Letters to Tom (2)

Today another reply to in inquiry from Tom about hedge funds I thought worth posting...

Tom,

Hedge funds traditionally got cash from wealthy individuals and institutions (corporations and the like). The basic rules were something like one had to have a net cash worth of about $1.5 million or total assets of like $5 million or some other arbitrary number. In addition, since they are unregulated, brokerages could not sell or recommend directly to their clients so they would have to arrange social events or other such things to introduce their hedge fund friends to wealthy clients.

In the past few years, some hedge funds tried to become more transparent by listing on stock exchanges. Fortune Group in the US along with Blackstone and Man Group in the UK were the first. This has stopped.

The SEC put out a report about 2002 or so suggesting they tighten rules and researched whether it would be wise to regulate them. They did require "registration" of hedge funds with a certain size and some other criteria around 2004 but the hedge funds sued the SEC and won so all that got turned back. (my dates are from memory here as are the stats but the info is correct)

They have plenty of cash, there are hundreds of hedge funds, they hold over $2 trillion and leverage themselves anywhere from 7 to 20 to one. They engage in every scheme imaginable to make money and were involved in much of the success of esoteric products based on debt. I suspect they are responsible for the margin calls against brokerages, insurance companies and the like who sold the CDS insurance products without enough cash to back losses when things turned sour. Thus they have enough knowledge of the extent of the crises to know the sellers would not be able to cover their obligations and went heavy into shorting their stock, putting them out of business while making money on the fall. They got their cash anyway I guess one could suspect.

Wall Street has not changed.

I suggested a couple years ago that Wall Street had become dwarfed by the pools of money outside of the regulated system. I was right. The regulated system is for suckers and the Government will not win against the unregulated pools of money. They cannot print enough to keep up. Secondly, the money they are printing to cover the insurance calls against companies like AIG is going directly into the pockets of those who bought the unregulated insurance products and are now being paid big time cash to keep the hedge funds from bringing more companies to their knees.

So, the unregulated money industry, with hedge funds in the center along with private equity, and the esoteric products created and sold which were also unregulated insurance products, are bringing down the regulated markets.

No one in Washington will say this and I just don't get it. However as I said, this is the biggest wholesale transfer of wealth the history of capitalism has ever seen.

Said.

Patrick