I don't understand the link between "investment firms" and the everyday citizen. Why are we bailing out investment banks with large portfolios of hedge funds that are 1.) open only to the "elite" investor (those with $multi-millions to invest) and 2.) only benefit the investor and the fund managers?? What is the link to the common citizen? It appears to me that we (the average jane and joe) have NO STAKE in these investments. Un-beknownst to us simple po' folk, our sub-prime mortgages became the house of cards upon which many of these hedge funds were founded. As citizens default on the loans they cannot afford, the INVESTOR and the FUND MANAGER lose money. Silly me, but how does this translate into a massive need for an economic bailout? Seems to me that we're bailing out the rich people who are betting the average citizen won't figure out what hedge funds are and how crappy the concepts of derivatives and credit swaps really were!
The typical public investment company (e.g. mutual fund) in the United States is required to be registered with the SEC. These investment companies are subject to strict limitations on short-selling and the use of leverage and are prohibited from charging incentive or performance fees.
Hedge-funds, on the other hand, are limited-access, private investment instruments NOT OPEN TO THE PUBLIC. Hedge funds are permitted to operate pursuant to exemptions from many of the SEC requirements that regulate public investment companies. The two major exemptions are set forth in Sections 3(c)1 and 3(c)7 of the Investment Company Act of 1940, which essentially say that hedge funds with 500 or more investors must register with SEC (so they almost always have less than 500 investors). Furthermore, the investors must be "qualified purchasers" (A qualified purchaser is an individual with over US$5,000,000 in investment assets.) Hedge funds can - and DO - charge EXHORBITANT performance or incentive fees...sometimes up to 50% of a fund's performance. Hedge funds are sold via private placement under the Securities Act of 1933. Interests in a hedge fund cannot be offered or advertised to the general public.
Based on this information...who in the heck are we really bailing out?? I DON'T UNDERSTAND!
More information about hedge funds can be found on wikipedia at: http://en.wikipedia.org/wiki/Hedge_fund
Oh, and the idea that this collapse of the investment market was a surprise is garbage. The SEC and the Federal Reserve were made acutely aware of the HIGH systemic risk posed by hedge funds when, in 1998, they coordinated (but didn't fund) the bail-out of Long-Term Capital Management (LTCM). Then again, as recently as June 2007, Bear Stearns had an omniscient near-collapse of its mortgage-backed hedge funds that necessitated an infusion of cash. At that time, no outside assistance was needed, but it was (at the time), the largest fund bailout since LTCM's! EVERYONE in a position of authority KNEW since 1998 that floating our economy on hedge funds was massively risky. BUT THEY DID NOTHING! AND NOW THEY WANT A BAIL-OUT????