Thursday, March 26, 2009

Geithner pushes for increased regulation

In a move to avert the next crisis, Geithner & Co. are seizing the political initiative and populist momentum to call for "New Rules of the Game"; i.e. more regulation. Looking past the rhetoric, it's interesting to assess each leg of the proposal independently.

- make it mandatory for "large" hedge fund, private equity firms and venture capital firms to register with the SEC, new disclosure requirements and potential inspections

First, it will be interesting to see what gets defined as "large". The specific number will give some indication of what the administration's true motives are; if the number is legitimately high to prevent a LTCM-type unwind vs. a generic $1B AUM limit to cover every mom and pop corner store in Greenwich to simply rattle the cages. 

The disclosure requirements are going to require beefier compliance departments for (insert household fund name here) but the end result will be minimal, especially to the industry leaders which tend to hold themselves to higher audit standards. For example, the mega funds with a strong institutional base are already used to a detailed level of scrutiny of their operation. 

- these same "large" pools of capital may be ordered to raise capital or limit leverage

This has the potential to really screw over some funds - it's all dependent on what "large pools of capital" is defined as, and what the target capitalization levels are set at. If the administration's philosophy is purely to prevent systemic risks, this shouldn't pose a serious damper to returns but Zero Hedge has a sneaking suspicion that some asset classes are going to be severely curtailed.

-would require a central clearinghouse for derivatives

Great move. The initial transition period will be more than offset by a lower probability of a Lehman London type scenario. 

-new rules to require banks to build up capital during boom times for the slumps

Great in theory, but I'm short this idea being executed well. How do you define boom times, slump, adequate capital, and over/undercapitalized? It's foolish to think that banks won't figure out some way around this in 6 months to increase returns on capital.

- future plans to generally police fraud more effectively, plug gaps in regulation and collaborate with international counterparts on tax evasion and leverage rules

More details are really needed - there are a bunch of simple, logical actions that the government could take but that is far from a given.

As a final note, it's important to realize that this is far from getting passed. ZH is reasonably sure something to this effect will get passed but keep in mind that Congress will attempt to amend this to ride the populist wave as much as possible. This could result in additional, poorly thought out legislation, including curbs on compensation; we'll be watching this very closely.
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Anonymous said...

Oh big deal. Send the jet to pick them up for a visit to "inspect the books".

While the investagators are inspecting make sure there wives are pampered while shopping.

And get them good seats for dinner and a show.

EconomicDisconnect said...

great job in filling in. Love this site.

Anonymous said...

Gawdamn Corny, who needs CNBC? I get all my news from Zero Hedge!

Great move. The initial transition period will be more than offset by a lower probability of a Lehman London type scenario.

Hrmph. I doubt it -- well, I take that back, it never happens the same way twice. But what about that old saw about keeping your friends close and your enemies closer? Why regulate the black swan away to murkier environs, a place where we don't yet have any reason to look? Why not let the CDS traders do their thing, self-clear, and let's just peek in on them from time-to-time?

I mean, if you know there's dogshit in the yard, you know to walk carefully. But if you put up a fence to keep the dogs out, who knows where the shit is going to be?

Anonymous said...


What the word on EUR/USD, and USD/JPY?

Central Bunk said...

Hi Zero Hedge - I'm putting in a request for a piece on the IMF Special Drawing Right's. There's been a lot of chatter about this.
44% USD 34%Eur 11%JPY 11%Pound
Is this what you voted for??
What will happen to USD?
Would love to see something go up about this. Best JCB

Cornelius said...
This comment has been removed by the author.