http://online.wsj.com/article/SB123923644886203393.htmlAs Obama dazzles everyone on the world stage, I continue to have my doubts about Geithner here at home. Apparently, he has the idea he is going to be treating venture capital firms like hedge funds (in terms of the risks they create), and subjecting them to heavy regulations.
This is quite ironic, in light of the fact that Silicon Valley did expand into a massive bubble in the 1990s---crashed all the way down to the bottom---and hardly affected the economy at all in the long run.
One of the things that has been so devastating about the housing market collapse is the highly leveraged nature of house buying. The typical home owner only actually owns a portion---in many cases a very small portion---of the home. When all these relatively recent homebuyers start losing their homes, therefore, they themselves only sustain a small portion of the loss. Most of the loss is actually sustained by investors, which is part of why our economy was hit so hard.
The world of venture capital is nothing like this. What is Geithner thinking?
"The Obama administration wants to regulate venture capital firms to prevent systemic risks. Silicon Valley residents are scratching their heads and asking: What risks? The rest of us should ask why Washington is targeting a jewel of the American economy that had nothing to do with the housing bubble.
"The confusion began when Treasury Secretary Timothy Geithner recently told Congress that large venture capital (VC) firms should be forced to register with the Securities and Exchange Commission (SEC), and submit regular reports on their investors and portfolios. Data collected by the SEC would then be shared with a new risk regulator to ensure that VCs aren't "a threat to financial stability."
"Since then, venture investors have been trying to solve the mystery of how they could possibly threaten the financial system. Their work involves very little banking. Venture firms raise equity from wealthy investors to buy ownership stakes in small companies. The VCs and the companies in which they invest use little or no debt.
"'I cannot imagine any venture fund being of a size to pose "systemic risk," so they either don't understand the nature of the business, or by including this provision they are sharing that their agenda is not the overt one disclosed,' says Jack Biddle of Novak Biddle Venture Partners. What Washington needs to understand is that bank-style regulation could destroy the culture that created the microprocessor."
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