Marginal Utility

by Ken Houghton

It's a catty summary, to be certain, but not an unfair one in this Self-Delusional NYT piece. First admit the truth:

Today’s decision, which followed months of study by a presidential working group, reflected both the strong antiregulatory philosophy of the administration and the formidable new clout and influence of the wealthy hedge fund industry. Three of the major economic policy makers in Washington — Treasury Secretary Henry M. Paulson, Robert K. Steel, who is the under secretary of the Treasury, and Joshua Bolton, the White House chief of staff — are all alumni of Goldman Sachs, which in the last decade has evolved into perhaps the most significant player in the private equities market.

And only then get around to letting readers know that the games are being played with Other People's Money:

Millions of Americans do not qualify to make investments in the funds, which are pools of largely unregulated assets, but they are unknowingly exposed to the risks associated with hedge funds through their pension and retirement accounts.

James Hamilton at Econbrowser—one of the premier analytical economists in the country, and perhaps the closest thing to my political and temperamental opposite in all of the blogsphere (Tom's mileage likely varies significantly)—thought about hedge funds and, instead of leaping to a likely conclusion, examined the available data. The scary thing is that he comes to the same conclusion I do:

When I heard about the disastrously irresponsible investments made by the Amaranth hedge fund, my first reaction was, who would be so stupid to have put up the margin requirements for such a scheme? The answer turned out to be found in my own backyard-- the San Diego County Employees Retirement Association apparently donated over a hundred million dollars to this worthy cause.

He follows this will three paragraphs of fascinating detail; follow the link above. His conclusion from those 'grafs is:

But as far as I'm aware, there's no place you can go to find an audited statement of the assets and liabilities of these "alpha fund managers", so there's no way to verify exactly what the nature and magnitude of the risk is that's being palmed off on the county. We have only the word of the county fund managers that they're doing something smart. They in turn are likely basing their own confidence primarily on the word of the alpha fund managers. At least in the case of Amaranth, we know how much that word is worth, and it ain't $233,830,268. [emphasis mine]

He has a specific recommendation as well:

But when the buyer is acting on behalf of the government, to me it seems very appropriate for the government to set statutory limits on the extent to which managers' interests can be permitted to deviate from those of the beneficiaries. Specifically, I recommend that California's County Employees Retirement Law be amended to specify that if one calculates the sum of all investments, pledges of collateral, financial liabilities and exposures, and margin deposits and calls made by a county retirement fund in institutions for which there are not publicly available annually audited balance sheets of those institutions' assets and liabilities, the sum of all such commitments across all such institutions can not exceed 10% of the retirement fund's total gross assets.

On one side, we have James Hamilton, stating that there is not enough transparency in the hedge fund industry to allow unlimited investment by government-run funds in hedge funds. On the other side, we have "[t]he Bush administration and senior regulators."

Anyone else feeling less well about their 401(k)/403(b)/IRA??

Labels: Bushonomics, hedge funds, pension funds, retirement