FROM THE OFFICE OF PUBLIC AFFAIRS
September 30, 1998RR2728
The Honorable James A. Leach
Chairman
Committee on Banking and Financial Services
U.S. House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
I appreciate the opportunity to discuss the role of the Treasury Department with respect to Long-Term Capital Management. At Treasury, we monitor developments in markets around the world. We were informed of developments affecting Long-Term Capital Management, and we were kept apprised of the progress of discussions among its creditors. We did not, however, participate in any of those discussions.
We applaud your decision to hold a Banking Committee hearing on the role of hedge funds in today's financial markets. There are many important issues that will be raised and that must be considered by Congress, the financial regulators and market participants.
Therefore, Secretary Rubin, as Chairman of the President's Working Group on Financial Markets, has asked that the staffs of the constituent agencies prepare a study of the potential implications of the operations of firms such as Long-Term Capital and their relationships with their creditors. We will proceed as expeditiously as possible, and we will share our results with Congress as soon as practicable.
While there are many issues to be studied, we urge the Congress to pass the Financial Markets Reassurance Act of 1998. This legislation will decrease rather than increase systemic risk, because it will reduce legal uncertainty with respect to certain OTC derivatives and hybrid instruments. In addition, the standstill legislation will allow the CFTC to take appropriate action in response to a market emergency. I would note that the conferees on the Appropriations for Agriculture have preliminarily decided to include a version of this bill.
We also urge the Congress to enact the financial contract netting legislative proposals approved by the Banking Committee. These proposals would amend the Bankruptcy Code and the bank insolvency laws and are important in reducing systemic risk in financial markets.