Billionaire hedge fund manager and big Republican donor Paul Singer has long criticised Dodd-Frank, the post-financial crisis regulation intended to prevent another meltdown.
Now that Donald Trump’s administration is expected to dismantle the regulation, Singer’s $36.1 billion hedge fund is weighing in again, calling to revamp the law formally known as the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“The financial system needs to be freed from the dysfunctional dictates of this ineffective law and properly and efficiently regulated instead,” reads a line from Elliott Management’s fourth-quarter letter to investors.
A copy of the letter, dated this month, was obtained by Business Insider.
“Calling for the repeal or reform of Dodd-Frank is not the same as saying that the financial system needs to be ‘deregulated,'” the letter added. “Dodd-Frank did not adequately address the problems that led to the crisis, and in fact created new problems by establishing new and unnecessary debt resolution schemes and by explicitly identifying certain institutions as too big to fail.”
In short, Elliott sees several issues with Dodd-Frank, including:
- the Orderly Liquidation Authority (OLA), whose power “to seize massive financial institutions which it deems to be merely in ‘danger of default'” is, in Elliott’s words, a “dangerous” expansion of regulatory power.
- the Volcker Rule, a Dodd-Frank provision which is supposed to “ban proprietary trading by organisations which have insured deposit-taking entities. But the ban is metaphysical, has significant loopholes, diminishes market liquidity and is the wrong approach to mitigating and managing risk,” according to Elliott.
Elliott proposes several solutions, including allowing bailouts, refining margin requirements for big investors and counterparties, replacing the Volcker Rule and repealing the OLA, among other things.
Elliott Management was one of the top hedge fund donors in the 2016 election cycle, giving about $27 million to conservative groups and Republican candidates, according to public filings tracked by the Center for Responsive Politics. Singer backed Senator Marco Rubio (R-Fla.) for president.
Here are the solutions that Elliott proposes, according to the letter:
- “Every financial institution and counterparty globally needs to post initial margin plus daily two-way mark-to-market variation margin on all derivatives positions, regardless of the institutions’ or counterparties’ credit quality or status as a sovereign, “end-user,” speculator or investor.”
- “The OLA must be repealed. There is no need for a separate resolution authority for large financial institutions, especially one which gives such arbitrary authority to a tiny group of regulators who have no ability to discern, in the midst of a crisis, what the heck is actually going on and what needs to be done.”
- “”Living Wills” are a darkly comic fantasy which ought to be abolished immediately. These documents cannot possibly describe the quantity, scope, shape, direction or solution for the next wave of losses in the next GFC, and they effectively represent a “feel-good” hallucination.”
- “The Volcker Rule, which currently spans hundreds of pages of overly complex dictates, should be replaced.”
- “Maybe a restoration of some version of the Glass-Steagall Act which separated investment banking and trading from commercial and residential whole loan lending, or some other solution could be the answer.”
- “In actual crisis situations, however, it is important that the government retain the ability to render open bank assistance, lending money on a secured basis or investing in equity where appropriate and attractive.”
- “The Consumer Financial Protection Bureau, currently an “independent bureau” within the Fed, should instead be directly accountable to Executive and Congressional oversight just like any other federal agency.”
The Elliott Associates L.P. fund returned 4.4% for the fourth quarter of 2016 and 13.1% for last year, according to the investor letter.