George Soros, chairman of Soros Fund Management, said hedge funds were an integral part of the financial market bubble that has now burst.
"A deep recession is now inevitable and the possibility of a depression cannot be ruled out," Soros predicted in written testimony for a U.S. House Oversight and Government Reform Committee hearing. Soros is a Democrat and billionaire philanthropist who is said to have earned $1 billion by betting against the British pound in 1992.
John Paulson, Philip Falcone, James Simons, Kenneth Griffin and Soros were called to testify at the hearing about the role of hedge funds, their tax status and regulation.
Committee Chairman Henry Waxman, a California Democrat, asked them to testify because each earned on average more than $1 billion each last year. The hearing is the latest in a series held to investigate the causes and effects of the financial crisis, and Waxman made it clear he was concerned about the lack of regulation in the $1.7 trillion industry.
"Currently, hedge funds are virtually unregulated," Waxman said. "They are not required to report information on their holdings, their leverage, or their strategies. Regulators aren't even certain how many hedge funds exist or how much money they control."
Falcone, who runs the activist hedge fund Harbinger Capital Partners, said in prepared testimony, "I support greater transparency and better reporting in the hedge fund sector."
Hedge funds, which are delivering their worst-ever returns this year, have been widely blamed for contributing to the downfall of two major U.S. investment banks and for having kicked stock prices lower in the last weeks.
But Falcone defended the industry. "The behavior of institutions in several financial sectors contributed to the recent crisis, but, in my view, the hedge fund sector was not among them."
David Ruder, a former chairman of the U.S. Securities and Exchange Commission said the credit crisis was closely linked to mortgage originators, investment banks, rating agencies, and sellers of credit default swaps (CDS).
The SEC and the Federal Reserve must share some of the blame for their hands-off approach to highly leveraged investment banks and the uncontrolled nature of the CDS market, Falcone said.
Falcone also defended short-selling, saying it was a valuable component of financial markets and didn't drive companies out of business. Two months ago, the SEC briefly forbid money managers from shorting some 1,000 financial stocks, or betting the stock price would decline.
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