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Hedge Funds and the Financial Crisis

Politico has a piece running through the number of former Hill staffers-turned-lobbyists that hedge funds have hired to ensure that financial regulatory reform does not encroach on their businesses or slim their profits:

Hedge fund managers, Weissman said, are in the business of using inside information to make money, a model they’ve successfully translated to Washington, where they’ve built the relationships they are now trading on. “They have lots of money, and they know how to deploy it effectively to gain influence — and that’s through campaign contributions and connected lobbyists. And they’re doing it with a high level of sophistication and success,” he said.

But the piece reads a bit thin to me. There is not much evidence that the architects of financial regulatory reform ever wanted to go after the hedge funds in the first place — meaning there is not much evidence that those lobbyists have had much work to do. By law, hedge funds and private equity firms only allow very wealthy individuals or firms to buy in — investors who understand risk, want a lot of it, and can afford to burn through loads of cash. Many hedge funds suffered major losses or collapsed during the crisis, wiping out hundreds of billions in wealth. But hedge funds neither caused nor worsened the crash, and on aggregate they did not pose a systemic risk. Therefore, Sen. Chris Dodd (D-Conn.) and the other authors of the bill never honed in on them.

Of course, that is not to say that hedge funds will not play a major part in the next crisis. They certainly have before. When the hedge fund Long-Term Capital Management collapsed in 1998, it required a government-supervised bailout and destabilized the Russian and Asian economies. For that reason, Felix Salmon notes that Dodd’s regulatory proposal could use bolstered prudential measures to better hedge fund reporting and monitor risk — provisions Sen. Jack Reed (D-R.I.) plans to introduce via an amendment.

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