Cerberus's Snow Says `Lighter' Regulation Best for Hedge Funds

Date: Tuesday, October 31, 2006
Author: Kevin Carmichael, Bloomberg.com

Oct. 31 (Bloomberg) -- John Snow, the former U.S. Treasury secretary named chairman of Cerberus Capital Management LP this month, said investors, not policy makers, are the best regulators of hedge funds.

Snow, who left George W. Bush's administration in June after 3 1/2 years, said he came to favor a ``lighter'' touch for hedge funds because the $1.3 trillion industry was too big for the government to monitor effectively.

``The real policing of these pools of capital are the investors,'' Snow said yesterday in his first interview since joining New York-based Cerberus. Any government promise to increase scrutiny would create ``a real risk of moral hazard that implies, `Don't worry. Now the government is watching over you and there aren't any problems.'''

His comments come as pressure mounts to regulate the industry after the collapse last month of Amaranth Advisors LLC. The Greenwich, Connecticut-based firm lost $6.6 billion in a few weeks with wrong-way bets on energy prices, the biggest meltdown ever at a hedge fund.

Snow joins Federal Reserve Chairman Ben S. Bernanke in defending the government's current approach to hedge funds, loosely regulated private pools of capital that allow managers to participate substantially in the gains of the money invested. The funds, aimed mostly at wealthy and sophisticated investors, have provided needed liquidity for capital markets, Snow said.

Grassley's Demands

Senate Finance Committee Chairman Charles Grassley, an Iowa Republican, in an Oct. 16 letter told Snow's replacement, Henry Paulson, that hedge funds pose too big a risk to the U.S. pension system, and asked the Treasury to find ways to boost transparency in the funds.

At the same time, the Securities and Exchange Commission is focused on insider trading by hedge funds ahead of corporate merger announcements, Chairman Christopher Cox said on Oct. 18. Paulson said in an interview last week that regulators need to find out if ``there is sufficient transparency'' at hedge funds and whether there is ``enough liquidity in the system.''

A SEC rule that tightened oversight of the industry was struck down by a federal appeals court in June, leaving the agency without the power to conduct random inspections of many funds.

Snow, 67, said he was the first to initiate discussions about hedge funds at the President's Working Group on Financial Markets, a group that includes the Fed, the head of the SEC and other regulators. The Treasury, reacting to the proliferation of hedge funds, also started an examination of their impact on financial markets under Snow's tenure.

Hedge funds attracted $44.5 billion from wealthy investors and institutions in the past three months, the most in one quarter since at least 2003. Net deposits beat the previous record of $42.1 billion in April through June, according to Hedge Fund Research Inc. in Chicago.

`Bigger Risk'

``These pools of capital, and how best they should be overseen, is a fair question,'' Snow said in the telephone interview from New York. ``The far bigger risk is overreaching regulation.''

Cerberus, founded in 1992 by Chief Executive Officer Stephen Feinberg and William Richter, manages $16.5 billion in hedge funds and private equity. The firm participated this year in buyouts of Albertson's Inc., a U.S. grocery chain, and General Motors Corp.'s finance unit.

Snow, who had amassed personal wealth of about $100 million when he joined the Bush administration in February 2003, said joining a private equity fund seemed a natural evolution for a career that spanned academics, industry and government.

``Being part of an organization that is carefully and prudently making capital available is something that seems to me to further objectives I've longer cared about,'' said Snow, who has a doctoral degree in economics from the University of Virginia.

Snow, the former chief executive of railroad CSX Corp., said he would take on a ``leadership'' role in the company, assisting with ``broad'' strategic decisions. He said he would also ``help position'' Cerberus in Europe and Asia.

``The work I do will complement others,'' Snow said, declining to be more specific about companies or industries the firm is targeting.

To contact the reporter on this story: Kevin Carmichael in New York at kcarmichael@bloomberg.net .