LAWMAKERS PLAN RISK REVIEW AFTER HEDGE-FUND FLOP.

Byline: Marcy Gordon Associated Press 

The near collapse this week of a huge, largely unregulated investment fund has pushed lawmakers to investigate the potential risks to the economy and banking system from such hedge-fund operations.

Rep. Jim Leach, R-Iowa, chairman of the House Banking Committee, announced Friday that the panel will hold a hearing soon on the $3.5 billion private bailout of Long-Term Capital Management LP by a group of major banks and brokerage firms. At issue is whether lawmakers should consider imposing new controls on hedge funds.

Consumer activist Ralph Nader told key senators the hedge-fund debacle shows that the Senate should slow its action on sweeping legislation to lift Depression-era barriers between banks, brokerage firms and insurance companies.

``The public interest and the safety and soundness of the nation's financial system . . . require that further consideration of (the legislation) be postponed until all the facts can be gathered about the operation of the hedge funds like Long-Term Capital Management,'' Nader wrote Senate Banking Committee Chairman Alfonse D'Amato, R-N.Y., and Sen. Paul Sarbanes of Maryland, the panel's senior Democrat.

Spokesmen for D'Amato and Sarbanes couldn't immediately be reached for comment.

Rep. Richard Baker, R-La., chairman of a House Banking Committee subpanel on capital markets, rejected Nader's position. ``I don't think it has a relationship'' to the financial overhaul legislation, he said in an interview.

But Baker did endorse the idea of lawmakers taking a close look at hedge funds and their potential for causing economic mayhem.

In a bid to avert wider repercussions in the financial system, the Federal Reserve Bank of New York helped facilitate the Long-Term Capital's rescue, which was disclosed Wednesday. The fund, run by some of the most esteemed minds on Wall Street, had more than $90 billion invested in complex bets in financial markets around the world.

Some of the money was borrowed from commercial banks and investment houses, which would have faced huge losses had the fund failed. A failure also would have forced Long-Term Capital to unwind many of its positions, causing panic selling in the market, and possible losses for other hedge funds and investment companies that had made bets on similar securities.

Leach said the bailout raised numerous issues, notably the role of such speculative trading in the global economy.

``Questions exist as to whether appropriate national and international supervision'' of hedge funds exists and whether the funds designed to shield private companies from risk actually create risk for the economy as a whole, he suggested.

Leach said lawmakers also want to know who the potential losers are from a collapse of Long-Term Capital: Are they only the big financial companies, or are pension plans, mutual funds and college endowments also put at risk? What about ordinary citizens?

With only a few weeks remaining in the congressional session, the hearing is expected to be held late next week or early the following week, a Banking Committee aide said.

Treasury Secretary Robert Rubin declined to take a position on whether new government controls were needed for hedge funds.