“Note how easy it is to show a short-term profit in a financial institution: you have only to take on risk.”
David Beim and Charles Calomiris of Columbia University
Loosely regulated hedge funds have many advantages: they can move freely among markets, they can profit from prices going down as well as up, and they can increase their returns by using borrowed money. The meltdown of Long-Term Capital Management (LTCM) in September 1998 showed that they compelled markets to move in alignment; its rescue stoked moral hazard.
If banks appear logically doomed to decline, the same logic points to the rise of hedge funds. LTCM was the biggest and most ambitious, but it has become the perfect exemplar of the hedge fund model’s ...