[tcostell]

I've worked as a quant and portfolio manager at Hedge funds and major investment banks for over 20 years, and here is my thought on the kind of new "regulation" we need to avoid problems like this in the future:

A Free Market Solution To Further Market Crises

[ovrtaxt]

Prime brokers for hedge funds track the leverage they have offered on a daily basis. If we have them report this information in a summary way, it will fully obfuscate the activity of individual investors putting no one at a disadvantage. The total data for all investors and markets could then be accumulated and released on a daily basis, and would then be available to allow investors to stabilize world markets on their own. As always, market problems are really a problem of information, and should be solved in that way.

At first glance, I like it. I think the control freaks among us won't go for it though. No opportunity to expand their power and importance. Plus, I think the Fed is looking forward to their new, powerful role with brokers and hedge funds.

[palmer]

We don't need to prevent people from making foolish investments we only need provide enough information so that not everyone joins them in their foolishness. Disclosure of cumulative leverage will accomplish that goal without the negative consequences of otherwise restricting investor behavior.

Like many in your industry, you've completely missed the point. The market (or information flow) is working fine, but the bad information is being input by the Fed. Short term rates are and were too low both here and Japan as evidenced by the carry trade and lowering of spreads. There is no reason that the market should price fake "AAA" securities in a traunche backed by crappy mortgages other than excessive liquidity and carry trade.

The answer is to let the market set the rates. Right now 2 year treasuries are being forced down by the anticipation of lower short term rates, plus the flight to quality. That drives down all sorts of other long rates (carry trade) below a realistic inflation rate plus risk premium.