Large funds pose systemic risk to the U.S. and global financial system
Commentary
Recent news reports that the top Justice Department antitrust lawyer, Jonathan Kanter, is planning to scrutinize large private investment funds’ practice of “rolling up” competing companies to create monopolies and oligopolies.
That may be a good idea on the antitrust front, but let’s take a step back and look at the risk front.
In 1995, a young trader in Singapore named Nick Leeson, who was supposed to be doing low-profit, high-volume, arbitrage trades on the Nikkei, was approving his own trades. When he entered into a short straddle of the Nikkei and Singapore exchanges, the Kobe Earthquake cratered the markets in the region, causing Leeson’s trade to fail catastrophically. To hide it, Leeson entered into a number of risky trades that, ultimately, drove his employer, Barings Bank—chartered in 1764—into bankruptcy with losses of $1.4 billion.
Just 13 years later, another young trader, Jerome Kerviel, engaged in unauthorized trades that cost Societe Generale some 4.9 billion euros (US$7.2 billion). Then, in the same year, 2008, Bernie Madoff became the biggest financial fraudster in history, fleecing investors of as much as $65 billion.
Today, the world’s largest private equity fund, BlackRock, controls upwards of $10 trillion (yes, that’s with a “T”) in investment assets. That’s nearly half the U.S. GDP. It is about one-third more than annual federal…
