The shadow of LTCM

WSJ: "The watchmen are back. And they're watching the hedge funds again, among other points of concern.

The group, which wields the weighty title Counterparty Risk Management Policy Group II, was established to monitor risks to the world-wide financial system in the wake of the 1998 implosion of hedge fund Long-Term Capital Management.

E. Gerald Corrigan, past president of the Federal Reserve Bank of New York and now a managing director at Goldman Sachs Group Inc., is serving as chairman of the revived 15-member group, which includes representatives from major brokerage firms, banks and one insurer as well as the hedge funds with which they often trade. It will hold its first formal meeting next month.

The group's revival comes with the quiet backing of the New York Fed, which appears to have grown more concerned about potential market disruptions. For example, in a speech in November, New York Fed President Timothy Geithner noted "hedge funds -- and financial leverage more generally -- still present a source of potential risk to the financial system" and went on to cite a relaxation in credit terms and other risks."

Sounds like a good idea to me. But will they really be able to do anything about systemic risk? Someday this global liquidity bubble will come to an end. Hopefully in an orderly manner, but if not, look for a lot of hedge funds to blow up. LTCM would be a medium-sized fund these days, although the amount of leverage they used would still be considered high.