Treasury Department Meddling In Venture Capital For No Good Reason

from the not-all-private-equity-is-the-same dept

The Wall Street Journal has an important editorial pointing out why it's a mistake for Treasury Secretary Timothy Geither to include venture capital funds in his new regulatory plan to deal with "systemic risk." There's no doubt that highly leveraged hedge funds contributed greatly to the current economic situation creating a level of systemic risk that we're only just coming to terms with. However, it's not at all clear what venture capital has to do with that. Yes, both are unregulated funds of private equity, but that's about where the similarities end. Venture capital relies very little on debt, and is usually a way for wealthy investors to bet money more long term on new innovations, rather than the sort of short-term speculation that is more common with hedge funds.

Yet, for some reason, they're being lumped together and will have the same regulatory burdens. This could significantly hinder venture capitalists, similar to some other recent regulatory changes, creating unnecessary and wasteful burdens that are more for show than any actual effort to protect the economy. As the editorial points out: we've already stress tested the venture capital world, when the dot com bubble burst, it didn't cause any systemic risk. No banks failed because of the bubble bursting. So why is the government suddenly acting like VCs are a threat to the widespread economy now?
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Filed Under: economy, systemic risk, timothy geithner, treasury, venture capital


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  1. identicon
    SilverSliver99, 10 Apr 2009 @ 8:10am

    Well actually the hedge Funds (Venture capitalists) were a huge cause of a lot of our issues. For one thing they did a ton of naked short selling, thats where you short a stock without first borrowing the stock to short. This is against the rules

    Then they also bought credit default swaps. Basically this is insurance against a stock going down. This was meant for insurance on stock you own, but you can take it out on stock you don't own.

    So what does this add up to, well
    Venture Fund 1 takes out Credit default swaps on company A. Then proceeds to Naked short the stock to drive it down. This causes panic and others sell as well. Now the company's net value goes down and they are in the red. So they start going bankrupt and need gov. help. Meanwhile the insurer is paying through the nose to ccover the credit default swaps.

    Now the venture fund makesmoney from there naked short and cash from the credit default swap. All because they illegally drove a companies stock into the ground.

    Who pays, we pay.

    Still think it's tragic the treasury is meddling? I don't

    Venture Fund 1 takes out cred

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