64 These 30 complex securities have been at the forefront of discussions

64 these 30 complex securities have been at the

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64 These
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30 complex securities have been at the forefront of discussions regarding the root cause of current financial market turmoil. Here lies one of the main issues that does not sit well with policymakers in Washington. Investment moguls preached the free-market gospel and pocketed unheard of amounts of money, yet when times got tough, they called for a government bailout. 65 According to Raghuram Rajan, economist at the University of Chicago Graduate School of Business and former chief economist at the IMF, “markets work if participants are at risk to both positive and negative consequences. 66 However, on the upside, financial firms insisted not to even think of regulating them, yet when things started to head south they pleaded for help. One of the main arguments for regulation floating around the halls of Congress is that if relatively unregulated entities want help from the Federal Government, then they must play by the same rules as everyone else. Policymakers advocating for tighter regulation argue that, once the turmoil calms down regulators should step up their scrutiny of the industry, demand more transparency, and require greater accountability among financiers. If investment banks have a line to the Fed in bad times, then the Fed must have authority over the investment banks in good times too. 67 With the increasing amount of institutional investment in hedge fund operations coming from sources such as pension funds, universities, charities, and endowments, there is an increasing likelihood of retail exposure to hedge fund risk. 68 What this means is that many of the people indirectly invested in hedge funds through their pension funds etc. are exposing themselves to the risks associated with hedge fund operations. Policymakers have called for greater transparency, and more restrictions on marketing
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31 activities for hedge funds, so as to limit retail exposure and ensure that hedge fund investors are limited to that breed of “sophisticated investors” that are aware of higher levels of risk for higher returns associated with hedge fund operations. Limiting systemic risk is perhaps the main argument for regulation. The extensive use of leverage and the trading of complex derivatives and illiquid assets has been a major source of concern for regulators. As we witnessed earlier, systemic risk has been at the forefront of major policy issues. In the case of the Bear calamity, the Fed’s unprecedented actions came as a direct response to containing systemic risk. Policymakers have argued that the Fed and other regulators must act to curb the exposure of the market to systemic risks and avert future turmoil. The Case Against Regulation Financial regulation has been an evolving process. Ever since the 1930’s the United States has been subject to various different changes/ updates to the regulatory framework. Hedge funds are a new breed of investment animals, and their success can be attributed to the relatively “light touch” regime under which they operate. “The last time
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