The testimonies of five hedge fund managers to the US Congress lead to the inevitable conclusion that regulation of some sort is headed our way. One would hope that Congress took on board the opinions of the managers that over-regulation would be unnecessary and harmful, however, and that, this time around, more consultation and cooperation with the managers themselves might be undertaken before a list of rules is drafted.
Citigroup has been the latest bank to whinge to the Federal Reserve to make the shorters go away, although by now it’s clear that short-selling bans do not save companies from precipitous declines in their stock prices.
And what of the end-investors in hedge funds? Will they also face a grilling?
The role of pension funds in short-selling clearly has to be addressed. Yet, on that front, voices have been noticeably absent so far.
Pension funds have been a dominant source of stock for shorters to borrow. Although that is economic efficiency at its finest, and pension funds make money from lending into the market, is it truly right?
How can trustees look their pension fund contributors in the eye and blame the shorters or the markets for the pension plan’s losses, when they helped create the situation?
Whether pension funds should be contributing to the demise of their own portfolios raises ethical questions. As investigations into the meltdown continue, the number of those who must admit to playing a role is bound to increase – let’s just hope regulation does not get out of hand as a result.