Hedge funds put US economy at risk, says report

(Bloomberg): Hedge funds and insurers might threaten US economic stability in a time of crisis, according to a report aimed at helping regulators decide which non-bank financial companies warrant Federal Reserve supervision. An exodus of hedge-fund investors could “cause activity in some markets to freeze,” said the report by staff of the Financial Stability Oversight Council. The report, obtained by Bloomberg News, also said the failure of a large insurance company could “result in dramatic and destabilizing actions being taken by investors.”

The 80-page report is a preliminary draft that, without making recommendations, offers a glimpse of issues regulators, including Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy F. Geithner, will consider when deciding which firms should be designated “systemically important” and warrant central bank scrutiny. The council, created by last year’s Dodd-Frank financial overhaul law to prevent another financial crisis, may begin making those rulings by midyear.

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