Steel on hedge funds

I was with Professor B at a Manhattan Institute event yesterday. Steve, Nicole Gelinas, the Manhattan Institute’s Jim Copland and I discussed SOX.  There was another panel, with Christine Edwards, Michael Perino, Walter Olson and Peter Wallison, discussing litigation.

I had to duck out to catch a flight before the lunch speech by Treasury Undersecretary Robert Steel. Sorry I missed it because, based on this Bloomberg report, it sounded good:

Robert Steel, the U.S. Treasury's top finance official, said he opposes stricter regulation of hedge funds because it would increase risks by suggesting the government has given their investments an "all-clear.'' Steel, the Treasury undersecretary for domestic finance, also said it would be costly and impossible to train enough people to keep tabs on some 8,000 hedge funds. "I don't like the moral hazard of communicating a government all-clear,'' Steel said at a conference hosted by the Manhattan Institute in New York today. The risk is that regulation "communicates confidence in a product that is riskier than normal investors should get involved in,'' he said.

Sounds right. In fact, I made a similar point about SOX in my initial SOX article (at 52-53 in the published version, footnotes omitted):

[E]ven if lack of confidence is keeping investors out of the market, it is not clear that regulation should bring them back in unless it actually justifies greater confidence. The Sarbanes-Oxley Act may justify little confidence because it makes only incremental changes in prior law. Corporate frauds arguably were facilitated because there was too much investor confidence, as indicated by investors' willingness to ignore what the market knew about questionable accounting and to not question firms' extravagant claims about unproven business plans. Overselling regulation might perpetuate this misjudgment and mislead investors back into the same complacency that contributed to the recent frauds.