Termite Infestations in the Financial System

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Should private equity shops be regulated by the SEC? Felix Salmon listens to a debate between two Democrats and comes away unimpressed with both of them:

The main reason for PE shops to be regulated, of course, has very little to do with fiduciary responsibility, and everything to do with the fact that leverage is a systemically-dangerous thing, and regulators need to know where it is and how it’s being put to use. But it can be hard to explain systemic tail risk to the kind of people who only really understand the meaning of a pie chart when they bake an actual pie.

Precisely. In fact, I’d go further: even if it were true that private equity funds don’t generally operate with abusive levels of leverage today, the fact remains that Wall Street boffins are always on the lookout for new ways to overleverage themselves. If banks and hedge funds are regulated but PE funds aren’t, then eventually some bright boy will figure out a way to leverage a PE fund at 50:1 while still making it look like it’s an ordinary equity shop with modest leverage. The only way to have even an outside chance of preventing this is to regulate any entity with a substantial amount of money — and that most definitely includes PE funds. If they keep their leverage modest, the regulation will be light and little harm is done. But if they start to go overboard because someone figures out a new angle that no one’s ever thought of before — and you know someone will eventually — a regulator who’s already familiar with the operation has at least a fighting chance of catching it before it blows up the world.

Leverage is like a termite infestation: it swarms anywhere there’s food, but you hardly even notice it’s there until things get out of hand and your house starts to fall down. Substitute “money” for “food” and “the entire global economy” for “your house,” and that’s leverage. Constant vigilance is the only defense.

Having said that, though, I’d like to defend the practice of baking pies to understand the meaning of pie charts. It sounds like a delicious alternative to reading New York Times op-eds.

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is the first thing despots go after. An unwavering commitment to it is probably what draws you to Mother Jones' journalism. And as we're seeing in the US and the world around, authoritarians seek to poison the discourse and the way we relate to each other because they can't stand people coming together around a shared sense of the truth—it's a huge threat to them.

Which is also a pretty great way to describe Mother Jones' mission: People coming together around the truth to hold power accountable.

And right now, we need to raise about $400,000 from our online readers over the next two months to hit our annual goal and make good on that mission. Read more about the information war we find ourselves in and how people-powered, independent reporting can and must rise to the challenge—and please support our team's truth-telling journalism with a donation if you can right now.

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