Thursday, February 8, 2007

Trying to Close the Barn Door BEFORE the Horse is Stolen

The G7 is meeting in Essen this weekend; and Angela Merkel is leveraging Germany's year-long presidency to give the topic of hedge funds are prominent position on the agenda. SPIEGEL ONLINE has released an excellent analysis of this issue by Christian Reiermann, even if the rhetoric is somewhat colored by the metaphor of locusts. To the extent that the general public is aware of hedge funds at all, it is probably through "financial heroes," such as Warren Buffet, who have used them to amass great wealth for himself and an elite few allowed to benefit from his insights. In other words the hedge fund is one of those key instruments of choice for the rich who want to get richer. The key question, however, involves the extent to which hedge funds succeed by virtue of their being situated in a regulatory grey area; and Angela Merkel has charged her Finance Minister Peer Steinbrück to discuss this question at the G7 level. In preparation for this discussion, the German government has issued a working paper called "Challenges of the Hedge Funds Industry and Associated Political Measure."

What concerns Merkel and Steinbrück is that old cautionary motto: "What you don't know can hurt you." Germany's mission seems to be one of bringing hedge funds into the regulatory sunshine. Here is how Reiermann describes the situation:

In preparing for this weekend's meeting, Steinbrück's experts, headed up by his deputy Thomas Mirow, had a difficult time convincing their colleagues that Berlin wasn't trying to crusade against " locust" investors or ruin a prosperous industry with excessive regulation. They just want to create better oversight, Steinbrück's emissaries insist. They want "transparency" -- more light.

And that's indeed what's missing -- government supervisory authorities are very much in the dark when it comes to hedge funds.

All they have is a rough estimation of the number of hedge funds in the world: about 9,000. But no one knows exactly how much money these constructs control, how much they've hoarded and then borrowed on credit.

Estimates as to how much money is involved are as high as $1.3 trillion (see graphic). But the supervisors have little idea of where the close-lipped managers have invested the money -- and what risks they've decided to run in doing so.

This lack of knowledge contrasts starkly with the disclosure obligations that supervisory authorities impose on garden-variety credit institutions. For example, Germany's supervisory authority knows precisely how much money every little savings bank has lent to prospective home owners. But international financial supervisors have no idea what a financial acrobat like Peter Thiel, the 39-year-old star of the hedge fund community, is doing with his billion-dollar Clarion Capital fund.

I have found SPIEGEL ONLINE to be an excellent source of analytic reports about the global economy. I have been following them since they ran a series of translations of excerpts from Gabor Steingart's Weltkrieg um Wohlstand ("war for wealth") book. This series prompted a series of entries in my previous blog, which may best be reviewed by following the back-pointers from the last of these entries. Whether such reports reflect a historical sensitivity to the consequences of economic crisis or whether it is just that Spiegel is more inclined than the American press to provide such analyses to the general public, we can all benefit from this editorial policy. I just hope that at least some of the members of Congress appreciate the value of such analysis, particularly since any discussion in Essen will come down to whether our own Secretary of the Treasury is willing to put the financial security of the American public above the interests of his former colleagues at Goldman Sachs.

1 comment:

Anonymous said...

There is evidence out there that some of these funds hold vastly more Capital than one would think try 27.5 Trillion. Its actually more than one.
International Currency Review has some excellent articles on this very topic. Check it out.