The regulatory powers on both sides of the Atlantic are proposing sweeping changes to broaden oversight in the financial system. Timothy Geithner, President Barack Obama's nominee as Treasury secretary, has pledged to strengthen regulation of over-the-counter derivatives and to introduce registration of hedge funds to improve market transparency.
'We are going to need sweeping changes in regulatory policy, the oversight structure, and in our tools for crisis management,' Geithner said in written responses to questions from Democratic Party Senator Carl Levin, ahead of his confirmation vote by the full Senate on Monday.
Geithner (pictured) believes better federal oversight is needed for hedge funds because their destabilisation could seriously disrupt markets. 'I support the goal of having a registration regime for hedge funds because we need greater information and better disclosure in the marketplace,' he said.
In the UK, Financial Services Authority chairman Adair Turner says capital rules similar to those for banks may need to be applied to hedge funds if they are deemed large enough to pose a serious risk to the economy if they fail.
Both men have linked potential hedge fund failures with market destabilisation even though not one hedge fund has received a public bailout. This is because the problem lies with the banks and the authorities that were meant to regulate them.
This, surely, is where the need for sweeping regulatory changes lies. The hedge fund industry seems now resigned to greater regulation but no-one should imagine that this will automatically put all the problems of the financial industry to rights.