Ignoto on "Creating Your Own Leverage"

My friend Ignoto, who understands this stuff better than I, considers the question of which institutions are "systematically important." He offers a spin perhaps familiar in the trade, unfamiliar to me, and in particular, he says that the class of "systematically important" players does not include the subclass "hedge funds:"

No institution incapable of creating its own leverage is "systemically important." Most of us - hedge funds included - have to be provided leverage. And the parties capable of leverage provision tend to be banks, insurance companies, and futures clearinghouses (by virtue of the implicit leverage in futures contracts). A hedge fund that takes a 100x levered bet on a company's credit through a credit default swap (sell the protection for 1% per year on the notional amount) cannot do so without someone taking the other side of the trade. Unless/until we see hedge funds running side bets directly with one another rather through clearinghouses or the Street, they're not systemically important. (The hedge funds are, however, vital to understanding the risks being undertaken by the "systemically important" few - there will be far fewer line items on even the biggest hedge fund's balance sheet than whatever Goldman can muster, making the process of understanding the goofiness being undertaken somewhat easier.)

I asked for clarification on just who "makes their own leverage."  Ignoto responds:

Banks can create leverage through the fractional reserve / central banking system. Insurers can create leverage by underwriting risk and receiving premiums a small percentage of the face amount of that risk. Futures clearinghouses can create leverage by facilitating the transfer of futures contracts, which have implied leverage (although the clearinghouse itself minimizes counterparty risk). Blackstone can't create its own leverage - it has to obtain it from a bank or someone else who can create it. If no bank is willing to lend Blackstone a dollar, it can't manufacture a borrowed dollar out of thin air. Blackstone seeks the leverage, but they need the commercial banks to make it and serve it up...

But then, some second thoughts:

The hole in my thesis appears when hedge funds, PIMCO, etc. are able to write credit default swaps or other unregulated insurance contracts - which is really all CDS is. But even in those instances, without the market-making services of an investment bank, it's really stinkin' hard to trade CDS. Nonetheless, this is the rationale for requiring CDS to be exchange-traded and -cleared - a central repository where all counterparties to a given risk profile are known helps minimize the likelihood of unpleasant surprises.

But even protections like CDS clearinghouses, while better than the status quo, are still insufficient. Cross-border regulation is needed. After all, the AIG unit that Joe Cassano turned into the beast that ate us all was based in the UK.

 I'm thinkin', I'm thinkin.'  At the moment, only one thoughtlet: I had supposed the real problem with AIG was not that Cassano had a London postmark, but that AIG bosses were too distracted trying to pick up after Hank Greenberg.  And while Cassano may have been London based, his (apparent?) principal beneficiary was Goldman Sachs.