That's the word from the Washington Post. The Post reported that the Fed is seeking to structure its rules in a way that facilitates investment from hedge and equity funds. The only comment on the merits of this proposal comes from Randal Quarles, a managing director of the Carlyle Group, a private equity fund. Mr. Quarles is quoted as saying that, "Banks have a tremendous need for capital right now and it's in everyone's interest for the Fed to help facilitate the flow of capital into the industry, including from private equity." Observers who were not surprised by the collapse of the housing bubble and the crisis in the banking system (and who don't have a direct material stake in the Fed's policy) might have told Post readers that many of the current problems in the credit market stem from a failure to maintain transparent arms length relationships. For example, the bond-rating agencies were paid by the companies whose bonds they rated. Similarly, Citigroup created numerous Structured Investment Vehicles (SIVs), corporate entities whose legal status was unclear. These SIVs contained tens of billions of dollars in assets and liabilities. Since we are seeing the fallout of a large set of dubious, if not illegal, practices in the financial sector, it might be a very bad time to adopt regulations that will make it easier for secretive private equity and hedge funds to play a larger role in the sector. It may well be better to let failed institutions collapse and then to start over with clean books, after their incompetent and/or corrupt management has been removed.
--Dean Baker