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Billionaire financier George Soros on Thursday called on
President-elect Barack Obama to do more to regulate hedge funds and to tax
hedge fund managers at higher rates.
Soros was one of five money managers, each earning an
average of $1 billion in 2007, who testified before the House Committee on
Oversight and Government Reform.
“Since [financial markets] are prone to create asset
bubbles, regulators such as the Fed, the Treasury, and the SEC must accept
responsibility from preventing bubbles from growing too big,” Soros testified.
“Until now financial authorities have explicitly rejected that responsibility.”
Soros suggested that the government tighten margin and
minimum-capital requirements so that it would be more difficult for financial
institutions to overextend their assets. The financial markets fell into
trouble earlier this year when several of the biggest players, such as
now-defunct Lehman Brothers, accumulated too much debt, which snowballed when
the housing market suffered a downturn.
Soros also called for the government to ensure greater
transparency of financial instruments to give investors a better idea of how
much debt is attached to various securities. Investors lost billions in recent
months, often because they bought securities so complicated that the underlying
asset value became obscured.
“[F]inancial engineering must also be regulated and new
products must be registered and approved by the appropriate authorities before
they can be used,” said Soros. “Such regulation should be a high priority of
the new Obama administration.”
Lawmakers were at times awed by their wealthy witnesses
but also sometimes showed irritation at the money managers, whom some critics
have faulted for short-selling the market during its recent plunge.
“This is the wealthiest panel to testify in the history
of Congress,” Rep. Jim Cooper (D-Tenn.) remarked before the hearing.
Republican Rep. Darrell Issa (Calif.) told Soros, who has
spent tens of millions to support liberal causes and the Democratic Party, that
it was nice to finally meet.
Several lawmakers rapped the witnesses for speaking too
softly or taking too much time to answer questions.
“You’re mumbling,” Rep. Christopher Shays (R-Conn.) said
in a sharp admonition to James Simon, the president of Renaissance
Technologies.
Kenneth Griffin, president and CEO of Citadel Investment
Group, was the least receptive of greater government regulation or higher
taxation of the 20 percent share that hedge fund managers usually reap from
investment profits.
“I believe and have said before that our financial
markets work best when they are competitive, fair, transparent and stable,” he
testified. “Proper regulation is critical but the best regulation is created
with an eye toward unleashing opportunities, not limiting possibilities.”
At one point Griffin and Rep. John Tierney (D) of
Massachusetts got into a testy exchange over tax rates on managers' take on
profits, which is often called carried interest.
Griffin compared the 20 percent to the profits received
by an employee, such as a chef, who benefited when a business he worked to
build was finally sold.
But Tierney cautioned Griffin from carrying the analogy
too far, noting that a chef’s entire income is taxed at regular rates and that
a hedge fund manager's income is compensation for management activities more
than a return on his or her own investment.
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