Regulators and Legislators Slam Hedge Funds In Wake Of Amaranth Fiasco

Sep 30 2006 | 9:02am ET

Regulators from China to Australia to New York are calling for action, and politicians in Washington are calling for heads, in the aftermath of the Amaranth Advisors debacle.

In the wake of the collapse, hedge funds may have made some new, formidable enemies in the Federal Bureau of Investigation and Federal Reserve Bank of New York. FBI Assistant Director Chip Burrus called hedge funds “an emerging threat” as pension funds become more involved, and said “people that aren’t expecting to have this type of a risky investment in their portfolio end up taking a bath.” He promised that the Bureau would protect investors who “get fleeced left and right.”

Meanwhile, New York Fed chief Timothy Geithner said that the Fed may need to “revisit both the scope and the design” of its regulatory framework, as “we have capital-base supervision over a diminished and smaller share of the system as a whole.” And the U.S. House of Representatives passed a bill Wednesday authorizing a study of hedge funds and possible regulation.

On the other side of Capitol Hill, three U.S. senators expressed their concerns about hedge funds’ impact on the market. Sens. Dianne Feinstein (D-Calif.) and Carl Levin (D-Mich.) called for giving the Commodity Futures Trading Commission greater power to monitor energy trading. Meanwhile, Sen. Arlen Specter (R-Pa.)—who’s hometown, Philadelphia, saw its pension fund lose “a lot of money” in Amaranth—railed against hedge funds and the Securities and Exchange Commission’s allegedly weak response at a committee hearing. He told SEC enforcement chief Linda Thomsen he was “interested in indictments, even more interested in convictions, and more interested in jail sentences.”

Meanwhile, on the other side of the globe, the head of the China Banking Regulatory Commission has called for greater cooperation among the world’s financial regulators to keep an eye on hedge funds. And Reserve Bank of Australia chief Glenn Stevens, has also expressed concern that
“under abnormal conditions... the leverage employed by some of the funds will be at its most damaging.”

There are, of course, calls for caution in the maelstrom, and one of them, predictably, is from the SEC’s Paul Atkins. Commissioner Atkins, who vehemently objected to the SEC’s hedge fund registration requirement, told reporters in Europe that “It looked like the system worked,” in that Amaranth did not trigger a wider system failure.

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