Wednesday, May 6, 2009

Not Everyone in Washington Believes Hedge Funds are Evil

Our Government tends towards, what I consider, excessive partisanship; so I probably shouldn't be surprised that a Republican Congressman would come out with a statement disagreeing with the President. Seldom, however, are such statements made as intelligently as this one issued on Monday by Congressman Scott Garrett (R, NJ 5th District).

Garrett Statement on Hedge Funds
Washington, May 4

Rep. Scott Garrett (R-NJ) issued the following statement regarding President Obama’s statements on hedge funds:

“I am troubled by President Obama’s statements that single out a certain class of Chrysler’s creditors. The president’s comments display complete disregard for the rule of law, as well as the practices which govern our bankruptcy code.

“The actions of the hedge fund managers in exercising their fiduciary responsibilities to their investors is not the reason why Chrysler is in jeopardy, and their acceptance of the government’s offer would not have guaranteed the company’s success. I think the president should think about who he's attacking when he makes these statements. Many of those invested in these funds were seniors, school teachers, and others whose pension funds are an important component in maintaining a healthy standard of living throughout their retirement.

“This demonization of investors comes at the same time when the administration’s Treasury Department is begging for participation from the private sector in its Public-Private Investment Program. The president’s comments beg the question: why would private investors enter into a partnership with the government when there is the future possibility of being publicly scolded for making business decisions the government dislikes?

“It’s time for the government to stop interfering in the marketplace. It simply creates greater uncertainty, facilitates the choosing of winners and losers, and prevents private capital from entering the marketplace.”

Hopefully, others in Washington, including Democrats, will stop the populist rhetoric and work towards solutions that make sense. Congress passed a Bankruptcy Code in 1978, and has made several changes to it over the last few decades. I believe it is inappropriate to attempt to toss the laws aside to force the realization of a particular goal.

One of the major reasons for the success of the United States economy over the years is the legal system that provides its backbone. Participants in our markets have greater certainty and less risk when transacting in the United States because of the clarity our legal system provides. These participants, whether they be domestic investors, workers, or foreign interests make their business decisions based on our laws and the expectation that they will be enforced by the Government.

Failure of our the Government to act in accordance with our laws could have a much larger impact than simply changing local lending policies. That, together with demonizing the managers who invest trillions in markets on behalf of pension funds, insurance companies, charities, and other institutions - as well as the wealthy - could very easily change the role of the US in the world economy.

The world that we live in is still, significantly, Dollar centric. While the Euro and Yen have made inroads, the Dollar is still considered the primary currency for world trade.

New York took over from London as the center of the world's markets during the 20th century. Tokyo, Hong Kong, Singapore, and London (along with others) are extremely important markets today, but New York (and, for commodities, Chicago) is still the market that the world looks to.

Other countries are constantly making changes to tax law, investment regulation, and assorted other areas in attempts to attract capital (and become a market center or increase the importance of their markets). If our laws and Government start to become hostile to capitalism, then the management of those trillions could easily move to another, more hospitable, location. This would be a significant loss, both directly and indirectly through the effects on the availability and cost of capital.

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