Hedge Fund "Carve In" for Resolution Fund Remains in House Bill as Passed

Despite the hedge fund industry’s efforts to have it removed, a carve in for hedge funds in the amount of assets a firm manages with regard to triggering its contribution to a fund to resolve failing financial firms remains in the Wall Street Reform and Consumer Protection Act, HR 4173, as passed by the House. As part of provisions allowing the winding down of systemically important financial firms, the legislation sets up a fund to assist in the winding down of these firms, thereby ending the too big too fail doctrine.

Regulators would be able to dissolve large, highly complex financial companies in an orderly and controlled manner, ensuring that shareholders and unsecured creditors, not taxpayers, would bear the losses. The legislation establishes an orderly process for the dismantling of any large failing financial company in a way that minimizes the impact to the financial system. Any costs for dismantling a failed financial company will be repaid first from the assets of the failed firm at the expense of shareholders and creditors. Any shortfall would then be covered by a dissolution fund pre-funded by large financial companies. I

With respect to the resolution fund, in a letter to House leaders, the Managed Funds Association said that firms receiving the benefits of the resolution authority should bear the responsibility for paying the costs of the authority. Systemically relevant firms are the entities that will benefit from this framework, said the MFA, and it is these firms that should be responsible for payment of the assessment. Firms that are not systemically relevant and do not receive competitive benefits, such as government guarantees or access to the Fed’s discount window, should not be required to subsidize those firms that do receive these benefits.

Even more, and conceding that hedge funds will be assessed a fee for the resolution fund, the MFA is troubled by a fee assessment for hedge funds with assets of more than $10 billion under management when the trigger for other financial firms is $50 billion under management. Far from recognizing that hedge funds had no adverse impact on the financial crisis, said the MFA, HR 4173 now ``perversely’’ singles out hedge funds for more onerous treatment without any articulated policy rationale, thereby compelling them to unfairly shoulder a disproportionate share of the proposed assessment for the resolution fund. This renders hedge funds the only market participants with either assets under management of less than $50 billion that will be required to pay an assessment. The MFA could discern no rationale for this singular treatment.

The relatively modest size and historically low leverage of hedge funds would indicate that this measure is misguided. Indeed, no hedge fund has received any taxpayer bailout funds and it is not expected that any individual one would be deemed systemically relevant.

There are broader issues with regard to the resolution authority. For example, SIFMA opposes pre-funding a fund for the resolution of systemically important firms. This fund will be $150 billion in size, noted SIFMA, three times the size of the FDIC fund at its peak, and could be used to codify the too-big-to-fail doctrine the bill seeks to end. The resolution mechanism in the legislation is designed to resolve systemically important firms, not put them into conservatorship. The creation of such a fund will significantly reduce the capital available for lending at the start of this economic recovery and may actually increase systemic risk.

.