Bang or whimper?
Jun 24th 2010 | NEW YORK
RONALD REAGAN once quipped that he didn’t know what the Ten Commandments would have looked like if Moses had run them by Congress. If only Congress could run financial reform past Moses. Legislators from the House of Representatives and the Senate this week continued the erratic process of reconciling versions of bills passed by each chamber. By the middle of the week, a number of differences had been ironed out, including the creation of a consumer-protection bureau housed within the Federal Reserve, the regulation of debit-card “interchange” fees and measures requiring firms that securitise loans to retain a portion of the risk. But the trickiest issues were still to come.
Among them was discussion of the “Volcker rule”, which was designed to restrict banks’ “proprietary” trading activities (bets made for their own account) and “sponsorship” of hedge funds and private-equity firms. The provision, named after Paul Volcker, a former chairman of the Federal Reserve, was first unveiled by Barack Obama in January. Since then some bankers have worried that they might be forced to sell their hedge funds and private-equity units because politicians consider those activities too risky.
Their worst fears seem unfounded. As The Economist went to press, it looked likely that a diluted version of the Volcker rule would pass, allowing banks to keep running hedge-fund and private-equity units for clients who want to invest in them, and perhaps to keep putting a small share of their own capital in them as well. To placate those who wanted to see a stricter version, some senators were pushing a provision that would give regulators less say in how to enforce the rule.
Many banks had already been betting that the Volcker rule would not cause them to surrender their role in the “alternative investment” sector. Citigroup has plans to raise more than $3 billion for its private-equity and hedge funds, an audacious move considering regulators’ watchful eyes. JPMorgan Chase, whose Highbridge hedge fund has an estimated $22 billion under management, reportedly wants to buy Gávea Investimentos, a Brazilian asset manager. They may not be able to invest as much of their own capital in these vehicles, but it looks as if they can keep making money on them.
The Volcker rule will have some effects on the relationship between Wall Street and alternative investment companies. Already, proprietary traders have started to leave banks and go to hedge funds, where they feel more certain about their long-term employment prospects, say headhunters. Tim Sangston of Greenwich Associates, a research firm, expects a further migration of traders out of banks once the bill is finally passed.
Some traders may also try to start their own hedge funds, although the fundrais-ing environment is bleak. The Volcker rule could make things even worse. Funds of funds owned by American banks provide around $180 billion, or about 16% of all its assets under management, to the hedge-fund industry. Some of that is seed money, which goes to managers who are starting funds. If the final version of Volcker prevents banks from investing as much capital in hedge funds, start-ups may have fewer potential backers.
Alternatives thinking
Not everyone thinks the Volcker rule will be bad news, however. Non-banks with seeding funds, such as Blackstone, a private-equity firm, and Citadel, a hedge fund, may fill some of the fund-raising gap. And if banks are required to reduce their own investments in alternative assets, that should be a boost for the secondary market for stakes in private-equity funds. Harvey Lambert of PineBridge Investments, an alternative-asset manager, estimates that banks could choose to sell as much as $100 billion in private-equity positions, which is around two or three times the size of the whole secondary market now.
Even so, these potential effects look relatively modest compared with the splash the rule made when it was first unveiled. Peter Clarke, the boss of Man, a large hedge fund, pooh-poohs the importance of the Volcker rule. He says the “continued deleveraging of banks” will influence returns at hedge funds more than the new rules. Irrespective of the Volcker rule, banks’ need to get rid of assets and unwind trades will be good news for many in the alternative-investment industry, he says, because there will be less competition for returns.
Among them was discussion of the “Volcker rule”, which was designed to restrict banks’ “proprietary” trading activities (bets made for their own account) and “sponsorship” of hedge funds and private-equity firms. The provision, named after Paul Volcker, a former chairman of the Federal Reserve, was first unveiled by Barack Obama in January. Since then some bankers have worried that they might be forced to sell their hedge funds and private-equity units because politicians consider those activities too risky.
Their worst fears seem unfounded. As The Economist went to press, it looked likely that a diluted version of the Volcker rule would pass, allowing banks to keep running hedge-fund and private-equity units for clients who want to invest in them, and perhaps to keep putting a small share of their own capital in them as well. To placate those who wanted to see a stricter version, some senators were pushing a provision that would give regulators less say in how to enforce the rule.
Many banks had already been betting that the Volcker rule would not cause them to surrender their role in the “alternative investment” sector. Citigroup has plans to raise more than $3 billion for its private-equity and hedge funds, an audacious move considering regulators’ watchful eyes. JPMorgan Chase, whose Highbridge hedge fund has an estimated $22 billion under management, reportedly wants to buy Gávea Investimentos, a Brazilian asset manager. They may not be able to invest as much of their own capital in these vehicles, but it looks as if they can keep making money on them.
The Volcker rule will have some effects on the relationship between Wall Street and alternative investment companies. Already, proprietary traders have started to leave banks and go to hedge funds, where they feel more certain about their long-term employment prospects, say headhunters. Tim Sangston of Greenwich Associates, a research firm, expects a further migration of traders out of banks once the bill is finally passed.
Some traders may also try to start their own hedge funds, although the fundrais-ing environment is bleak. The Volcker rule could make things even worse. Funds of funds owned by American banks provide around $180 billion, or about 16% of all its assets under management, to the hedge-fund industry. Some of that is seed money, which goes to managers who are starting funds. If the final version of Volcker prevents banks from investing as much capital in hedge funds, start-ups may have fewer potential backers.
Alternatives thinking
Not everyone thinks the Volcker rule will be bad news, however. Non-banks with seeding funds, such as Blackstone, a private-equity firm, and Citadel, a hedge fund, may fill some of the fund-raising gap. And if banks are required to reduce their own investments in alternative assets, that should be a boost for the secondary market for stakes in private-equity funds. Harvey Lambert of PineBridge Investments, an alternative-asset manager, estimates that banks could choose to sell as much as $100 billion in private-equity positions, which is around two or three times the size of the whole secondary market now.
Even so, these potential effects look relatively modest compared with the splash the rule made when it was first unveiled. Peter Clarke, the boss of Man, a large hedge fund, pooh-poohs the importance of the Volcker rule. He says the “continued deleveraging of banks” will influence returns at hedge funds more than the new rules. Irrespective of the Volcker rule, banks’ need to get rid of assets and unwind trades will be good news for many in the alternative-investment industry, he says, because there will be less competition for returns.
Finance and Economics
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