Paulson Wants a Say in Hedge Fund Breakdowns

New York (HedgeCo.Net) – Treasury Secretary Henry Paulson outlined a plan yesterday that may give some power to the U.S. government when hedge funds come to the end of the road.

Paulson said that in the event of trouble, he wanted “"additional powers to manage the resolution, or wind-down, of large non-depository financial institutions, such as larger hedge funds, so as to limit the impact of a failure on the broader financial system."

Paulson has long been an advocate of tighter hedge fund regulation and an increased authority of the Federal Reserve.  He had recently stated that the Fed should have extended control over risky financial instruments such as hedge funds so that they may “intervene to mitigate systemic risk in advance of a crisis.”

This stance has made him the target of heightened criticism by those who think the government should cease to intervene in times of trouble, referring of course to the Fed backed purchase of Bear Stearns by JPMorgan.  Though others say the bank’s demise never would have happened if two of its major hedge funds hadn’t collapsed that past summer.  Since massive hedge fund implosions shake the entire economy, Paulson hopes that his plan can provide balance and regulation to quell those instances in the future.

"Over the last several weeks, the need to move more quickly toward an optimal regulatory structure that establishes a prudential financial regulatory system, focused on promoting long-term market stability has become all the more apparent," he added.

Though the speech didn’t directly target hedge funds, the rhetoric mirrored the tone of his recent attempts to vamp up regulation of risky investments and to shed light on the often ambiguous industry.  He responded to critics saying, “I’m playing the hand I’ve been dealt.”   

Julie Scuderi
Senior Editor for HedgeCo.Net

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