As the hedge fund industry gears up for a fight to head off new regulation from Congress, five of the top fund managers in the world journeyed to Capitol Hill to argue their case before the House Committee on Oversight and Government Reform. Hedge fund billionaires George Soros of Soros Fund Management LLC, John
Alfred Paulson of Paulson & Co., James Simons of Renaissance
Technologies LLC, Philip A. Falcone of Harbinger Capital Partners and
Kenneth C. Griffin of Citadel Investment Group LLC appeared before the
committee chaired by Rep. Henry Waxman Thursday morning.
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Waxman called the industry out on a number of issues including the
notion that with more than $2 trillion under management hedge funds may
present a systemic threat to the economy. Waxman said:
"Some experts worry that the failure of large hedge funds could pose
significant systemic risks to our financial system. We
also know that hedge funds can receive special tax breaks. The five
witnesses we will hear from today earned on average over $1 billion
last year. Yet the tax law allows them to treat the vast majority of
their earnings as capital gains. That means that at least some portions
of their earnings could be taxed at rates as low as 15%. That's a lower
tax rate than many school teachers, firefighters, or plumbers pay."
The assembled managers were also quick to defend their industry, which hemorrhaged $100 billion in redemptions last month. In his statement to the committee, Soros writes:
In view of the tremendous losses suffered by the general public, there is a real danger that excessive deregulation will be succeeded by punitive
re-regulation. That would be unfortunate because regulations are liable
to be even more deficient than the market mechanism. As I have
suggested, regulators are not only human but also bureaucratic and
susceptible to lobbying and corruption. It is to be hoped that the
reforms outlined here will preempt a regulatory overkill.
These were just the opening volleys in a fight over if or how the currently unregulated hedge funds may gain a government overseer. It is unlikely that this will be the last trip up to Capitol Hill for hedge fund
managers, since Waxman is only one of a number of powerful lawmakers targeting
them for more regulation and higher taxes. On Monday Senator Charles Schumer, D-N.Y., indicated that he'd like to see a single
regulator in the U.S. with
authority over private capital firms like
hedge funds and LBO firms.
And at The Deal's M&A Outlook 2009
conference earlier this week, Mel Schwartz, a senior partner at Grant Thornton LLP,
said that
higher taxes on carried interest -- the primary form of
compensation that managers receive -- is certainly on the table for
the next Congress. -
George White
See video and full statements from the committee hearing
See Dealscape post on SchumerSee Dealscape post on SchwartzSee all posts from M&A Outlook 2009
