Spare a thought for the poor trees that will fall victim to the latest bit of regulatory theater.
New rules implemented under Dodd-Frank will now require “private funds”, i.e. hedge funds, private equity funds and liquidity funds to report their most intimate details to the SEC. They will do so using a 42-page form PF. Small investment advisers will have to report annually, large ones will have to dish the goods on a quarterly basis. BusinessWeek describes some of the info that Form PF requires:
Among the queries: What are your long and short positions on corporate bonds issued by financial institutions? How about credit-default swaps, both single-name and exotic? Crude oil? Gold? What is the geographical breakdown of your investments? Who do you trade with? If investors wanted to, how quickly could they remove their money? There is even space for firms to add detail and explanation to their answers.
Wow, what a great idea. Not.
Of course, the regulators mean well. Having all of this information sounds great, in theory. However, what are regulators actually going to do with all of this data? How are they going to the information off the forms and into a format that’s actually useful? What will be their process for analyzing it? What methods will they use to compare data across firms? How are they going to draw any useful conclusions that will allow them to spot and nip a problem in the bud, as opposed to waiting until after it has blown up? In other words, what’s the plan?
Consider some recent history that should give pause.
The London Whale made big waves when a series of gigantic, risky derivatives trades blew up earlier this year and cost JPMorgan Chase over $5.8 billion in losses. The question on everyone’s lips (including mine) was, “How on earth could Jamie Dimon not know what was going on?” Yet Lisa Pollack of FT Alphaville pointed out that regulators had access to data that, had they looked at it, would have shown very clearly that something fishy was going on:
The question going on around and around our heads is: how does the regulator miss a bank seemingly corner a market? If not the OCC, then why not another regulator even?
Here’s one of the graphs Pollack refers to, with more commentary:
We told you this could have been spotted. More bluntly: when risk on a single credit derivative index doubles like this in a relatively short period of time, does it maybe make sense to log into the regulatory portal of DTCC [the world's largest securities clearance and settlement organization] to see if the exposure is overly concentrated in a single bank? Hmmm?
Regulators already have access to a wealth of raw data, not to mention the occasional on-a-silver-platter whistleblower packages from the likes of Harry Markopoulos. Time and again we’ve seen that the regulators don’t know what to do with the reams of data they already have. So what’s the point of giving them more with Dodd-Frank’s Form PF? This may be worse than doing nothing, for it lulls us into a false sense of security.
It’s time to get serious about regulating our out-of-control financial system, and that means rethinking it entirely, not piling more data on top of the same broken oversight structure. What do you think about Form PF?