The government has to demand accountability and frugality from those receiving our tax dollars as loans or equity, such as the automakers and financial institutions. And, we need to make changes to Wall Street to lower the chance the excessive risk taking can bring down our economy again. My first choice for Wall Street changes is more transparancy. I
f the volume and nature of the credit default swaps on the balance sheets of financial institutions was more widely known, perhaps that would have increased the pressure on such institutions to lower their exposure or ensure that they have more capital to back up their risks. However, it's clear that there was a regulatory lapse here since the credit default swaps should have been considered insurance, which would have demanded the right capital structure.
As I read on PE Hub today, a bill introduced in the Senate would require additional disclosure from private equity and venture capital funds, in addition to hedge funds. Ropes and Gray has issued a preliminary legal opinion on the bill.
I think that this type of broad regulation goes too far. I am all in favor of requiring disclosure of funds with excessive leverage or derivative trading. Of course, any fund with public investments is already required by the SEC to meet various disclosure standards. Leverage and derivative (and credit default swap) trading can cause a lot of damage if done to excess because a small amount of capital can lead to huge losses (or gains). These types of investments shouldn't be eliminated, of course. They have a place. But, we should require more transparency so that the market will help limit the risks that are being taken.
However, 'long' investors who own vanilla equities (public or private) are only risking their own money. They can make money when the equities go up. And, they can lose the money they invested when they go down. Without leverage, they have all of their investments backed up with capital. So, I'd be in favor of requiring VC or PE funds to inform their investors of the amount of leverage they are employing (they probably already do that). But, I don't see why we need more disclosure of venture firms who are investing in private companies alongside other qualified investors.
Although probably harmless, what good will it do to require VC and PE firms to list their investors? Or, to publicly list the value of their funds? These funds are not publicly traded, so the public doesn't really gain with this information. I am very wary of the SEC pushing regulation into areas that don't need it. We need regulation to protect the public good. But, we don't need regulation for regulation's sake.