month after the Amaranth hedge fund lost $6.6 billion – the most ever by a hedge fund – Henry Paulson Jr., the Treasury secretary, spoke with Bloomberg News about the importance of "transparency" at hedge funds and "liquidity" in the system. His remarks were interpreted at the time as a warning, perhaps even a harbinger of more oversight.

What a difference a month makes.

In what was billed as a major economic address last week, Paulson devoted less than one-tenth of his speech to hedge funds, leaving the impression that he is basically satisfied with the regulatory status quo.

No one wants the Treasury secretary to be an alarmist. But other officials, notably at the Federal Reserve Bank of New York and the Securities and Exchange Commission, have gone further than merely acknowledging "potential risks" and pledging more "deliberations," as Paulson did in his speech. Without pushing any panic buttons, they have broached the need for more collateral and better risk controls at banks that deal with hedge funds and greater oversight of hedge funds that solicit investments from pension plans. Currently, 9,000 hedge funds manage $1.3 trillion of investors' money and control trillions of dollars more through their use of loans and derivative financial tools. They invest in all major sectors and operate through banks and securities firms, affecting the economy as a whole. And yet, they remain largely beyond the reach of federal overseers, a holdover from the days when they were much less ubiquitous. In 1990, only a handful of hedge funds existed, and altogether they managed just $39 billion.

As hedge funds become more numerous and complex, it is simply not feasible for banks to stay on top of their activities. And then there's the matter of responsibility. It's not a banker's job to protect the public interest. It's the job of regulators.

Paulson was right when he noted in his speech that the need for regulation must be balanced against the benefits of flexibility. But the challenge of striking a balance is beginning to sound like an excuse for delay. It's time to move the discussion beyond whether hedge funds require more regulation to how they should be regulated.

The New York Times, November 30, 2006

Letters to the editor

________________________________________________________

Letters to the editor, like op-eds, present the writer's opinion on a current topic, and may be based on personal expertise or on research. However, because they are allotted much less space in an average large-circulation newspaper, letters to the editor are much briefer, sometimes only 1-2 sentences. Therefore they are not normally considered for Writing Portfolio submission at CPCS. (An exception might be granted, however, for a longer letter, such as those submitted for a local or community newspaper.)

Here's some helpful advice about writing a letter to the editor:

• In your opening sentence, refer to the article or editorial or   newsworthy subject about which you are writing.

• Clearly explain the problem or situation about which you're writing.

• Offer your opinion of the cause and offer possible solutions.

• Support your opinions with facts and examples.

• Suggest ways to change or improve the situation.

• Follow the guidelines in Writers INC for a business letter.

Address your letter as suggested in the publication you're writing.