Hedge Hogs - Part II

After a failed attempt by the SEC to regulate the growing number of hedge funds (Hedge Hogs - Part I), the Bush administration sent a clear message in early 2007; something like "this is part of my plan to deregulate financial markets entirely: leave hedge funds alone."

Apparently Sen. Chuck Grassley (R-IA) wasn't paying attention. More likely, "Iowa’s favorite curmudgeon" understood the importance of regulating hedge funds, and he has an annoying habit of doing what he believes is right.

So Grassley attempted to bring hedge funds under SEC oversight a few months later. Realizing that the SEC needed Congressional action to begin the process by registering hedge funds, he sponsored the "Hedge Fund Registration Act of 2007" (S.1402). In his May 15, 2007 announcement, Sen. Grassley said:

The goal of my initiative is to make our financial markets more transparent. Openness is key to trust in those markets.

Considering that hedge funds controlled up to $3 trillion in assets last year, requiring that they register with the SEC doesn't seem like a bad idea. Hedge funds control almost a third of the stock market trading activity, and it seems like we should spend at least as much time regulating them as we spend on, say, fishing licenses.

Grassley's bill was read twice on the Senate floor, and referred to the Senate Committee on Banking, Housing, and Urban Affairs where Chris Dodd (D-CT) and Richard Shelby (R-AL) immediately recognized the importance of this legislation and sprung into action. Just kidding: the Committee website shows a list of all they accomplished...nothing. No hearings; no expert testimony; no referral to the SEC for comment. It's called "killed in committee."

I can understand Richard Shelby toeing the Republican party line, but Chris Dodd is a Democrat. There must have been something else going behind the scenes. One possibility might be that Dodd was too busy counting his political contributions... from hedge funds.

According to opensecrets.org, Sen. Dodd received $693,250 in contributions from hedge funds in 2008; more than many politicians running for the Presidency. Not bad for someone whose 6 year term expires in 2011, and isn't even running for reelection. It's called "payoff."

Last month Sen. Grassley again introduced a bill to require hedge funds to register with the SEC, the Hedge Fund Transparency Act. (S.344) Needless to say, he won't be getting campaign contributions from hedge funds when he runs for reelection in a couple of years.

Grassley's latest effort has again been referred to the Senate Committee on Banking, Housing, and Urban Affairs. This one is worth keeping an eye on.