Will Troubles of Bear Stearns Trigger The Return of Hedge Fund Regulation?

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Fears that the narrowly avoided meltdown at a couple of Bear Stearns hedge funds last week could have triggered a "systemic event"—a domino-like tumbling of other hedge funds and investment banks—have not gone unnoticed on Capitol Hill. The staffs of at least two prominent lawmakers have been asked to look into whether new legislation regulating hedge fund activity might be needed to protect the capital markets, DealBreaker was told by someone familiar with the staffers work.
The staffers have contacted economists, legal scholars and some prominent hedge fund professionals seeking ideas for new regulations. There have been calls for new laws since the Supreme Court struck down a Securities and Exchange Commission regulation requiring hedge fund managers to register. But lawmakers in Washington, DC have been paying to the financial headlines in recent months with renewed interest, we're told. Recently, bills to raise taxes on money managers have been introduced in both the Senate and the House of Representatives.
"At the very least, there's going to be hearings," the source said. "This is Washington, DC. Down here we believe that the best disinfectant is sunshine. Right now there is concern that no-one seems to quite understand exactly what happened with Bear Stearns. Or what might have happened. There's the impression that hedge funds live in the damp attic of the economy."
Although hedge fund managers mostly oppose regulation, Wall Street is not as universally opposed to regulating the industry as sometimes thought. Many investment banks make money from brokerage fees and by extending leverage to hedge funds, and currently a portion bear the costs of monitoring their clients as well as the risks of hedge fund failure. While banks would not want to give up this business to rivals, some might favor a move that would restrict all the players in the same way.
"Right now they are in a race to the bottom," the source told DealBreaker. "Lawmakers are considering imposing a collective solution to the problem of exploding leverage and hedge funds. Everybody on Wall Street gets hit the same, while investment banks get to pass on the costs of monitoring hedge funds to the government."

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