Really?
The VIX is no where as high as it was towards the end of last year and the markets have been doing significantly better since then as well. However, that does not mean that the market and public are still not afraid of an over involved government. In these trying times everyone is tuning into the news and following every word coming out of Tim Geithner’s mouth. With such high scrutiny on every word uttered, I was astounded to hear about Tim Geithner’s simpleminded and pointless decison to regulate both Venture Capital and hedge funds. What surprised me more is the tepid response this issue has received both from the press and public. Secretary Geithner went onto justify his statement by mentioning the high risk and instability caused by these firms due to the high levels of leverage that they take on. Though I understand his concern regarding Hedge funds, Venture Capital (VC) by their very nature do not take on high amounts of leverage.
There is a significant difference between venture investment funds (what Berni Madoff ran) and venture capital (the kind of investing that started Amazon.com, Google, Microsoft and Apple to mention a few).
Where as venture investment funds, invest your money in the market and generate returns using their savvy investing skills (or Ponzy schemes). Venture capital invests money in small business without using much leverage (debt). Start ups traditionally don’t take on debt because they don’t have steady or at all predictable cash flows, they also make it clear from the outset that you may loose 100% of your investment if things don’t go as planned. Thus, it is not the average Joe that invests his life savings but wealthy institutions and investors that are looking to make high returns by ‘gambling’/investing a few hundred thousand.
Mr. James Freeman the author of the Op-Ed peace, makes a compelling case and there is little I can add to what he wrote.What I will try to do in this piece is try and understand what Secretary Geithner was trying to accomplish by making such statements.
I will give the treasury secretary the benefit of the doubt and assume that his intention behind the policy recommendation was not to regulate venture capital per se but to try and make it harder for hedge funds to pose as venture capital funds to avoid the vast umbrella of SEC regulation. We saw an example of such shenanigans at work with TARP 1.0, when insurance companies started to buy small and mid size banks in order to be eligible for TARP funds. However, what I don’t understand is why Mr. Geithner would explicitly go after VC funds, instead he could have made more caveats regarding hedge funds rather then explicitly talking about VC funds. The fact of the matter is that the NASDAQ has by far been the best functioning exchange this year. Small and medium sized industries suffered already due to the high expense incurred due to compliance with Sarbanes Oxley. Regulating VC funds is going to create more road blocks for start ups and make it harder for these companies to come up. By trying to mollycoddle the investor the administration is not encouraging risk (something the treasury secretary insisted he wanted to see more of) but instead is scaring people away from the mere thought of taking risk. This Results in the suffocation of yet another growth artery of the currently (growth) anemic economy.
I hate to quote fictional charecters such as Spider man’s grandad but the guy had a point when he told his grandson Peter Parker, “with great power comes great responsibility’. Think about it Timmy G!
