SEC May Require Disclosure of Hedge Funds’ Short-Sale Positions

September 17, 2008 by · Leave a Comment
Filed under: Legal News 

Where is the manipulation? Under the rug? Under the bed? Under the desk? I guess they are in the hedge funds are the reason for this precipitous drop in the stock market….NOT! Let me put forth an alternative theory for what is happening. Maybe, just maybe it might be this huge expansion of credit in every aspect of commercial life from finance, real estate, consumer debt, autos, student loans(personally this is the only one I give a pass on) auction-rate debt etc…. and now with this last vestige of fee making frenzy the credit-default swap or CDS.

Now we are at the end, this is it if we actually want to call our markets free. These nice little unregulated and unreserved instrument is the pinnacle of our financial ingenuity, the only problem is no one actually took the time to ask the basic question “what if a bunch of parties or counter-parties fail?”. Now after my rant is complete ask yourself this question, if you don’t carry a reserve against these, your buddies don’t, every major institution participates for the fees and then let it get to the point of $1.44 quadrillion dollars worth of these and they are going default and make the contract requires performance of this corporate debt insurance……what happens? Good question, I have read quite a large amount of monetary theory from all spectrum and they all come to the same two answers which are both very very very fun.

1. Institutions fail by way of INSOLVENCY

2. You issue currency for the deficit and unless you have had productive growth for the same amount you create INFLATION

The Federal Reserve and the World have a hard question to answer and either choice has consequences that are no fun. I would suggest thinking about the precedence you are going to set and if that is the policy for the future then chose that answer. I am not being alarmist, just a realist and right now that is just what we need before we make a mistake that will be almost impossible to come back from.

SEC News:

The U.S. Securities and Exchange Commission may require hedge funds to disclose their short-sale positions and plans to subpoena the funds’ communication records in an effort to stem turmoil in stock markets.

Hedge funds and investors managing more than $100 million in securities would be “required to promptly begin public reporting of their daily short positions,” Chairman Christopher Cox said in a statement late yesterday. The agency will obtain “disclosure from significant hedge funds” regarding “past trading positions in specific securities,” Cox said.

Lawmakers including U.S. Senate Banking Committee Chairman Christopher Dodd and executives such as Morgan Stanley Chief Executive Officer John Mack say short sellers may have contributed to the market crisis by spreading false information and using abusive tactics to attack companies. Hedge funds argue that poor business strategies are to blame, not short sellers.

“A lot of hedge funds don’t like being forced to disclose their long portfolios, so they’re really not going to like this,” said Sean O’Malley, a former SEC lawyer and now a partner at Goodwin Procter LLP in New York. “There is going to be some push back from hedge funds, but they may not get any sympathy in the current market environment.”

The five SEC commissioners must approve the rule, which would be adopted on an emergency basis, for it to become binding. Hedge funds, which are private pools of capital whose managers participate substantially from any profits on invested money, prefer to keep their positions secret to prevent other traders from stealing their strategies.

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