SEC Chief: More Hedge Fund Woes

More hedge funds may be in trouble, the government's top securities regulator told Congress on Tuesday.

Lawmakers grilled Arthur Levitt, chairman of the Securities and Exchange Commission, in the aftermath of last week's near-collapse of Long-Term Capital Management LP. Rep. Edward Markey, D-Mass., said the largely unregulated hedge funds act as "the Howard Hughes of the financial services industry - too rich to be seen in public."

Lawmakers, worried about the potential risks to the economy and banking system from hedge fund problems, want to know whether new government controls are needed. The questions came at a hearing called to examine another subject, mutual fund fees.

Last Wednesday, a $3.5 billion private bailout of Long-Term Capital by a group of major banks and brokerage firms was facilitated by the Federal Reserve Bank of New York.

Asked whether other hedge funds are at risk, Levitt replied, "Probably." He added, however, that the Long-Term Capital situation "is probably pretty extreme."

His remarks came as investors' anxiety reportedly rose about a second hedge fund, Convergence Asset Management, in possible trouble for making the same kind of bad financial bets in volatile markets. The New York Times reported in Tuesday's editions that both funds are run by former star traders at Wall Street powerhouse Salomon Brothers and use similar investment strategies.

Market sources told Dow Jones News Service that Chase Manhattan, one of the banks rescuing Long-Term Capital, has total hedge-fund risk exposure of $3.2 billion, of which only $300 million is unsecured. The rest is backed by cash, Treasury bonds, corporate bonds and other securities, according to the sources, who were familiar with an analysts' meeting that Chase held Tuesday.

It wasn't immediately clear whether the $300 million of unsecured exposure coincided with its contribution to Long-Term Capital, which was in the same amount.

Levitt told the House Commerce finance subcommittee it was too early for him to reach "a definitive conclusion" as to whether stricter government oversight was needed. He deferred to a report on hedge funds that will be drafted by top regulators.

Levitt did say that as a general rule, he was hesitant "to inject government into the private sector unless it's absolutely necessary."

Treasury Secretary Robert Rubin has asked agencies making up the presidential Working Group on Financial Markets to submit the report. Rubin heads the group, which was established after the 1987 stock market crash and includes the Federal Reserve, the Treasury Department and the SEC.

"I think it's premature for us to assign where the blame is," Levitt said when asked about the oversight of securities and banking regulators before the Long-Term Capital crisis hit. He said the SEC had been "reasonably well aware" of the brokerage firms' risks in inesting in the hedge fund.

That led Markey to conclude, "That puts the blame on the banking regulators" such as the Treasury and the Federal Reserve.

While the funds are mostly unregulated, the Treasury and the Fed do have responsibility for the nation's banking system, which could be severely affected by a major hedge-fund collapse.

Rubin has declined to take a position on whether new government controls on hedge funds were needed.

Federal Reserve Chairman Alan Greenspan told lawmakers before the Long-Term Capital debacle that hedge funds are "very strongly regulated" by the bankers who lend them money and no new government oversight was necessary.

Because hedge funds attract only a handful of wealthy, sophisticated investors, they are exempt from the rules governing the booming mutual fund industry, such as requirements for publicly reporting asset values and protecting investors.

Though lawmakers are satisfied with the regulation of mutual funds, some expressed concern at the hearing that ordinary investors may be paying too much in complicated fees.

For months, Levitt has been pushing the industry for improved disclosure of mutual fund fees and investment risks. He also recently took measures to make pricing information about corporate bonds as readily available as data on stocks and government bonds, another topic of Tuesday's hearing.