Wider net proposed for US regulators

Hedge funds and CDOs would be brought under Federal legislation if proposals by the US Treasury secretary, Henry Paulson are accepted.

The proposals, which will be made public Monday (US time) have been described as the broadest overhaul of Wall Street regulation since the Great Depression.

Virtually all market players, including hedge funds and private equity funds, would be drawn into the regulators’ nets, if the proposals are accepted.

However, they have already attracted criticism, with one academic noting that they would rely heavily on self regulation.

“This is the equivalent of the builders of the Maginot Line giving us lessons on defence,” law professor, Michael Greenberger said

And in an article published in the New York Times (www.nyt.com), reporters Nelson Schwartz and Floyd Norris confirm that the proposed legislation would have “a light touch.”

They say it would enable the government to do little beyond collecting information, except in times of crisis.

And even Paulson himself does not expect the proposed legislation to apply before the end of the year, when a new president would be in office.

Paulson, himself, had a long career on Wall Street.

And his proposals have been designed to ensure that US financiers would still be able to compete effectively with foreign rivals, once they are in place.

Even so, they are sweeping. Scwhartz and Norris the proposals would impose the first regulation on hedge funds and private equity funds overnight.

“The proposals would, for the first time, create a set of Federal regulators with authority over all players in the financial system, be they banks, insurance companies or other entities like hedge funds and private equity funds, which now operate virtually without regulation.”

They note, too, that as the full impact of the current US market crisis becomes evident, the political stakes are likely to grow.

That, almost certainly, will include demands for much tighter regulation than Paulson is proposing.

However Schwartz and Norris note that the initial response of influential Democrats to Paulson’s proposals has been positive.