The NYT reported on Friday that the Bush administration's working group on capital market regulation decided that there was no reason to tighten rules for financial disclosure for hedge funds. It might have been useful if they talked to some of the economists/analysts who think that there is some danger to the financial system from having more than $1 trillion floating around in complete secrecy. At least by his actions, if not his words, Alan Greenspan falls into the camp who believes that they require regulation. Remember, he said that it was necessary for the Fed to intervene in the collapse of the Long-term Capital Hedge Fund in order to protect the financial system. Perhaps President Bush's working group thought additional regulation was unnecessary based on the court decision that had just been issued, which held that banks could be responsible for the loses suffered by hedge funds for which they act as a prime broker. If the banks that act as the agents for these funds are held liable for the losses their investors suffer, then the banks will themselves impose some real regulation on the funds. Of course, if the money managers that sink millions into funds that they know nothing about were actually held accountable for their investments, then we would have to worry much less about hedge funds.
--Dean Baker
