I Keep Forgetting To Regulate*

As much debate and consternation as there has been over the Geithner plan for toxic assets, we are seeing today a move forward on overhauling financial rules, which to my not-economist ears sounds fairly good. In particular, regulating hedge funds and CDS traders makes a ton of sense.

WASHINGTON — The Obama administration will detail on Thursday a wide-ranging plan to overhaul financial regulation by subjecting hedge funds and traders of exotic financial instruments, now among the biggest and most freewheeling players on Wall Street, to potentially strict new government supervision, officials said.

The plan, which would require Congressional approval, would give the government vast new powers over “systemically important” banks and other financial institutions that are so big that their collapse would jeopardize the economy as a whole.

The government would have the power to peer into the inner workings of companies that currently escape most federal supervision — insurance companies like the American International Group, multibillion-dollar hedge funds like the Citadel Group and private equity firms like the Carlyle Group or Kohlberg, Kravis & Roberts.

If regulators decided that a company had become “too big to fail,” as was the case with A.I.G. in September, they would subject it to much stricter capital requirements than smaller rivals and much closer scrutiny of its borrowing levels and its trading partners, or counterparties.

But the most striking new proposals, and the ones that may provoke the most heated opposition from the industry, would regulate so-called private pools of capital — hedge funds, private equity funds and venture capital funds — and the gigantic market in financial derivatives, including instruments like credit-default swaps, the insurancelike instruments that allow investors to hedge against bond defaults.

Hedge funds and private equity funds manage money for wealthy individuals and institutions like pension funds. They operate almost entirely outside the regulation of either the Securities and Exchange Commission or the Federal Reserve.

Under the administration proposal, hedge fund, private equity and venture capital fund advisers would for the first time have to register with the S.E.C. They would be required to provide the government — on a confidential basis — information on how much they borrow to leverage their investments as well as information about their investors and trading partners.

The S.E.C. would then share those reports with a new “systemic risk regulator.” At least for the moment, Mr. Geithner is ducking the crucial question of who the powerful risk regulator should be, a contentious issue among Democratic lawmakers.

A plan, of course, is one thing - getting it through Congress is quite another. And there's a compelling strain of thought that the laws on the books today could have stopped much of this crisis, and what we actually lack is regulatory will. Perhaps taking this completely out of the realm of politics AND Wall Street - I've no idea how, maybe hiring the Blue Moon Detective Agency - would help, but essentially the regulators have to WANT to regulate to protect the public. And yet, we have the elites we have:

Joe Donnelly asked Tim Geithner whether we ought to eliminate naked default swaps. Geithner said that it's too hard to distinguish hedges from gambling. Donnelly pointed out that we're taking money out of truck drivers' pockets and waitress' pockets to pay off Wall Street's gambling debts. Ultimately, though, Geithner said we don't need to--and that it would be very hard to--do that.

I guess the truck drivers will still be asked to pay off rich men's gambling debts.

Maybe Lord Stern's idea for an independent international body with an endowment and no possibility of recall makes the most sense. Because I don't have a lot of trust in anything resembling independence on this side of the pond.

* - Anyone who knows the provenance of the headline gets a cookie.