2 Former Treasury Chiefs Add Clout to Hedge Funds
Saturday, October 21, 2006
Two former U.S. Treasury secretaries -- John W. Snow and Lawrence H. Summers -- have accepted positions with two of the nation's largest hedge funds at a time when federal officials are growing increasingly concerned about the impact of the private investment pools on U.S. financial markets.
Snow, 67, who resigned in May after three years with the Bush administration, will become chairman of Cerberus Capital Management LP, a $16.5 billion fund that contributes heavily to the Republican Party and counts former vice president Dan Quayle among its chief officers.
Summers, 51, who led the Treasury Department during the final years of the Clinton administration and until recently was president of Harvard University, will join D.E. Shaw & Co. as a part-time managing director. D.E. Shaw, a major Democratic Party contributor, manages $25 billion in assets and ranked as the nation's fourth-largest hedge fund in a recent survey by Absolute Return, a monthly magazine for the hedge-fund industry.
With the announcements Thursday, Snow and Summers join a long line of "highly ranked Treasury officials who have found gainful employment on Wall Street," said Kevin Hassett, director of economic policy studies and a resident scholar at the American Enterprise Institute.
"Part of the reason why they're so valuable is that they acquire the best address book you can imagine. They know the key financial players in every country on Earth," Hassett said, adding that the names Snow and Summers may also lend gravitas to their new employers and inspire confidence among investors.
Treasury officials also know all the players in Washington, where scrutiny of the hedge fund industry is on the upswing.
Federal ethics rules limit the extent to which Snow and Summers may lobby federal agencies, but do not prohibit them from lobbying Congress. Cerberus declined to make Snow available for an interview yesterday. The fund focuses on undervalued companies from a range of industries, including aerospace and defense.
Shaw identifies investments around the world using mathematical models. Summers said he has made it clear to the fund that he will do no lobbying.
But Michael Feiner, a management professor and ethics fellow at Columbia Graduate School of Business, said: "There's lobbying and then there's lobbying."
While influencing Washington may not be the chief reason Snow and Summers were hired, Feiner said, "it is inconceivable that either of these guys wouldn't pick up a call and try to head off the slowly burgeoning movement to get a better handle on these folks."
Earlier this year, Treasury officials began studying the impact of the $1.34 trillion hedge fund industry, which is exempt from many of the rules and regulations governing other mutual funds and free to pursue highly aggressive investment strategies. Those characteristics have contributed to the rapid growth of the funds, which attracted $44.5 billion in net new investments in the third quarter, a record inflow for the second quarter in a row, according to figures released yesterday by Hedge Fund Research Inc.
But the lack of regulation has also contributed to some spectacular failures, including the near-collapse of Long-Term Capital Management in 1998. Last week, Amaranth Advisors LLC announced that it plans to shut down by March after losing $6.6 billion on natural gas trading.
After the Amaranth debacle, Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) asked administration officials, including Treasury Secretary Henry M. Paulson Jr., to recommend ways to make hedge funds more transparent.
Securities and Exchange Commission Chairman Christopher Cox said Wednesday that his agency is increasing investigations of potential insider trading by hedge fund managers.