Government to Hedge Funds: Don't Profit!

By publicly revealing that they sent requests to a bunch of hedge funds to keep trading records related to the Euro currency, the U.S. government is in effect telling hedge funds not to profit from any overvalued situations, such as the Greek debt

The United States government has asked a number of leading, in terms of assets under management and reputation, hedge funds not to destroy trading records on trades they make involving the Euro currency. This is according to a report in the Wall Street Journal.

The current Greek debt crisis coupled with the public and political outrage over the Goldman Sachs/Greece debt fiasco, has allowed governments in both the European Union and the U.S. to increase oversight on the effects hedge funds are having both on sovereign debt and financial engineering products designed to produce better debt performance.

Apparently the Department of Justice sent requests to save the records to several hedge funds that attended a controversial dinner hosted by New York-based research and brokerage firm Monness, Crespi, Hardt & Co. The meeting was reported on the front page of the Wall Street Journal, and claimed such firms as Soros Fund Management, Paulson & Co and Greenlight Capital (David Einhorn) attended. The meeting was led by SAC Capital Advisors (Steven Cohen).

It is strange that such an event would make news as hedge funds meet all the time, but what is unusual is the Department of Justice making public such record-keeping demands. I understand that the DOJ frequently asks financial institutions to keep various records, and why they would now come out and publicize this particular request is undetermined.

The report said, “The European Commission said yesterday it will investigate trades in sovereign credit-default swaps in the wake of the Greek crisis, which has pushed the euro lower and prompted officials to warn hedge funds they shouldn’t try to profit from the woes of the region’s nations.” Now for just a split second I nearly agreed with that statement, but then I relooked it. Hedge funds “shouldn’t try to profit” from the Greek and Euro sovereign debt calamity? Such an idea is ludicrous! That’s like saying retail investors should not try to invest in Google (GOOG) because the company might increase in value and we don’t want people trying to profit from such an increase.

Public backlash has really come to the fore in recent months, mainly led by Goldman Sachs. However the public is certainly not done with chastising financial firms and the industry in general. I strongly disagree with outsized Wall Street pay and bonuses as I’ve said here. In saying that it’s outrageous that government thinks they can control the activities of private enterprise to an extent that they cannot profit from downside risk. Can you imagine as a small street vendor if there’s rain forecast and you have a business selling umbrellas, that they government comes along and says, well, you see, now that the outlook is not so good we don’t want you to sell umbrellas because you are profiting from people’s woes in getting wet!

A major concern in my mind is the looming threat of excessive government regulation. While regulation is necessary and by no means unwarranted, the extent to which government suffocates the revenue and profit streams of these businesses is going to have a massive effect on the economy. U.S. politicians plan to hold a hearing on the role that investment banks including Goldman Sachs�may have played in Greece’s debt crisis. Federal Reserve Chairman Ben S. Bernanke said recently that the U.S. central bank is reviewing derivatives contracts arranged between Goldman Sachs other investment banks with Greece. When people with the illusion of perfect hindsight switch to foresight it usually ends in catastrophe.

The Wall Street Journal has a great blog article on this topic here.

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  • Sam Cass

    March 08, 2010

    I think you're analogy is flawed. It's more akin to a restaurant selling glasses of water at high prices after saturating the food with salt. The investment banks helped precipitate the crisis and now they are going to profit off it.

    Now, that's not necessarily illegal and wrong. But it should be clear that they are profiting from a bad situation that they helped create. Just like Enron did with energy and electricity prices in California ten years ago.

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