The Daily Alpha: The End of Democracy, Hedge Fund Leverage, and Morgan Stanley Defections

The Daily Alpha: The End of Democracy, Hedge Fund Leverage, and Morgan Stanley Defections

Garrett Baldwin

“The aim should be to better assess potential systemic risks from these funds.”

The election season is fully underway, but what you may be missing is the regulatory season in Washington for the financial system.

While everyone got together in 2010 to draft Dodd-Frank, it was almost like no one really cared about whether or not the systemic problems of the financial crisis were still always there. There wasn’t much follow through and a lot of the laws still needed to be written.

The solution it seems – looking back – was to simply pump the monetary system with money and see if it would all work out. Now, the administration is rushing to complete its work for years ago.

A funny thing has happened in the last year. There is still a lot of cheap money, which allowed a massive amount of mergers and acquisitions to fuel some level of growth in the post-QE world.

Now, the regulators are stepping up to stop inversions… they’re questioning the emergency plans of the major banks in times of financial stress to prevent another bailout, and… they’re going after hedge funds.

In the June issue of Modern Trader, we address regulatory efforts and the demonization of the hedge fund activity. The first is an utterly toothless bill called the Brokaw Act, which will reduce disclosure times on 13ds and create an entirely new set of loopholes for so-called Wolfpacks.

The second is the absurdity in New Jersey, where pension managers complained about fees when the hedge funds were able to significantly generate more money than the other pension managers were able to over the last five years.

While these events were taking place, the agencies have been losing in their broader efforts to designate firms like BlackRock and MetLife as strategically important to the U.S. economy.

But today’s story takes place in Washington, where Jack Lew and the Treasury Department – and every other financial agency it seems – are looking at leverage and borrowing practices at hedge funds.

To understand the risks in the hedge fund space, the Financial Stability Oversight Council “will form a working group to further study risks in hedge funds.”

Because this is what Washington does best: It spends millions of dollars on studies to reinforce any level of common sense that you might have concluded otherwise.

“Our job is to ask questions which may or may not lead to the conclusion that action is required,” Mr. Lew says at the conclusion of the article.

Hint to Jack Lew: The last crisis taught us that too much leverage is dangerous.

The only conclusion that this article provides – based on the numerous conversations at every alphabet soup agency that oversees some niche part of the financial sector – is that no one is yet on the same page seven years after the crisis.

Every agency says the same thing: We don’t know the risks… we need a committee… we need a study. It’s been six years.

We went to the moon in less time than it’s taking to implement Dodd Frank.

But that’s bureaucracy for you. It will take this oversight committee at least three months just to decide what color paper to print their report on when they finally conclude it.

Meanwhile, hedge funds will have moved onto some other strategy that regulators don’t understand.

"There's no justification."

Speaking of regulation, Vice President Joe Biden visited with CNBC to discuss the “carried interest” tax break for hedge fund managers. Biden said that President Obama has not been able to eliminate the tax break.

However, Biden projects that the next president will be successful.

We have heard Bernie Sanders and Hillary Clinton both support the elimination of “carried interest.”

However, Donald Trump has said before that hedge fund managers “will pay more” under his plan.

Jon Kasich is somewhere trying to get the attention of the media to try to share his plan.

But that wasn’t all Biden said… check out his response to Steve Schwarzman’s statement about carried interest and the Obama presidency just a few years ago…

“People want to make the move to a smaller and more meritocratic environment where what they say will actually impact investment decisions.”

A few M&A analysts at Morgan Stanley have been making the leap toward hedge funds.

One has to wonder if this is the beginning of a much larger trend.

“We continue to remain an advocate for more stable and sustainable approaches to serving this market."

The second act of the collapse of the Affordable Health Care Act happened today.

The largest health insurer in the country, UnitedHealth, announced plans to leave several public health insurance exchanges in just a few states next year. They’re bleeding money from the healthcare law, once again proving that centralized planning doesn’t really offer sound public policy or cost containment.

United will lose $650 million on the exchanges this year.

But hey, at least it was nice that the government gave them a lot of free money, led them help write the law, created a scenario where the Federal Reserve incentivized mergers and acquisitions, and then basically allowed all of our healthcare companies to merge and effectively become “Too Big to Fail” on their own.

This healthcare system is unsustainable…

And then, it’s government riding to the rescue, while somehow making it even more expensive.

"I think we were clear when launching the competition that we were looking for a name that would be in keeping with the mission."

Britain's Natural Environment Research Council launched a public poll last month to name a brand new polar research vessel. Members of the public could submit names and court votes using social media.

In first place, receiving four times more votes than the name to honor the young girl was…

Boaty McBoatface received nearly 125,000 votes.

Twitter… once again proving why we can’t have nice things.

Finally, this is the end of democracy, I suppose…

In second place, RRS Poppy-Mai — named after a 16-month-old girl with an incurable disease.

“Boaty McBoatface.”

However, it appears that the Natural Environment Research Council will strike that name from the public discourse. They will ultimately decide on a name at a later point.

See you tomorrow.


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