A major feature in the Washington Post on the recent decisions and legacy of Treasury Secretary Henry Paulson notes that he believes that it is time to begin regulating hedge funds, reversing his long-held opposition. "You should not be thinking about how to fight it [regulation] but how to make it work," Paulson is quoted telling hedge fund managers.
Paulson is reported to have said that the policy statement he crafted on hedge funds in January 2007, which stated they should not be regulated, was wrong.
The article says that Paulson is working on a proposal that would grant the federal government broad new powers to take over a wide range of financial firms (beyond banks) whose collapse could endanger the financial system. Paulson said Congress would have to define which companies meet the criteria and determine how much they would contribute to a fund that would help cover the cost of closing them in an orderly fashion if they cannot be saved.
Regulation is coming. Hedge funds need to act proactively to make sure the regulation is sensible. Part of the process is demonstrating to Congress, the media and the public the important roles they play in enforcing good governance, providing liquidity in markets, and the degree to which they are an important source of capital to an economy constrained by banks' inability to lend.
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