September 19, 2006
After a $6 billion dollar hedge fund blow-up today, there is quite a lot of talk about Congress regulating hedge funds. That would mean Congress would set up some new rules to follow and require some sort of oversight. Sort of like what we have now. We have rules about short selling and borrowing shares prior to shorting, and we have a system to detect those who are clearly not following these rules, yet the consequences for breaking these rules are NIL. Not only that, but you are afraid to punish the cheaters for fear of the volitility it would create. In other words, there is no downside to naked short selling and its blatant manipulation. I hope someday, a hedge fund that has participated in heavy naked short selling, gets wiped out, because the first question will be whether or not the SEC had rules in place to protect that from happening, and the answer will be "Yes, but they we allowed to do it anyway." You don't need new rules, you just need to strictly enforce the ones you have.