It's Time To Clip The Hedge Funds
Long-Term Capital Management's spectacular crash and subsequent $3.6 billion rescue is the wake-up call that regulators everywhere needed ("The Fed steps in: Will it work?" American News, Oct. 12). For too long, governments and regulators have ignored the activities of the so-called hedge funds. The argument that hedge funds are tightly supervised by their management and creditors lulled regulators and analysts into believing that they can be self-regulated. The truth is lenders and borrowers are too greedy and vainglorious to be left on their own.
The speed with which the U.S. Treasury Dept. has organized the rescue of LTCM's rich men's club is amazing, since it is still debating how much to contribute to the restructuring of some Asian economies, like Indonesia, where the lives of 200 million people have become intolerable.
The structural weaknesses of developing economies are no excuse for the quants to plunder at will like modern-day pirates through superior firepower. Indeed, the newly liberalized currency and stock markets of the Asian economies are no match for the quants. Having pressured these economies into liberalizing their markets, the U.S. has now abandoned them in their hour of need. Blind faith in the free-market system is wrong. Like all markets, it has to be vigorously regulated to prevent overheating, excessive leverage, antitrust behavior, and fraud. In the final analysis, the mistakes made in LTCM's case are no different from the ones the now-faltering Asian economies made. Excessive lending with insufficient collateral made on the belief that the borrower has some magical touch prove to be the undoing of lender and borrower.