Among the many regulatory headaches created by the Dodd-Frank financial reforms, consider just one. Should the government fsoc it to the hedge funds?
Fsoc-ing is a term with which we are doomed to grow familiar. It derives from one offspring of the new law which is to issue hundreds of new rules, each one a Rubik's cube of moving pieces: the Financial Stability Oversight Council, which will be set up to keep tabs on all systemically risky institutions. Until now, no single regulator has enjoyed such a broad mandate, with the result that crises have often germinated outside the traditional regulatory net – in insurance subsidiaries, over-the-counter derivatives and so on. In future, the FSOC will have the right to shine its light on whatever looks risky.
It sounds good. But how should the FSOC decide whom to fsoc? Hedge funds seem an obvious candidate – they are growing like topsy; they are opaque; and they are only lightly regulated. But the history of hedge funds teaches two lessons. Only a tiny proportion deserves regulatory attention. And identifying these risky exceptions is an inexact science.