ALEX CHADWICK, host:

This is Day to Day. I'm Alex Chadwick.

MADELEINE BRAND, host:

I'm Madeleine Brand. The government made some changes this week in how it regulates those ultra-secretive hedge funds. Well, actually, they aren't regulated, and critics say increased accountability could have prevented the subprime mortgage mess we're in now.

CHADWICK: Here to explain how the government keeps up with the so-called shadow markets is Michael Greenberger. He's a professor of law at the University of Maryland, and he's a former member of the Commodity Futures Trading Commission. Michael, welcome to the program.

Professor MICHAEL GREENBERGER (Law, University of Maryland): Happy to be here.

CHADWICK: Let me just begin here. Define a hedge fund for us. We read about it almost every day in the papers, but I don't personally invest in one.

Prof. GREENBERGER: Well, a hedge fund is an investment collection of money from wealthy people. The organizers of the fund solicit very wealthy people, very wealthy institutions to give them their money and then it's orchestrated in a way that prevents it from being regulated. They evade regulatory laws, and then they usually - many of them invest in instruments that aren't regulated. So the reason people don't know about it is that these funds purposely try and keep themselves below the public and the regulator's radar screen.

CHADWICK: OK, one more background question if I may. We read about these funds a lot, and especially how much money people who run them make. And we read well, there's something that they have to do with this subprime mortgage crisis. What is their role in the subprime mortgage crisis?

Mr. GREENBERGER: Well, as I said, a lot of hedge funds engage in very complicated, tricky, complex what are called derivatives transactions, which simply put are bets the direction of various economic circumstances are going to take. Many of these hedge funds place bets either that subprime mortgages would be paid off or that they wouldn't be paid off. The hedge funds that are closing down and are in trouble are those that bet that people would pay off their subprime loans. They made lots of bets. They didn't have the capital to cover it, that's why you see the rescue of Bear Stearns.

You're also reading about people who made billions and billions of dollars last year. Many of those are hedge fund owners who bet that they wouldn't be paid off. So every time somebody is foreclosed upon and kicked out of their house and is on the street, there is a hedge fund owner out there who has made a lot of money off that. The one famous one is a man named Paulson, no relation to the secretary of the treasury, who made three billion dollars last year, much of it betting that people would be kicked out of their houses.

CHADWICK: So, the reason that we called you, Michael Greenberger, is that this week we read the U.S. Treasury Department has announced voluntary guidelines for hedge funds to start following. What are these guidelines, and what are they going to do to help us better understand these things?

Mr. GREENBERGER: Well, the short answer is that they are going to do nothing. Also the Treasury Department didn't issue these guidelines. The Treasury Department went out and for one important set of the guidelines put together a committee of hedge fund owners to decide how they would regulate themselves. And what they announced yesterday that they had established, quote, "best practices," close quote, that are voluntary, cannot be enforced, that will make themselves more transparent to the public. They're completely unenforceable. There were only 10 hedge funds involved in the writing of this - there are 8,000 of them. It's sort of a joke on the American public. The Treasury didn't do it. They put together a committee of hedge fund owners. They did it, they wrote unenforceable guidelines. If followed they might be helpful. I'm very skeptical that those ten hedge fund owners represent the other 7,990, and that those things will be meaningfully followed. It's designed to make the American public think something is happening when nothing is happening, and I can assure you the hedge fund industry is laughing up its sleeves at the headlines that this is somehow a regulation.

CHADWICK: These hedge funds, as you say, they are managed by people who did make money betting against homeowners. Is that something that we really could prevent, and is it something we should prevent?

Mr. GREENBERGER: Well, look, by this report they say there are 8,000 hedge funds controlling trillions of dollars. Of course because they are completely opaque, nobody knows how many hedge funds there are, or how much they control. But even assuming those facts are right are you going to allow people who have that influence on the American economy to write their own regulations for themselves that aren't enforceable?

We would never say that about banks. We would never tell the banks we're going to drop our whole regulatory structure and just let you guys get together and decide how you're going to be regulated. It's a calamity. We are in the crisis we are in now because of the timidity of the Bush administration. And in all candor even those who are in charge of the relevant committees in Congress, that is to say members of the Democratic Party, and I'm afraid the reason is that these people make very large contributions. And if you can run a little shell game and say we have regulations that were written by the hedge funds themselves that are not enforceable so everybody can sleep at night, maybe you can get away with this. But unless we get serious about these problems and worry about the public interest rather than the hedge fund's interest, we are on a slippery slope that is going to take all of us into very treacherous economic circumstances.

CHADWICK: You sound outraged by this. I'll note that we saw this story across on the newswires a couple of days ago, these regulations coming out. There's been barely a blip about this in the papers or on news broadcasts since then.

Mr. GREENBERGER: Well, you know, I go back to the analogy of during the Great Depression most Americans didn't understand the stock market or banks and how they brought the Great Depression about. But Franklin Roosevelt made it a point to explain those things to the American people so that they would understand what the securities laws were, et cetera, et cetera. Certainly this president, this secretary of the treasury, this chair of the Fed has no interest in informing the American people about what the causes of the problems are. What surprises me is the very bright and aggressive chairs from the Democratic Party of the relevant committees are also asleep at the switch. We are in a crisis but our legislators and our executive branch members are not treating it as such. We're already paying four dollars in gasoline. And that too if you read articles people will point to hedge funds, trading energy futures products in dark markets and driving the price of crude oil, natural gas, heating oil, and gasoline way above what supply and demand would dictate, and our government is asleep at the switch.

CHADWICK: Michael Greenberger, a professor of law at the University of Maryland, a former regulatory director at the Commodity Futures Trading Commission on the very lately regulated hedge fund decisions this week. Michael Greenberger, thank you.

Mr. GREENBERGER: You're welcome.

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