Can we expect government regulators to start moving against hedge funds in the wake of the Greek crisis? If they do, it won't stop things blowing up again.
The hedgies have been accused of blowing up the crisis by placing heavy bets on the Euro. Bloomberg reports that the United States is stepping up its scrutiny of hedge funds with the Department of Justice sending notices to them not to delete their records of Euro bets. The Wall Street Journal reports that funds under investigation include SAC Capital, Greenlight Capital and Soros Fund Management.
This is classic knee jerk government action and it's unlikely to succeed. For sure, the hedge funds did have a role. It's pretty simple actually – you buy swaps on Greek debt, create panic in the market and then place millions of dollars betting against the Euro before it crashes. These bets do move markets. But legally, this case will die quickly. How do you prove they actually conspired to drive down the Euro when Greece was already having problems? A Euro crash was inevitable, regardless of their bets.
It reminds me of that exchange in the movie Blood Simple by Joel and Ethan Coen:
Marty: "You know in Greece they cut off the head of the messenger who brought bad news."
Visser: "Now that don't make much sense."
Marty: "No. It just made them feel better."
As David Callaway from MarketWatch says, there isn't much regulators can do to stay ahead of the market. But what they can do is bring in rules for more transparency so that we can see what's going on. Attacking the hedge funds after the damage is done will not stop this happening again.
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