It will take a 'good scam' to rein in hedge funds
There is a common thread between the ongoing subprime crisis and the previous corporate scandals at the start of the century: the lack of transparency. Day in pics
By Santosh Nair, TNN |
MUMBAI: They strike you as the archetypal ���good cop, bad cop��� combine. Former Congressmen Paul Sarbanes and Michael Oxley, co-authors of the famous (or dreaded, if you were to believe listed US firms) Sarbanes-Oxley Act, feel there is a strong case for regulating US hedge funds. Unfortunately, they also feel this is unlikely until some financial disaster involving a hedge fund takes place. In their view, there is a common thread between the ongoing subprime crisis and the previous corporate scandals at the start of the century: the lack of transparency.
Mr Sarbanes and Mr Oxley were in Mumbai on Friday to attend a seminar on corporate governance and capital markets.
In an exclusive chat with ET, the duo spoke their mind on a wide range of issues affecting financial markets. The obvious topic was the ongoing crisis in the US subprime loan market. Is it a case of inadequate disclosures, or poor understanding of the derivative products involved? ���The (Sarbanes Oxley) Act requires a lot of disclosures, but that does not mean what might be disclosed may turn out to be large losses,��� says the 75-year-old Sarbanes, who has spent 30 years in the US Senate.
Mr Sarbanes and Mr Oxley were in Mumbai on Friday to attend a seminar on corporate governance and capital markets.
In an exclusive chat with ET, the duo spoke their mind on a wide range of issues affecting financial markets. The obvious topic was the ongoing crisis in the US subprime loan market. Is it a case of inadequate disclosures, or poor understanding of the derivative products involved? ���The (Sarbanes Oxley) Act requires a lot of disclosures, but that does not mean what might be disclosed may turn out to be large losses,��� says the 75-year-old Sarbanes, who has spent 30 years in the US Senate.
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His partner, Mr Oxley, who now serves Nasdaq as its vice-chairman, is more forthright on the subject. ���A lot of it was about the lack of transparency in the secondary market, where it is difficult to assess risk. And I think there was a pricing fraud,��� says the 64-year-old, who had served in FBI for three years before entering politics.
���The parallel between Enron, Worldcom and the current crisis is the lack of transparency in the process,��� he added. On the contentious issue of regulating hedge funds in the US, the duo are not very hopeful. ���The only way to get a regulatory regime for hedge funds is a huge scandal. Else, it is difficult to get a momentum,��� says Mr Oxley. Hedge funds have opposed efforts to bring them under the regulatory ambit, as they largely cater to a select set of affluent investors.
However, Mr Sarbanes pointed out that many hedge funds have come out with a fund-of-funds concept to make small investors put their money. That was not the way it was intended to be when hedge funds sought to be excluded from regulatory glare.
���There is a saying, a crisis is a wonderful thing to waste; that is what it may take,��� he said ruefully. ���But I hope it doesn���t come to that because the LTCM (Long-Term Capital Management) episode in the late 90s was extremely serious,��� he added.
What about the perception that stringent regulatory framework in the US is driving companies to other markets? The duo wouldn���t agree. ���I think that has more to do with the development of capital markets globally,��� points out Mr Sarbanes. In the olden days, somebody looking to raise capital would have to go either to New York or London, he says.
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���But now Chinese companies are going to Shanghai or Hong Kong. Many companies are even going to Paris. There is a lot of liquidity and capital raising has become more easier than before,��� he says.
When it was instituted in 2002 in the wake of widespread corporate frauds in the US, the Sarbanes-Oxley Act sparked outrage among listed firms, which felt the cost of implementing those norms was huge. Has that opposition subsided over a period of time? Yes, claim Sarbanes-Oxley.
Many companies, after working through the process of implementing the compliance rules, have reached the conclusion that they served a useful purpose and are benefiting out of it, says Mr Sarbanes. ���I think the initial costs have come down substantially,��� Mr Oxley concurs.
���With the recent changes in accounting standards by SEC (the Securities Exchange Commission which regulates the US markets), there is going to be a top-down, risk-based scaleable model for smaller companies,��� Mr Oxley adds.
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