Investment analysts are all over the map on whether the market downturn has nearly reached a bottom or whether a much deeper bottom is waiting, and it could be several years away.
The problems are varied, but many stem from inadequate regulation. Lawrence Cohen QC, a member of the Chancery Bar Association in the UK, cites the lack of risk controls in a piece in the FT’s fund management supplement.

“I have been shocked to learn of the exposure to UK pension funds to hedge funds,” adds Cohen, a point I pick up on in a piece coming out in Alpha about the likelihood of increased regulation of hedge funds – either directly or by requiring large institutional customers like pension funds to invest only in funds which meet certain requirements of transparency and risk management.
Cohen says regulators should limit access to financial markets to those who comply with acceptable standards, and anyone marking to model should be charged with creating a false market in securities.

No hedging there.

Elsewhere in the FT, Tony Jackson cites a recent IMF study which says that recessions preceeded by a financial crisis tende to be longer and deeper than others, and worse if the financial crisis is in banking rather than securities or FX.

“And third, the countries hardest hit are those with so-called arms-length financial systems such as the US or UK. If banks are free to innovate, they tend to build up more leverage.”

Hmm, remind you of any economy(ies) starting with “U”?

It’s a long-term macro argument for more active regulation.

Filed under: Credit Crunch, Technology