"Fed's Role In Hedge Fund Oversight Questioned"
Sunday September 27 7:26 AM EDT
Fed's Role In Hedge Fund Oversight Questioned
By Joanne Morrison
WASHINGTON (Reuters) - The Federal Reserve may not be doing enough to make sure that U.S. financial institutions
are operating safely when they make loans and investments in hedge funds, a key lawmaker says.
''If they are looking at it, then there must be more thorough disclosure of the risk associated with these investments,'' Rep.
Richard Baker, a Louisiana Republican who chairs the House Capital Markets subcommittee, said Friday.
Baker's concerns came week after Federal Reserve Chairman Alan Greenspan told the lawmakers that hedge funds do
not pose an overall risk to world financial markets.
Only days later, Greenspan's comments were followed by news that the Federal Reserve Bank of New York was forced
to step in and organize a $3.5 billion bailout of Long-Term Capital Management in order to avoid huge systemic market
losses.
''I think the unfortunate news is Long-Term Capital has proven that not to be true,'' Baker said of Greenspan's earlier
assurances.
''I think there needs to be clearer transparency in disclosure of risk to counterparties and investors and that does not
appear to be the case at the moment,'' he added.
Key regulators as soon as next week will have to explain to Congress the fund's bailout and how they monitor U.S.
financial firms' activities with hedge funds.
These huge private funds are unregulated and highly-speculative and have often been able to influence global markets.
''Questions exist as to whether appropriate national and international supervision exists,'' House Banking Committee
Chairman James Leach said. ''This week's interim rescue of Long-Term Capital management has raised numerous macro
and micro economic issues, in particular the role of speculative trading in the global economy.''
The Iowa Republican is asking Greenspan, New York Fed President William McDonough, Treasury Secretary Robert
Rubin and the heads of other key regulatory agencies to explain how they regulate U.S. investment in hedge funds.
Ironically last year, under the influence of key Republican lawmakers, the Securities and Exchange Commission relaxed its
hedge fund rules, allowing these funds to take in more investors.
''It is important to know who the losers are from the collapse of Long-Term Capital. Is it only the big financial firms? Or
do the losers include endowment, pension and mutual funds? And are the pocketbooks of ordinary citizens indirectly
jeopardized?'' Leach asked.
But some banking industry experts also have raised concerns about bank investment in hedge funds and the Fed's role in
overseeing Long-Term's bailout. Some fear that the New York Fed's involvement could set a dangerous precedent.
''I do believe that this situation has demonstrated the reality of having a too big to fail policy,'' Alexandria, Va., banking
industry consultant Bert Ely said, questioning whether the Fed ought to have been involved earlier.
Baker said he is not concerned about the Fed's intervention, which staved off even bigger losses, because it was done
with private money and not at the expense of U.S. taxpayers. But had the Fed waited to act on the failing fund, a bailout
could have come at the expense of taxpayers, he warned.
''That could have very quickly led to potential taxpayer losses because of the size of this investment portfolio,'' Baker
said.
Rep. Edward Markey, a Massachusetts Democrat, Friday asked the General Accounting Office investigate the matter.
''This suggests that the firms and the regulators had not been doing enough previously to avert a potential financial
meltdown,'' the lawmaker wrote.
Rep. John Dingell, a Michigan Democrat, has requested a similar study from Greenspan, Rubin and other top regulators
into the matter.
Still, Baker predicted that Long-Term's bailout is an isolated case that will likely drive market participants to take another
careful look at their own portfolio to determine if their risks are inappropriate.
(http://dailynews.yahoo.com/headlines/bs/story.html?s=v/nm/19980927/bs/longterm_5.html) |
