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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Best guess is to avoid loopholes
Of course, that assumes the laws are well thought out and written, and don't end up landing VCs in a beauraucratic nightmare, which I'll grant you is a pretty big assumption (Sarbanes-Oxley springs to mind).
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I suspect it's a very good result for some involved - 'aka' someone's going to make more money because of it.
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There, fixed it for you.
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www.chl-tx.com
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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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SilverSliver((
You are not wrong about the trading strategy being employed by some investors, however you are wrong to assume it is a venture fund doing so.
Venture funds generally invest in early stage private companies that do not have public debt or a cds market. Further, those portfolio companies that directly employ leverage for capital efficiency purposes are most often restricted to asset based loans which are highly conservative in their covenants and risk profile.
I know of no venture fund that uses everages to stretch its capital base; indeed, most are prohibited by the terms of their fund indenture or partnership agreement. Plus, using bank debt to finance a portfolio that has a substantially longer duration would be a recipe for disaster (not that bad financial logic is sufficiently preventative).
Some one is guilty of adverse trading models, just not venture funds.
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The government's job
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Health care, education.
The govt. wants to control our major industries. Not regulate, control. It wants to be the major player. Why else do you think that the government is refusing to accept the TARP money is has given to banks? Why do you think a major player, that wanted to pay back close to a billion dollars in taxpayer money back to the government, was not allowed to?
How would you feel if your bank wouldn't accept your mortgage payment in full? How would you feel if your credit card company wouldn't allow you to pay off your balance? You would think it wrong, correct?
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Future of VC Sector
r kumar v
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Re: Future of VC Sector
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