Institutional Investor's Alpha Magazine - October 2007 - (Page 28)

Robert Steel before the market turbulence, and that hasn’t changed. We are going to do a thorough job and be vigilant, with a focus on investor protection and systemic risk. Our goal was to strengthen market discipline and develop principles that could be brought to life in best practices and also to work with regulators around the world. How does what you’re trying to do mesh with what regulators outside the U.S. are doing? stantial progress in counterparty risk management. In addition, market discipline has been strengthened by the institutionalization of hedge funds. What we are learning now is that we have to keep improving our understanding, and we need to be vigilant about that. Secretary Paulson has said that the PWG will be looking at rating agencies and securitization and other areas. Regarding the recent problem with subprime lending, is there a risk that the government could do too much? “Our goal was to develop principles that could be brought to life in best practices.” What we are proposing is not discordant with what others are saying elsewhere. Maybe not exactly the same, but directionally the same. We look forward to working with them, conversing with them and getting an idea of what best practices are around the world. We are going to develop what we think is right with our best-practices group. And they will be connected to other groups. The idea is that there will be consonance. What about transparency? Our investor committee is the logical place to address and develop — ROBERT STEEL best practices for what that should TREASURY UNDERSECRETARY be. If they don’t get the disclosure with which they are comfortable, they shouldn’t invest. That’s just it. There are various levels of disclosure, and we need to make sure it is meaningful. The investor committee — these are the experts — should give us a clear picture of what they think the right disclosure level should be. With regard to systemic risk, you already get a good deal of visibility and transparency via regulated entities like banks and prime brokers. Institutions that lend money to hedge funds are all regulated and offer complete transparency to their regulators. The banks and brokerage ﬁrms that ﬁnance hedge funds are regulated entities, and the regulators have a clear line of sight to them. But there is more to be done. But many would argue that the recent instability in the markets can be traced to hedge funds. I think our goal is to provide a response proportional to the issue. When people are faced with a rising number of foreclosures or personal challenges with regards to residential real estate, we want to be responsive. We sought a market-oriented response to focus on servicers and lenders and encourage the market to work to the very best of its ability. This is not about investors or lenders. This is about homeowners. Investors and lenders should recognize the reality of the marketplace, and borrowers should beneﬁt from that leadership. I think that the secretary is a very market-oriented person, and we are trying to use techniques here that would encourage the market to work better. Getting the balance right is a challenge, but this is our plan, and we think it is proportional and appropriate to the situation. What about other areas of the alternative-asset business not so well understood, such as prime brokerage? Could we see problems there? Prime brokers are in regulated entities. The SEC, or the Fed, or the Ofﬁce of the Comptroller of the Currency has a line of sight. Prime brokers are in commercial banks or securities ﬁrms and have a central regulator that has a line of sight into their business. Regulators can go right in to the prime brokers and securities lending businesses and make sure they are managed as they should be. That’s the comfort I am given on the issue of systemic risk. A large commercial bank loans money to a hedge fund. The commercial bank is regulated. The regulators can look at everything that’s in the commercial bank; they can see directly into the regulated institution and therefore indirectly into the private pools of capital. You seem to be enjoying the move from Wall Street to Washington. Do you like the challenge? I am not sure that’s how I would start the analysis. Whether it was the mortgage market or whether it was large regulated ﬁnancial institutions, I don’t see hedge funds as being the dry tinder. If there were challenges in the mortgage markets, it didn’t matter whether the mortgages were held on the balance sheets of banks, hedge funds, mutual funds or money market funds. Mortgages and securitized assets were the problem, not where they were owned. It has been almost a decade since the near collapse of Long-Term Capital Management. Are we better prepared now to deal with such situations? Absolutely. Creditors and counterparties have made sub28 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2007 First of all, it is a privilege. We have a great country, and the economy is working well. I have had great mentors with lots of market experience. If I can apply the things I learned in the past to this current position, that is the right way to show appreciation to all the people who helped me. Secretary Paulson is someone I have known for 30 years, and we are comfortable with each other. If I can serve the secretary and the president, that is a great privilege. It is a bit intimidating to have the responsibility, but we are doing our best. The challenging events require people to be focused and do their best.

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2007

Institutional Investor's Alpha Magazine - October 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Applied Knowledge The Good Guys: Autism Advocate Interview: Nerves of Steel Cover Story: Ivy League Education Alpha Awards: Top Service Providers: Trying Times Strategies: Passage to India Profile: The Oracle of Irvine Alpha Bytes: Futurama Research Center: Funds of Funds 50 Unhedged: Commentary: Crisis? What Crisis?

Institutional Investor's Alpha Magazine - October 2007

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