UPDATE: Treasury Seizure Authority Request Will Cover Hedge Funds
By Sarah N. Lynch and Gregory Meyer Of DOW JONES NEWSWIRES WASHINGTON -(Dow Jones)- A Treasury official confirmed Wednesday that the department's proposal to allow the government to seize troubled nonbanking firms would include hedge funds if they pose a significant risk to the marketplace.
In an outline unveiled Wednesday, the Treasury proposed new legislation that would give the government the ability to take over any financial institution that poses a potential risk to the economy. The Treasury's outline specifically says that insurance companies, bank and thrift holding companies, holding companies that control broker-dealers, and futures commission merchants would be included in the bill.
The outline didn't mention hedge funds, but the Treasury official said they would be covered along with any other nonbank financial institution if they are deemed to pose a widespread risk.
The outline on the proposed new government powers was released just one day after Treasury Secretary Timothy Geithner testified at a congressional hearing on the topic.
Government officials said lessons learned from the collapse of Lehman Brothers and government rescue of American International Group Inc. (AIG) demonstrate the need for new powers to rescue the economy when it's threatened by a distressed firm.
Fears a troubled fund could precipitate an economy-wide meltdown have persisted since at least 1998, when banks banded together to insulate the financial system from the collapse of hedge fund Long Term Capital Management. Some hedge funds are major counterparties with the financial firms at the center of the past year's financial turmoil. AIG has said it paid $200 million in "public aid" to hedge fund titan Citadel Investment Group to settle short-term trades last year in which hedge funds lent AIG cash in exchange for bonds.
"Because hedge funds are major players in the credit default swaps market, they do become 'too entangled to fail' in the same way that AIG did," said John Coffee, a securities law professor at Columbia Law School. "Thus, from a systemic risk perspective, hedge funds - or at least the largest ones - do merit inclusion in the Treasury proposal."
The Managed Funds Association, a leading hedge fund trade group, said it supports creating a "systematic risk regulator."
"However, these are complex issues," MFA President Richard Baker said, "and it is critical for policy makers to have a firm understanding of the implications of these proposals on financial markets before taking extraordinary action, such as seizing the assets of non-bank financial institutions thought to be systemically relevant."
Steve Adamske, a spokesman for House Financial Services Chairman Barney Frank, D-Mass., said a draft of the bill requested by the Treasury should be done by late this week or early next week.
-By Sarah N. Lynch and Gregory Meyer, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com
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Publié le 25 mars 2009 Copyright © 2009 Dowjones
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