Hedge fund regulation protects banks, big hedge funds

One reason Big Business often supports bigger government is the tendency of regulation to disproportionately burden smaller businesses. Wal-Mart can afford an employer mandate in health insurance, but Mom n Pop can’t. Toy inspection requirements weigh down more heavily on a craftsman than on Mattel.

Today, we’re seeing the same thing with hedge funds, where past regulation proposals seemed aimed at protecting banks from hedge funds, and current ones seem aimed at protecting big hedge funds from smaller ones.

At CNBC.com, John Carney (my brother) quotes University of Illinois law professor Larry Ribstein on the previous effort by the SEC to regulate hedge funds:

Indeed, the rule seemed mainly aimed at protecting banks and big funds from the competitive threat represented by hedge funds rather than targeting a need for investor protection.

The whole history of hedge-fund regulation — and the increasing closeness of hedge funds and government (especially Chuck Schumer) — is worth studying. You can start with this New York Times piece from the first weeks of a Democratic Congress. Then see what happened to Democratic fundraising from hedge funds over that summer. And cap it off with Kim Strassel’s expert take on the picture.

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