When someone at the Federal Bureau of Investigation calls hedge funds “an emerging threat,” you know you’re in trouble. Chip Burrus, an assistant director at the FBI, made that comment in an interview, just as the Federal Reserve seems to be looking to insinuate itself more into the industry. Timothy Geithner, president of the Federal Reserve in New York, said in a panel discussion Monday that the time may come that since hedge funds are now such a major player in the financial system, that the Fed will have to play a bigger role in regulating them. Geithner, noted that as a result of changes in the market, the Fed has supervision over “a diminished and smaller share of the system as a whole. We may come to a point in the future that we may have to revisit both the scope and the design” of the current framework. (Unlike the Securities and Exchange Commission, which at times has complained of staff shortages to handle hedge funds, the Federal Reserve seems to have no such problem.) His predecessor at the Fed, William McDonough, who now works for Merrill Lynch, said the SEC may be able to watch over Wall Street and in some part over hedge funds, but the existing system “invariably demands that the Federal Reserve interest itself in institutions other than the banks more than it had in the past.” Without mentioning the Amaranth Advisors disaster by name, McDonough concluded, “One would hope that we would not wait for a crisis that is truly a mess for the Congress and the president to look at the structural issues and decide to put in place a supervisory system that is more appropriate.” Neither McDonough nor Geithner hinted at how they would go about getting that additional authority, nor has there been any reported reaction by the SEC on the thought that some other agency may be trying to muscle in on its turf.
