Reining In Speculative Funds; Prospect of Huge Loss Brings Call for Federal Oversight
The near-collapse of a huge and unregulated investment fund this week has prompted lawmakers to consider whether closer regulatory scrutiny is necessary to track the complex -- and often obscure -- financial deals these funds make with large sums of borrowed money.</br></br>"We are exploring . . . whether these funds that can pose a threat to the economic system or to the bank deposit insurance system should have more federal oversight," said Richard Baker, a Louisiana Republican who chairs the House Banking Committee's subcommittee on capital markets and securities.</br></br>Wednesday, at the urging of the Federal Reserve Bank of New York, a group of 14 banks and securities firms agreed to provide more than $3.5 billion to rescue Greenwich, Conn.-based Long-Term Capital Management L.P. after fears rose that its demise would send a shock wave through the global economy. The once highflying fund faced losses on about $100 billion in bets it had made in financial markets around the world. Baker and the staff of other lawmakers suggested that the question of regulating this type of funds, known as hedge funds, could affect the progress of pending legislation to revamp 65-year-old banking and securities laws.</br></br>Unlike most other financial companies, operators of hedge funds answer to no oversight institution, either state or federal, even though the funds make speculative, multibillion-dollar bets with borrowed money in markets all over the world. As recently as last week, Federal Reserve Board Chairman Alan Greenspan said he had no problem with that arrangement.</br></br>"Hedge funds are very strongly regulated by those who lend the money," Greenspan said in response to a question by Baker during testimony before the House Banking Committee. "The major vehicle for supervision of lending is really from those who make the loans."