By Robert Hunter

The near-blowup of Long-Term Capital Management last fall may be a fading image in the financial world’s rear-view mirror, but Washington’s fascination with the events surrounding the episode continues. On March 3, regulators and market participants trudged up to Capitol Hill for yet another round of hearings on the subject before the Subcommittee on Capital Markets, Securities and Government-Sponsored Enterprises of the House Committee on Banking and Financial Services. This time the proceedings ran the gamut from the mundane to the surreal.

William McDonough, president of the Federal Reserve Bank of New York and chairman of the Basle Committee on Banking Supervision, kicked off the proceedings with testimony that seemed like an instant replay of earlier regulatory oratories. He argued that three areas required particular attention by banks and their supervisors in dealing with hedge funds: the credit analysis process, exposure measurement and stress testing. McDonough conceded, however, that direct regulation of hedge funds would be difficult, and that the best approach would be to focus attention on banks’ lending activities.

Lee Sachs, a deputy assistant secretary of the Treasury, then gave a sneak peak at what the President’s Working Group on Financial Markets, convened last year, is considering as it writes its final recommendations, which are due out soon. Apparently, the group is ambitious; Sachs said it might suggest “imposing direct regulation on some currently unregulated market participants.” Whether that could ever happen, of course, is another story—virtually every country in the world would have to follow suit, lest hedge funds simply pack their bags and set up shop in less burdensome overseas locales.

After some now-familiar testimony from Commodity Futures Trading Commission chairperson Brooksley Born, it was time for the hedge funds to throw in their two cents. Leon Metzger, president of Paloma Partners, a Greenwich-based hedge fund, argued against any additional regulation of hedge funds, and against any arbitrary limits on leverage. Hedge funds, he said, are far more beneficial to the world’s financial system than they are harmful. He cited an International Monetary Fund report that found that, in general, “hedge funds make markets more stable, not less,” and noted that LTCM was merely an isolated example of massive funding and stratospheric leverage.

Say what?

At this point, the hearings seemed like another Washington snooze fest. But then, in a curious turn of events, Lawrence Parks, the executive director of the Foundation for the Advancement of Monetary Education and a member of Worker’s Education Local 189 of CWA AFL-CIO, took the stage. He promptly switched into attack mode, suggesting revolutionary changes in the world’s financial system.

“For several years, John Meriwether’s Long-Term Capital hedge fund garnered many hundreds of millions, perhaps more than a billion, dollars annually in ‘profits’ from currency and derivative trading. Consider the 3,000 other hedge funds along with major banks and brokerage firms doing the same thing. All told…I reckon that these folks are pulling about $50 billion out of the markets each year…Since currency and derivative trading are zero-sum games, every dollar ‘won’ requires that a dollar was ‘lost.’ But who are the losers that not only sustain but continue to tolerate these enormous losses year after year? Who could be so wealthy or so ignorant that $50 billion each year doesn’t matter?…The answer is that the losers are all of us. And, while neither rich nor stupid, we’ve been given no choice but to continue to lose. Every time we, on behalf of our businesses or ourselves, change one currency to another, we lose transaction costs. Every time we hedge a payment from or to a foreign land, the cost of that hedge represents a loss of wealth. And every time one of these fiat currencies cannot be ‘defended,’ the workers, seniors and business owners of that country—folks like us—suffer big time.”

Later, Parks named names: “I would like to think that the principals of Long-Term Capital, George Soros and the principals of other hedge funds, and the proprietary trading departments of banks and brokerage houses are not evil. I prefer to think that it is the fiat money system that is evil and corrupt. However, it is extremely unlikely that those who are on the receiving end of so much unearned wealth will cooperate in changing the system.”

His recommendation: “It’s time to reexamine the evidence supporting fiat money and to reevaluate the resumption of a fair and honest monetary regime and a system of honest monetary weights and measures: the gold standard.”

Are you listening, Mr. Greenspan?

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