Hedge fund manager Singer wants limits on leverage

Date: Friday, May 29, 2009
Author: Reuters.com

Aggressive government action can hurt the market, but regulators should clamp down on excessive borrowing by banks and investors to prevent another credit crisis, veteran hedge fund manager Paul Singer said at a conference.

Singer said the current "anti-capitalist" fervor, inspired by last year's market meltdown and the ongoing recession, will likely lead to increased regulation. These measures would only prolong the problem, he told some 1,200 hedge fund executives at the Ira Sohn Investment Research Conference on Wednesday.

By the same token, he observed that highly regulated banks fueled last year's market implosion because they ramped up their use or borrowed money, or leverage, for trading and investments. High levels of borrowing in a downturn can multiply losses and throw markets into chaos.

"There is one kind of regulation that will be useful and necessary and that is a global scheme of limitations on leverage," Singer said.

Such a scheme, he said would have to ferret out leverage whether it is on the balance sheet or "masked" through various off-the-books entities.

"The stark truth is it was not hedge funds that blew up the world, it was regulated entities or their affiliates," he said.

Singer's Elliott Management is one of the world's largest hedge funds at $13 billion and boasts a strong record of 14 percent annual net returns over its 32-year history. His multi-strategy fund has lost money in only two of those years.

In a private investor letter this month, Singer offered harsh criticism of an array of big government programs, including the public-private partnership designed to soak up toxic bank assets.

During his presentation -- part of an event that raises money for pediatric cancer research -- he said the U.S. government bears a lot of the blame for the two-year-old credit crisis. It pushed an easy monetary policy, encouraged people to buy houses they could not afford and allowed Fannie Mae and Freddie Mac to overexpand.

Singer said banks managed to hurt themselves without any government help by aggressively using complicated derivatives and off-balance-sheet structures that let them expand leverage and returns, while meeting regulatory standards.

"There is nothing that forced the major financial institutions to go 'hog wild,'" he said. "Limits on leverage will prevent a recurrence of this debacle."

The government also must resist the temptation to use its power in ways that could hurt the economy in the long term.

Though Singer did not mention President Barack Obama or Chrysler by name, he alluded to Obama's criticism last month of secured creditors who did not agree to a restructuring plan. Bad publicity prompted many of them to drop their opposition.

Singer took issue with how former U.S. Treasury Secretary Henry Paulson strong-armed Congress to pass his $700 billion Troubled Asset Relief Program, although it lacked many important details that subsequently drew fire from taxpayers and lawmakers.

"Using the law as mere fig leaf for the exercise of power may create short-term result that are pleasing, but it is a very bad idea for governments to create arbitrary, unfair outcomes," he said.

Singer also told his audience the market is in the midst of period of "abrupt change" and may not recover as quickly as it has since the 1940s.

"It may be a long time before solid, noninflationary, sustainable growth resumes, regardless of whether the economy has some kind of an upturn later this year," he added.

(Editing by Andre Grenon; Editing by Steve Orlofsky)