Hedge fund probes steal attention from banks' record bonuses, stingy lending

Bailed out with taxpayer funds just a year ago, major U.S. investment banks may again be gearing up to hand out record bonuses. But as the public outrage builds, authorities seem to be betting that a theatrical crackdown on the hedge fund industry will calm the widespread anger about Wall Street's excesses.

Federal investigators are again widening their investigation into the $1.2 trillion hedge fund industry. Last week, reports surfaced that authorities have gotten a former employee to serve as a cooperating witness and provide information about hedge fund giant SAC Capital Advisors. Richard Choo Beng Lee, who worked at SAC between 1999 and 2004, will tell authorities about transactions by other SAC traders, according to The Wall Street Journal.
The move follows an investigation of former hedge fund the Galleon Group, which folded after regulators accused founder Raj Rajaratnam (pictured) of insider trading on insider information about companies like Google (GOOG), Intel (INTC) and Hilton (HLNQ). Packed with absurd nicknames and snappy dialogue, the hedge fund squeeze has made for a great show. And a focus on SAC Capital -- a firm widely known to use its massive trading heft to ferret out sensitive information -- is likely to unearth more tawdry details over the coming weeks.

But the aggressive, highly publicized prosecution of hedge funds stands in stark contrast to the inability of officials to force the hand of the major investment banks. And these banks were made whole using taxpayer funds at height of the financial crises so they could lend to cash starved small businesses. Regulators can crack the whip on hedge funds -- but Treasury Secretary Tim Geithner can do little more than gently coax the big banks to lend.

The unemployment rate has now topped 10%, and small businesses have historically driven the lion's share of job creation in the country. But these businesses are now facing a credit squeeze that threatens to undermine a nascent economic recovery as investment banks use their capital for more lucrative purposes like making bets on stock and bond markets.

On Monday, Goldman Sachs CEO Lloyd Blankfein made headlines by saying that the investment bank was doing "God's work" in helping provide capital for business and thereby creating prosperity. But as some commentators point out, the bulk of Goldman's profits come from betting the firm's money -- a business that has been made all the more lucrative thanks to cheap, tax-payer guaranteed funds -- and not through lending.

Analysts estimate bonuses at the major banks Goldman Sachs (GS), Morgan Stanley (MS) and JP Morgan (JPM), meanwhile, to come in at a record $29.7 billion -- up 60% from last year.

And the timing of the headline-grabbing hedge fund probes seems to be curiously choreographed to dampen the anger around bank bonuses. The Galleon crackdown, for example, coincided with a salacious lawsuit that highlighted the SEC's cluelessness about the $60 billion Madoff scandal and the first report of Goldman Sach's coming massive bonuses.

Other developments also seem to be calibrated for maximum impact and tend to come on days with major hedge fund conferences taking place.

But regulators would be better off finding ways to get the funds currently flowing to bonuses into the cash-strapped businesses where they are desperately needed instead.
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