More SuperHank

Back in July, a federal court smacked down the SEC's ham-handed attempt to regulate hedge funds. The legal reasoning of the verdict was apparently so unassailable that the SEC turned tail and chose not to appeal. The momentum for regulation has now shifted to the Great Sausage Factory, where the pro-regulatory SEC has thrown the issue. Naturally, Congress is itching to regulate (or if you are super cynical, itching to threaten to regulate hedge funds but would be happy to lose enthusiasm if campaign contributions just happen to be made...) and the Amaranth blowup provides momentum to the forces advocating regulation. But Donny Baseball has it on good authority that Treasury Secretary Paulson is working to get cooler heads to prevail, just as he did by quieting Sens. Schumer and Graham's tariff mania. (Not that hedge fund regulation is on a par with protectionist tariffs in terms of its potential damage to the economy, it isn't even close. Still though, hedge funds are a source of efficiency in our capital markets, and why attack a source of efficiency for no good reason?)

There isn't compelling evidence that Amaranth's woes reveal systematic risk, and I'm sure that is what Paulson is telling the itchy Senators and House Representatives that inquire of his opinion. In fact the prevalence of third parties willing to swoop in and assume Amaranth's busted trades would argue that the proliferation of hedge funds and other alternative investment vehicles can be viewed as a positive. The expanded and increasingly diversified range of asset class and risk/reward profiles represented by thousands of new hedge funds exploiting ever finer niches means deeper and broader liquidity across the capital markets. This is not to say that there are no risks posed by irresponsible hedge funds, but like any other industry the responsible players far outnumber the irresponsible players and over time the irresponsible players tend to get washed out. You can't regulate away the risk of doing business with scummy, greedy and/or stupid people.

So, not as big or as visible a victory as the Schumer/Graham thing, but this is further evidence that Paulson is doing laudable legwork in DC keeping bad ideas from gaining traction. We are lucky to have him, cause man are we gonna need him if we have to face the horror of the dreaded seven words.