House Banking Committee Chairman Jim Leach warned regulators this week not to bail out hedge funds that make bad investments, even iftheir failure threatens the health of a creditor bank.
"Investing in and lending to hedge funds is by nature a risk-oriented activity, and those who do so should be subject to market discipline and not given any reason to believe government-assisted rescues are likely," he wrote to Treasury Secretary Robert E. Rubin. The letter, dated Feb. 23, was made public Thursday.
If supervisors continue to intervene, as they did last fall with Long- Term Capital Management, Congress will be forced to impose "intrusive government regulation" on hedge funds, the Iowa Republican said.
Reacting to a recent Bank for International Settlements report on hedge funds, Rep. Leach said regulators also should require banks to adopt conservative lending policies for offshore hedge funds, which are subject to few legal restraints.
Mr. Rubin is chairman of a presidential working group studying hedge funds. Rep. Leach plans a March 4 hearing on them.