Treasury Department Meddling In Venture Capital For No Good Reason

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

Fri, Apr 10th 2009 3:10am — Mike Masnick

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

14 Comments

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Douglas Gresham, 10 Apr 2009 @ 4:05am

Best guess is to avoid loopholes
If VC funds are unregulated and hedge funds are regulated, I'm guessing a large number of hedge funds will attempt to reclassify themselves as VCs. Say for instance you limit the leverage you can have on debt - that's not going to affect the vast majority of VC funds because as you say they're not based on leveraged debt. It would stop the "bad" behaviour and leave the good well alone, regardless of what you called yourself.

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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John Magin, 10 Apr 2009 @ 7:00am

I stopped trusting anything the WSJ puts in it's OP-ED since Murdoch took over. The man's a d-bag. That said I am not happy with Geithner and Summers in any way shape or form. Obama had the pick of the litter and he picked these guys. Which among them has won a Nobel Prize? Also, I think that half the TARP funds could have been spent better by direct infusement into communities and infrastructures rather than letting robber baron banks take responsibility
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Overcast, 10 Apr 2009 @ 7:18am

For "no good reason" in who's viewpoint? :)

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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TX CHL Instructor (profile), 10 Apr 2009 @ 7:57am

"...why it's a mistake for TAX CHEAT Timothy Geither to include venture capital funds in his..."

There, fixed it for you.
---
www.chl-tx.com
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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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SilverSliver99, 10 Apr 2009 @ 8:11am

Re:
ignore the "Venture Fund 1 takes out cred" somehow it got put at the end
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FitzInSV, 10 Apr 2009 @ 8:27am

SilverSliver((
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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Ryan, 10 Apr 2009 @ 8:31am

Re:
Huh? The current economic situation has nothing to do with speculation and everything to do with the real estate bubble. I'm not sure why you're singling out venture capital funds here anyway, and you mentioned already that naked short selling is against the rules--gee, hell of a lotta good the SEC's regulations did if short selling was, in fact, the problem.
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SilverSliver99, 10 Apr 2009 @ 9:00am

Heres the problem. While theoretically there is a difference between Venture Capital and Hedge Funds (As the former invests money in startups and the latter uses leverage on stocks and bonds) The fact is the line has blurred. It doesn't take much for a hedge fund to say they are a venture capital. In fact many do invest in startups. So rather then just watch every hedgie change to a venture capital while still dong the same thing, they just blanketed the group. A better solution may have been to make guidelines on what is what.
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Tony Black (profile), 10 Apr 2009 @ 9:27am

The government's job
Why is it the governments job to control the economy? Why argue about ridiculous rules and regulations that are completely arbitrary? These men shouldn't be allowed to do what they're doing is the important point to consider.
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Anonymous Coward, 10 Apr 2009 @ 1:44pm

Banks, Wall Street Firms, Hedge Funds, VC's, Insurance companies, Life Insurance companies, auto manufacturers, whats next?

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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Anonymous Coward, 13 Apr 2009 @ 4:29am

Re:
I originally thought it was funny that Obama beat out Hillary; now I see the joke was on me. The current administration is far more dangerous than the previous one. There will be no constitution left after this one.
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r kumar v, 16 Apr 2009 @ 10:11am

Future of VC Sector
At the juncture where Venture Capital Industry Leaders are expressing the optimizam on the revival of VC actitivites. I want to know from the experts about the future situation of VC industry as I am trying to go for advance course in VC keeping in the mind to shift my carreer line from current line of Business Adminstration to VC consultancy line.

r kumar v
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bwp (profile), 2 Jun 2009 @ 5:03am

Re: Future of VC Sector
This probably isn't the place to be if you want comments from "experts" in the VC industry.
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