WASHINGTON
The Obama administration's aggressive plan for strict scrutiny of hedge funds and other freewheeling investors, part of the biggest expansion of financial restraints since the Great Depression, is drawing instant opposition from Republican legislators and the rules' targets. And skeptics are questioning whether the new rulebook would work anyway.
Wall Street wizards have proved adept at designing complex financial products to sidestep existing regulations. And Vincent Reinhart, a former director of monetary affairs at the Federal Reserve, says, "You're going to see firms try to figure out how to be under the radar."
For example, private-equity investors might try to buy large hedge funds and chop them into funds that would be small enough to operate unregulated, Reinhart said.
Treasury Secretary Timothy Geithner, unveiling the plan yesterday, said that the nation's economic crisis demands bold action.
"We need much stronger standards for openness, transparency and plain common-sense language throughout the financial system," Geithner told the House Financial Services Committee.
The administration's proposals, which require congressional approval, include:
□ Imposing tougher standards on financial institutions that are judged to be so big that their failure would threaten the entire system.
□ Extending federal regulation for the first time to all trading in financial derivatives -- such exotic instruments as credit-default swaps that are blamed for much of the economic carnage.
□ Requiring larger hedge funds and other private pools of capital, including private-equity and venture-capital funds, to register with the Securities and Exchange Commission.
□ Creating a regulator to monitor the biggest institutions. Geithner did not say which agency should wield such authority, but the administration is expected to favor the Federal Reserve.
□ Empowering the government to take over major nonbank financial firms, such as insurers and hedge funds, if deemed necessary.
The chairman of the committee, Rep. Barney Frank, D-Mass., and many Democrats on the panel backed the proposals, but Republicans assailed them as too far-reaching.
Private analysts also questioned whether Geithner's plan would succeed in safeguarding the financial system.
"We're not in this mess because we need new rules," said Bill Fleckenstein, a hedge-fund manager in Seattle who accurately predicted the housing bubble.
"We need to enforce the rules we already have," he said. "What we had was a complete breakdown by all our regulators. They simply didn't do their jobs."
And Fleckenstein said he didn't think that requiring big hedge funds to register with the government would prevent devastating frauds, such as Bernard Madoff's Ponzi scheme.
"You could register all 10,000 hedge funds, and it probably would just overwhelm the regulator," he said.
The outline of the regulatory plan was announced a week before President Obama was to meet for talks with the Group of 20 major industrialized and developing countries to discuss solutions to the global crisis.
European countries have said that the United States, where the financial problems began, must toughen its regulatory system.
The administration's plan also includes a provision that Geithner and Federal Reserve Chairman Ben Bernanke discussed before the committee on Tuesday: to give the administration expanded powers to take over major nonbank financial institutions, such as insurance companies and hedge funds.
That power is aimed at preventing a repeat of the problems surrounding insurance giant American International Group Inc. AIG caused a furor with news that it had distributed $165 million in bonuses to its financial products group. That unit specialized in trading credit-default swaps, the derivatives that drove the company to near-collapse last fall.
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