Washington, DC –Rep. Nydia M. Velazquez (D-NY) today delivered a keynote address at an event on Capitol Hill entitled “Hedge Funds and Private Equity: Transferring Wealth Upwards.” Following are Velazquez’s remarks as prepared for delivery:

“Thanks for having me. This is a timely subject – and I thank the AFL-CIO, Americans for Financial Reform, the American Federation of Teachers, and the Center for Economic and Policy Research for organizing this important forum.

“We all come at this problem with different perspectives and experiences. The financial crisis in Puerto Rico originally drew my attention to hedge funds.   As the island’s economy took a dramatic turn for the worse in the last 2 years, bond prices plummeted and yields soared.  Hedge funds saw this as an opportunity — and began investing heavily.  Today, they hold as much as 30 percent of Puerto Rico’s securities.

“Unfortunately, they are using this leverage to lobby for draconian cuts that harm residents of Puerto Rico. For example, they issued a report that said Puerto Rico could avoid defaulting by cutting spending.   The report accused the island — where 56 percent of children live in poverty — of spending too much on education — even though the government has already closed down almost 100 schools so far this year.  Similarly, cutting basic services will hurt working families and retirees.  This is just morally unacceptable.

“At the same time they call for these cuts, hedge funds are opposing sensible steps that would allow Puerto Rico to regain its footing. Permitting Chapter 9 Bankruptcy would allow a small sliver of the island’s debt to be managed through judicial proceedings – just like all 50 states can already do.   But the hedge funds hold firm – they’d rather see the economic future of island vanish than take a modest discount on the debt they bought – even though they knew the island’s debt was in distress when they purchased it.

[drizzle]“They say Chapter 9 is not fair because it would change the rules on them in the middle of the game. Yet, that is exactly what hedge funds do to governments and taxpayers when they buy and sell large positions of distressed debt.  This happens throughout our economy every single day – hedge funds game the system at the expense of the rest of us.  The fact is hedge funds play a significant role in our economy – but we do not always know just how much influence they wield.

“That’s why I introduced legislation, HR 3921, the Hedge Fund Sunshine Act.  This bill would require hedge funds to disclose their major investment activities to the public.  This won’t correct all the problems — but taking a clear-eyed look at how these funds function would be a good start.

“When it comes to disclosure, hedge funds are already subject to some requirements – but, they are insufficient.  Dodd-Frank required certain hedge funds to register with the SEC.  Yet, full investment information is only available to regulators – not the public.  The current law requires certain hedge funds to file quarterly reports disclosing their holdings — as well as other reports — regarding the large acquisitions of equity securities.

“However, these reporting requirements are not enough.  The public and policymakers need a full picture of how this industry impacts capital markets, governments, corporations, employees, consumers, and — indeed, our daily lives. Keep in mind — this is a $3 trillion industry that operates with significant secrecy — and that leaves room, I’m afraid, for abuse and greed at the expense of the American people.

“Dodd-Frank disclosures, for example, are not public. While the 1934 Act disclosures are public, they only apply to equity holdings, not debt.  They also do not account for derivative positions, which can be used to circumvent filings.  Given that many funds take large positions in government debt issues – such as in Puerto Rico – there is a need for accurate and timely reporting on hedge funds’ bond holdings as well.  To increase transparency, my legislation requires hedge funds to meet stronger disclosure requirements when acquiring equity securities.

“First, it will strengthen disclosure for hedge funds regarding their acquisition of large equity positions. Under current law, entities must report to the SEC within 10 days if they acquire a 5 percent position in such securities.  For hedge funds, the legislation would lower this threshold to 1 percent and require such positons to be reported in 5 days.  We would also begin accounting for derivatives, which are often used to skirt federal disclosure requirements. This means the SEC and the public will have greater awareness and information about hedge funds’ investment actions.

“Second, the legislation requires that hedge funds report quarterly for ALL securities in which they hold a 1 percent or greater ownership stake.  Notably, this would apply to debt securities, which are excluded under current law.  For the first time, hedge funds will have to report to regulators when they begin buying up the debt of a locality, a state or a municipal authority.  It would also account for derivative holdings. And, this information would be made publically available – so the American people can finally see what’s happening behind the curtain.

“The situation in Puerto Rico demonstrates why we need these changes. While we know hedge funds are playing a significant role in the debt crisis, it is hard to determine their exact positions — the only information available is anecdotal.   Of course, it isn’t just about Puerto Rico.  While it is the island today, tomorrow it might be California or Illinois that finds hedge funds capitalizing on their debt problems.

“Certainly, there are times hedge funds provide liquidity in markets and do play a constructive role.  But, let me ask this –shouldn’t we hold hedge funds to some basic transparency requirements so we know how they are using their leverage?  As a nation, we need to take a hard look at what role these funds are playing in our economy — and this bill would be an important first step in that process.

“In closing, I want to thank you all for being here.  These issues are often overlooked — largely because some pretty powerful interests would rather avoid scrutiny.  That just makes it all the more important we continue drawing attention to this matter and pushing for reforms.    Thank you.”

Velazquez PR puerto Rico credit default swaps CDS
Velazquez Chart via S&P CapIQ

[/drizzle]

Tags: