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Paulson & Co., D.E. Shaw Told Fed of ‘Confusing’ Rules Process

Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

Feb. 8 (Bloomberg) -- Executives from Paulson & Co. and D.E. Shaw & Co. LP told the Federal Reserve last month they’re concerned about how regulators will decide which financial companies to deem systemically important and subject to the central bank’s oversight.

Michael Waldorf, managing director at Paulson & Co., and Darcy Bradbury, managing director with D.E. Shaw, “expressed concerns that confusing information was circulating about both the process and likely analytical approach” to designating firms, “contributing to market uncertainty,” according to a notice on the Fed website.

The Financial Stability Oversight Council, a group of regulators that includes Treasury Secretary Timothy F. Geithner and Fed Chairman Ben S. Bernanke, is developing criteria for determining which non-bank financial firms are systemically important and therefore warrant Fed oversight. The council may begin naming companies in the middle of this year.

John Paulson, who runs the New York-based hedge fund named after him, earned about $5 billion last year, a person with knowledge of the firm said last month. New York-based hedge fund D.E. Shaw & Co. was founded by David Shaw and, according to its website, had $19 billion of investment capital as of Jan. 1.

The Jan. 26 phone conversation also included Stuart Kaswell and Benjamin Allensworth of the Managed Funds Association, a Washington-based lobbying group for the hedge fund industry. Bradbury is chairwoman of the MFA’s board, according to the association’s website.

Banking Industry

In a November letter to Geithner, the council’s chairman, the lobbying group said hedge funds are too small to be systemically important and the mutual-fund and banking industries are much bigger. MFA spokesman Steve Hinkson declined to comment beyond the content of that letter. Spokesmen from Paulson & Co. and D.E. Shaw declined to comment.

The Fed officials participating were Pat White, Michael Gibson and Donna Hancock of the Fed’s research and statistics division. A Fed spokeswoman, Barbara Hagenbaugh, declined to comment.

The largest U.S. bank holding companies, including Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., and Goldman Sachs Group Inc., are automatically liable to be deemed systemically important. The council’s work is focusing on which non-banks, such as mutual funds, hedge funds, asset managers and clearinghouses, could potentially pose a risk to the financial system.

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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