While the facts are still hotly disputed, they are ascertainable. What role hedge funds played in different countries is an empirical question and not a matter of opinion. A Working Group on HLIs has been set up under the Financial Stability Forum. I hope it will settle the facts unambiguously so that the debate can move on to consider what, if anything, should be done. In deciding whether to restrict the activities of hedge funds, there are three considerations. First, who are the shareholders of hedge funds? They do not represent the retail public. Typically, hedge funds invest on behalf of wealthy individuals and institutional investors who do not need consumer protection. From this point of view, the activities of hedge funds are private business and need not be subject to the same strict regulations and disclosure demands as financial institutions that collect monies from the public. The second is a prudential concern. Are financial institutions that lend to hedge funds being sufficiently prudent and provisioning enough capital in relation to the lending? Hedge funds are not rated by commercial rating agencies, unlike most large banks and corporations. They often keep their portfolios and strategies secret which hampers a proper assessment of their financial soundness. The existing regulatory framework is not tight enough in this respect. As LTCM showed, creditors often lent independently of one another and were not setting aside sufficient capital to cover their lending to highly leveraged funds. The third is a systemic consideration.

The stock market and exchange rate crashed. Unlike other countries, Malaysia did not have excessive external borrowing. However, domestic borrowing was very high as banks had lent large sums, often against share collateral and to large property projects. The crash exposed these weaknesses in the private sector. On 1 September 1998, Malaysia decided to impose capital controls. Indonesia Indonesia was also believed to be fundamentally sound, even well after the initial outbreak of the regional currency turmoil. In late 1997, analysts continued to be upbeat on Indonesia’s economic prospects, expecting, on average, a strong 6-7% GDP growth in 1998. But as regional problems stacked up, Indonesia too could not escape the progressive erosion of confidence. The Indonesian economy had two domestic weaknesses: unsound banks and companies that had borrowed excessively abroad in short-term loans unbeknown to the government. These companies started hedging their exposures, sending the rupiah into a downward spiral. The companies became insolvent, badly affecting the banking system. Policy errors by the Suharto government compounded this. Grave social and political difficulties eventually led to a political crisis and a political transition that is still not completed. Korea Korea’s dynamic economy had certain weaknesses, but these were long-standing and well known: chaebols were very highly leveraged and banks often made lending decisions on government direction instead of commercial viability. Like Indonesia, Korea’s short-term foreign debt was high. When the crisis broke, foreign creditors refused to roll-over credit lines. Korean banks which had borrowed heavily overseas came under severe pressure.