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What a difference two years and a financial crisis make. When Congress last floated the idea of regulating the hedge fund industry in 2006, proposing a bill that would have forced them to register with the Securities and Exchange Commission, the industry revolted and the bill died in committee. But on Thursday, in the face of growing economic tumult and an incoming pro-regulation Democratic administration, top hedge fund managers signaled they are now willing to deal on the thorny issue of oversight.
Testifying before a congressional oversight committee, fund managers Philip A. Falcone, Kenneth C. Griffin, John Paulson, James Simons, and George Soros agreed that hedge funds may require increased government regulation. Even minor regulation or increases in transparency would be a big change for the hedge fund industry. "Currently, hedge funds are virtually unregulated," said Henry Waxman (D-Calif.), who chairs the House Committee on Oversight and Government Reform, which held the hearing. (Mother Jones also covered Waxman's previous hearings on Lehman Brothers, AIG, credit rating agencies, and federal regulators.) The 1998 rescue of Long-Term Capital Management (LTCM) demonstrated that the failure of just one highly leveraged, unregulated fund could require government intervention. Because LTCM was considered "too interconnected to fail," the Clinton administration arranged for a bailout of the fund by Wall Street banks. Most of the committee members (and, naturally, the hedge fund managers) believe that hedge funds were not the cause of the financial crisis. But with the economy already in dire straits, members of Congress are determined that the hedge fund industry not produce another LTCM. "In our prior hearings, we have focused on what went wrong in the past," Waxman said. "Today's hearing lets us ask what could go wrong in the future so we can prevent damage before it occurs." With President-elect Barack Obama entering office in January, the writing is already on the wall when it comes to increased regulation of the financial sector. By demonstrating their willingness to accept some increased regulation, the hedge fund managers who testified on Thursday made the imposition of new rules on their funds' behavior almost inevitable.