Dodd's Bill Soft On Private Equity And Hedge Funds, Say Critics
On Monday, Sen. Chris Dodd was proud to announce that his financial regulatory reform legislation does not exempt auto dealers from new regulations like the House version did.
"I don't want to be in the business of carving out large financial providers," said Dodd when he unveiled the bill. "I'm trying to allow the [Consumer Financial Protection Bureau] itself to make some determinations so we don't get into the business of picking winners and losers."
But some economists and policy analysts say Dodd's draft makes winners out of private equity and hedge funds. Under the proposal, hedge fund managers in charge of more than $100 million will be required to register with the Securities and Exchange Commission and to disclose information to a new systemic risk regulator. But venture capital and private equity fund advisers are exempt from that requirement. (Dodd's office did not respond to requests for comment.)
"We are very concerned about the loopholes in the hedge fund title of the legislation released on Monday, particularly the exemption for private equity and the failure to allow the SEC to require that hedge funds and private equity funds make simple disclosures to investors and creditors," wrote Heather Slavkin, a senior policy advisor for the AFL-CIO in an email to HuffPost.
"These [disclosures] are common-sense ways to protect investors and prevent systemic risk and were included in both the Obama proposal released last summer and in the bill passed by the House," wrote Slavkin. "We are working hard to find ways to remove these loopholes."
Doug Lowenstein, president of the Private Equity Council trade group, called it an "excellent approach," according to Dow Jones."Private equity doesn't create systemic risk, and the bill recognizes that," he said. "It's well-reasoned."
Part of Dodd's draft would assess fees on any bank or nonbank supervised by the Federal Reserve with more than $50 billion in assets for a $50 billion fund that would be used for the "orderly liquidation" of a financial institution whose collapse would threaten the stability of the entire system. In the House bill, hedge funds with more than $10 billion in assets are required to pay into a $150 billion "dissolution" fund.
Dodd's bill does not subject hedge funds to such an assessment fee.
"I find it hypocritical that the administration that has made a lot of rhetorical points about fat-cat bankers and they're quiet on hedge fund and private equity funds that will largely be carved out, won't have to pay into the resolution fund that will resolve the next failure," griped a bank lobbyist.
Economist Dean Baker, co-president of the Center for Economic and Policy Research, called it "unfortunate" that Dodd wouldn't make hedge funds pay into the liquidation fund. Baker cited the imminent failure and subsequent bailout of hedge fund Long-Term Capital Management in 1998 as evidence that hedge funds can pose a systemic risk.
"It is easy for hedge funds to adjust their size (much of their borrowing and lending is short-term)," Baker wrote. "If we say that all hedge funds with liabilities over $50 billion are subject to a special levy then this gives them a very strong incentive to stay under the cutoff. Therefore this is a case where the incentives created by the tax may actually have an impact. Since we know that hedge funds can jeopardize the financial system, there seems little basis for excluding them."
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First Posted: 5/17/10 Updated: 5/25/11