Sunday, October 5, 2008

Bretton Woods II?


Watch this Bloomberg video and listen very, very carefully (click link below):

Bloomberg video following meeting of European leaders

The message is clear, the global financial landscape is about to be radically transformed. The era of deregulation is over, only to be replaced by a new era of massive regulation on all financial markets and players:

I quote French President Nicolas Sarkozy:

"Each government will act according to its own methods and its own means but in a coordinated manner with the other European states"

"We call for an international summit by the states most affected for a refoundation of the international financial system"

"All players in financial markets must be regulated and supervised, not just commercial banks. In practice that means credit rating agencies, investment banks and hedge funds."

"Prudential rules must be revised to prevent speculative bubbles and liquidity crises"

"Executive compensation must be reworked to ensure that compensation doesn't lead to undue risk and a purely short-term outlook"
"Accounting methods and prudential rules must be established and coordinated as a whole"

"In addition, in times of crisis, a task force can be created between supervisors, central banks and finance ministers."

"We want a new world to come out of this. We want to set up the basis for a capitalism of entrepreneurs, not speculators.''

What does all this mean for pension funds investing in non-transparent hedge funds, private equity funds, real estate funds, as well as non-regulated OTC markets?

Get ready for massive regulation, the likes of which you have never seen in your lifetime.

As I told my buddy who sent me this video, politicians will regulate everybody because they will focus on saving their asses before saving the asses of any rich hedge fund or private equity fund manager.

My buddy replied: "Now you are thinking like a politician. These guys are looking at their 401Ks, looking at the global financial system crumbling and spilling over into the real economy and they want to put an end to non-transparency, executive greed, accounting shenanigans and regulate everything."

The party in alternative investments is over.

I also sincerely hope that political leaders around the world will begin heavily regulating some public pension funds who are equally non-transparent and who have abused the system in order to pay their top brass obscene compensation that they did not deserve (using bogus benchmarks, typically in alternative asset classes that they heavily invested in over the last eight years).

If such a commission is established, I will submit my resume and welcome the opportunity to produce a report that will put an end to public pension fund abuses that have gone on for far too long.

***Update:

European and Asian markets plunged on fears the crisis is deepening. Moreover, money-market rates climbed worldwide as banks hoarded cash on speculation the seizure in credit markets is deepening and may prompt more financial institutions to collapse.

In Britain, economists say interest rates will drop to a new 50-year low in the coming months, as the Bank of England tries to head off a serious recession. The Bank’s monetary policy committee (MPC) is expected to start the process by cutting rates this week.

The Securities and Exchange Commission said late Friday that its short-selling ban will expire just before midnight on Wednesday.

The Associated Press reports that with the passage of the $700 billion rescue package, the financial industry will face greater congressional scrutiny in coming weeks and months.

Finally, if you did not see it, CBS News' 60 Minutes had an excellent piece on Wall Street's shadow market. Importantly, pay attention as the head of ISDA gets grilled on the credit default swap (CDS) market. It kind of makes you wonder why some public pension funds sold CDS, which is insurance on credit default obligations.

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