SEC chief pressed over hedge funds
With stock markets jittery over troubled home loans, senators Tuesday pressed the head of the Securities and Exchange Commission on what the agency was doing about complex mortgage securities and hedge funds that invest in them.
The recent turbulence on Wall Street, with last week the worst for the Dow Jones industrial average in five years, was the backdrop as SEC Chairman Christopher Cox testified before the Senate Banking Committee. The swoon was blamed on investors’ growing concern that problems in the market for mortgages issued to riskier borrowers could spread to the broader economy.
Several committee members expressed concerns about the competitiveness of U.S. financial markets in a fast-changing global economy. Others, mostly Democrats, warned of the potential risks to the system from hedge funds and other highflying investment vehicles.
Regarding hedge funds’ lack of transparency, Cox said he thought the SEC was “increasingly getting a clearer picture of what’s going on.”
He said the agency also was grappling with how to deal with investment vehicles that manage foreign-government assets separate from countries’ official currency reserves. Projected to reach $12 trillion by 2015, such funds “are larger than all the world’s hedge funds combined” and are even less transparent, Cox said.
Cox disclosed in late June that the SEC had started investigations related to complex aggregations of debt known as collateralized debt obligations, in which hedge funds have increasingly invested. The situation took on urgency recently after two hedge funds managed by Wall Street investment firm Bear Stearns Cos. that invested in such instruments lost practically all their value.
The SEC is not the “frontline” regulator of mortgage lenders, Cox said, though it does have oversight of public companies that bundle mortgage loans into securities for sale to investors worldwide. The issue “is a real one and it is one about which the SEC is concerned,” he said.
Cox also said the SEC was devoting considerable resources to overseeing debt-rating firms such as Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. Their role in the high-risk mortgage troubles has been criticized by some lawmakers and regulators, who say the agencies failed to properly evaluate the risks of bonds backed by sub-prime mortgages. A law enacted last fall expands the SEC’s authority over the rating firms and gives the regulators a detailed look into their operations.