“We’re not too big to fail!” That’s the likely message that members of industry lobbyist Managed Funds Association had for staff at the Federal Reserve Board in a recently-disclosed meeting that took place on February 17.
The MFA sent its chair, Darcy Bradbury (also a managing director of the $14.2 billion D.E. Shaw Group) along with its top lawyers, Stuart Kaswell and Benjamin Allensworth, to the Fed, where they “presented an overview of the hedge fund industry and discussed their views” on applying systemic risk criteria to the hedge fund industry, according to a filing made public by the Financial Stability Oversight Council this week.
The MFA brought brand name hedge fund attorneys to bolster its case. In attendance, according to the filing, were Michael Waldorf of $36 billion Paulson & Co., Scott Bernstein of $10 billion Caxton Associates, and Brian Gunderson of GPC Associates, which was recently hired to lobby on behalf of $16.8 billion Elliott Management Corporation. Participants from the Fed included Michael Gibson (Senior Associate Director in the Division of Research and Statistics), Matthew Pritsker (a senior economist for risk analysis in the same division), Mark Carlson (an economist for monetary and financial stability), Kieran Fallon (associate general counsel) and several others.
The systemic importance of hedge funds is once again a subject of debate in Washington thanks to the financial reform legislation passed last summer. The Financial Stability Oversight Council, which was created by the Dodd-Frank Act, is led by Treasury secretary Tim Geithner and includes such chief regulators as the Fed’s Ben Bernanke and the Securities and Exchange Commission’s Mary Schapiro. The new council has the “authority to require that a nonbank financial company be supervised by the Board of Governors of the Federal Reserve System and be subject to prudential standards…if the Council determines that material financial distress at such a firm, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the firm, could pose a threat to the financial stability of the United States.”
Whether or not hedge funds will be viewed as so important is the big question. Draft FSOC rules currently up for public feedback—hence the meeting—emphasize six major factors in the determination: Size; lack of substitutes for the financial services and products the company provides; interconnectedness with other financial firms; leverage; liquidity risk and maturity mismatch; and existing regulatory scrutiny.
With little else clear, hedge funds are lobbying to minimize the industry’s importance without dismissing the council’s mandate. “We believe that, in light of the structure of hedge funds and the market and regulatory changes regarding counterparty risk management, leverage and use of collateral…should lead to the conclusion that it is highly unlikely that any hedge fund is systemically significant at this time,” wrote MFA president and CEO Richard Baker in a public comment letter to FSOC dated February 25. “We recognize, however, that circumstances can change and that there is a possibility that a hedge fund may, in the future, become systemically significant.”
Hedge funds have been lobbying heavily since 2007. In 2010, the industry spent $6.45 million on Washington influence, according to data compiled by the Center for Responsive Politics, a nonpartisan watchdog group. The MFA spent $3.72 million for the year; individual firms like Ken Griffin’s Citadel Investment Group ($570,000) and Elliott ($270,000) also spent big. (See AR’s previous coverage of hedge fund lobbying on the Dodd-Frank Act)
Spokespersons for Paulson, D.E. Shaw, Elliott and Caxton declined to comment.
The MFA also declined to elaborate on the discussions. However, attached to the filing are “written materials and other correspondence provided by MFA following the meeting.” They are re-posted below.
