A White House task force said Thursday that hedge funds should disclose more financial data, but rejected calls for direct regulation of these highly leveraged institutions.
"It is our goal with the recommendations to better promote private- market discipline," said Gary Gensler, the Treasury Department under secretary for domestic finance.
The President's Working Group on Financial Markets said all but the smallest hedge funds should report data each quarter on the amount of risk they incur. This would require legislation.
New regulations will require publicly traded companies, including banks, to disclose significant credit extended to highly leveraged institutions, such as hedge funds, investment banks, and commercial banks, the report said.
The working group also called for better risk-management techniques-a move recently required by bank regulators-and higher capital requirements on bank loans to hedge funds.
House Banking Committee Chairman Jim Leach called the report "thoughtfully balanced."
"Instead of proposing extensive regulations, the working group calls for greater disclosure and more prudential supervision of federally insured financial institutions which lend to hedge funds," the Iowa Republican said.
But Rep. Marge Roukema, chairwoman of House Banking's financial institutions subcommittee, said quarterly disclosure requirements for hedge funds and public companies are not enough. "I don't know if that is adequate," the New Jersey Republican said in an interview. "I suspect we are going to have to go a little farther."
The study was prompted by the September crash of Long-Term Capital Management, a hedge fund that was hit particularly hard by the Russian debt default and ensuing global financial turmoil. The Federal Reserve Bank of New York orchestrated an unprecedented rescue by 14 big banks and securities firms, arguing that the hedge fund's collapse could have caused a systemic crisis.
Few industry officials had seen the report; still several vowed to cooperate with the administration.
"This looks like a proposal based primarily on disclosure of financial data, which would be healthy for the markets," said Larry Larocco, managing director of the ABA Securities Association. "Still we need to ensure it would not create an overly burdensome regulatory environment."
"We are supportive of not having new regulations and of more public disclosure," said Richard Whiting, acting director of the Financial Services Roundtable. But he warned against requiring the release of confidential investment data that could aide competitors.
If the additional disclosures did not improve market discipline, the working group said capital requirements could be imposed to limit the amount of leverage a hedge fund could incur.
However, the report warned: "Directly regulating these institutions could drive them offshore. In addition, direct regulation of hedge funds could present formidable challenges in terms of cost and effectiveness."
Other options include imposing oversight and capital requirements on unregulated affiliates of broker-dealers, such as derivative trading units, and regulating derivative dealers that are not affiliated with an institution already subject to federal oversight.
The study cautioned against overreacting to Long-Term Capital's high leverage, which exceeded $50 of assets to $1 of capital. While that ratio was excessive, leverage by itself is not a negative, the report said, noting that the five largest commercial bank holding companies are leveraged 14 to 1 and the five largest investment banks are leveraged 27 to 1.
"We recognize that leverage can play a very positive role in our economy," Mr. Gensler said.
The working group was established after the 1987 stock market crash and includes officials from the Treasury Department, Federal Reserve Board, Securities and Exchange Commission, and Commodity Futures Trading Commission.