If you can't beat them with rules, then join them

Don't worry: bankers will adapt to new US financial reforms

Those on Wall Street will find a way to turn 1,136 pages of regulation into 1,136 pages of questionable opportunities. Jin Lee / Bloomberg

Well, how was the recovery for you? Yes, I'll agree it was a bit brisk and breathless, but I think we can all agree that it was fun while it lasted. But no sooner had it started than Greece threatened to default and the euro plunged. This led the oil price to dip, and the only thing rising was that most useless investment of all, gold. Now what? US authorities think they know. They have produced the Restoring American Financial Stability Act 2010 and it is a worthy and weighty 1,136 pages online, with 11 pages of contents. Its aim is to make sure there's no more instability.

Highlights include the whistle-blower award programme - just the ticket to grass on your mates, especially if they have trousered a bigger bonus than you - but there is very little talk of banksters. Christopher Dodd, the Democratic Senator from Connecticut who shepherded the legislation as chairman of the banking committee, is confident that it will do the trick. "Any one of these sections of the bill could stand almost as a piece of landmark legislation in and of themselves," Mr Dodd says.

Wall Street is pretending not to like it, but then of course they wouldn't. However, they are not complaining too much. The Senate bill could cut the profits of the largest US banks by 13 per cent, Goldman Sachs said in a May 17 report. The biggest impact would come from stricter rules on derivatives and the powers of a new consumer agency that could affect fees for mortgages and other financial products. Each of those provisions would hurt bank incomes by 4 per cent, Goldman estimated.

I wonder if those are the same analysts who predicted that oil would hit US$200 a barrel? If so, they are as worthless as most of the other analyst reports put out by Wall Street. After all, these are the same people who told us that 2008 would be a great year for the markets, with some predicting a gain of 11 per cent. Rather surprisingly, nobody mentioned that the S&P 500 US stock index would tumble by 38 per cent and that $29 trillion (Dh106.51tn) would somehow disappear from world markets.

"It's not perfect, but this [bill] will do a lot to help people," Kathleen Day of the Centre for Responsible Lending, a consumer interest group, said. Nonsense. The people it will help are those on Wall Street. They'll find a way through its 1,136 pages and use it to their best advantage, just as long as nobody blows the whistle on them. Which is why I am considering quitting the daily grind of journalism and setting up a hedge fund.

My model is the founding father of hedge funds Alfred Winslow Jones who, armed with neither certificates from a business school nor a knowledge of mathematical quantum theory, decided, aged 48, that he could outperform the market. After Harvard University, he had enjoyed a peripatetic career, working on a tramp steamer, studying at the Marxist Workers School in Berlin and drinking whisky with Ernest Hemingway during the Spanish Civil War.

He wrote a book called Life, Liberty, and Property, which became a standard sociology textbook. Then he turned to journalism, writing a number of articles for Fortune magazine. It was only after he had tried, and failed, to set up a couple of magazines that he turned to investing. Armed with $100,000 he came up with a cunning plan, the one that gave its name to hedge funds. Compared to a classical investor, who typically would keep $30,000 in cash and invest the remaining $70,000 in stocks, Jones came up with a shrewd wheeze.

First, he borrowed an additional $100,000. Then he invested $130,000 in stocks and used the remaining $70,000 to short the market. If the market went up, he won. If it went down, he won even more. I am indebted for this information to Sebastian Mallaby's new book More Money than God, a splendid look at the mysterious world of hedge funds and their inhabitants. "By 1968 he [Jones] had racked up a cumulative return of just under 5,000 per cent, meaning that the investor who had given him $10,000 in 1949 was now worth a tidy $480,000."

Leverage and short-selling were the keys for Jones. His model has been studied by many others and used to great effect. If Washington is Hollywood for ugly people, then a hedge fund is the place for those with colossal egos, even if they may be short, egg-headed or armed with a tic and a chronic stutter. Since the turn of the century hedge funds are no longer rare beasts. According to Mr Mallaby "from 2003 to 2006 the volume of money in the top 100 hedge funds doubled to $1tn - enough to buy all the shares in the Shanghai Stock Exchange or an entire year's worth of output from the Canadian economy".

My only fear is that I will be regulated out of existence. Jones was clear where he stood on regulation. He was against it. He did not want to register under the US Securities Act of 1933, the Investment Company Act of 1940 and dodged the Investment Advisors Act of 1940. His followers, who either live in Connecticut or Mayfair, and own private game farms and pheasant shoots, feel the same. If they can dodge this new bullet, they will be impregnable.

So too shall I, once I raise my first $100,000. [e-mail]