Miller discussed how the role of credit default swaps (CDS) created a more lax approach to due diligence and said that a lack of historical analysis played a big part in the meltdown as well. He pointed out that many of the financial products coming into the crisis looked like products offered just prior to the Great Depression.  He said that a halo effect on firms like Long Term Capital Management and AIG (supposedly “too big to fail”) also played a role. He noted the importance going forward of central clearing or sufficient collateral requirements for over the counter products, now a hot button issueon the regulatory front in the wake of President Obama’s regulatory blueprint released last week.

Education is key as well. Miller teaches his students what these products are, why they’re traded and who uses them, and, very importantly, how they have performed historically. With more and more regulatory changes coming down the pike from Washington, these sound like points that members of Congress and Treasury would be wise to study too.

Richard Hoey, chief economist for the Bank of New York Mellon Corporation, speaking at the Managed Funds Association Network conference in Key Biscayne, Fl. earlier this week, gave his take on the current economic crisis and the stimulus package.

Hoey says a stimulus package needs to be big, fast and well designed. Of the current package he said two out of three is not bad and predicted it would pass.

 “We had a collapse of credit discipline,” Hoey said of the crisis.  He described the problem as an “ambiguity about implied guarantee of risk,” pointing out how quasi public/private institutions like Freddie Mac and Fannie Mae created an assumption there would be a government backed guarantee and in the end there was for everyone except Lehman.

Hoey said that nobody believes there is a guarantee for hedge funds but “The market believed Lehman was so big that it would create a total meltdown.” On Sept. 15 the “row boat went over Niagara Falls leading to a severe recession.”

Hoey said that there are two types of recession: an inventory recession and  the more serious debt/deflation recession, which we are in. He predicted a trough to the recession somewhere at the mid-point of 2009 but expects the recovery to be weak.

The “it” is regulation and MFA is positioning itself to have a seat at the table or at least have its voice heard when new regulations come.

It is not the first time MFA has taken this approach. They accepted the Hedge Fund Registration Rule, approved in 2005 by the Securities and Exchange Commission (SEC), and sought to make it more palatable to the industry but one man, Phillip Goldstein, stood up to the SEC and got it reversed.

But this time is different because Congress is holding the strings and they do have the authority to make law, something the SEC lacked and ultimately what caused that rule to be reversed in court.

“Lawmakers are going to be inclined to give regulators more authority,” said Roger Hollingsworth, executive vice president and managing director government relations for MFA, at a panel on the impact of the Obama administration.

“Get over it, it’s coming,” repeated Darcy Bradbury, director of external affairs for the D.E. Shaw Group, adding that the question now is, “What can we do to inform the debate?”

She stated that added regulation could have a benefit to the industry. “Oversight will help our image.”

But most important was the need for engagement. Bradbury noted that the MFA was not informed when the SEC instituted  the no short sale rule following the market upheavals of this fall.

MFA President and CEO Richard Baker said “America is mad,” and some people believe that the hedge fund industry contributed to the crisis. “Our role is to tell our story. We bring liquidity into distressed markets,” added Baker, who can now engage Congress more fully because he is no longer under any restrictions.

“I am available for duty,” Baker said, while cautioning, “Don’t assume there is going to be one bill and one vote. We are going to be engaged in a long trip together.”

On the subject of a possible merger of regulators, Baker called it “lots of talk,” but added that it is not likely because of all the Congressional jurisdictional battles that would ensue. And Baker should know, coming directly from Congress to his role at MFA a year ago.

Perhaps more damaging than the implosion of the investment banks in 2008 was the Bernard Madoff scandal. While Madoff was not a hedge fund—a point made a couple of times at the conference—many of his investors were fund of funds and regardless of how many times the distinction is made, the popular business media has tied Madoff together with hedge funds.

This fact may indicate that the MFA would be better off going on the offensive instead of playing defense. After all, the SEC has basically failed to uncover wrong doing at every turn during the numerous major financial failures of the past decade. These were things, like Madoff, where the SEC had more detailed information than most, so moving a product under the SEC’s purview is no guarantee it will find a problem if one exists, in fact given history it will ensure that a problem is not found, at least by the SEC, until the proverbial horse is out of the barn.