U.S. Government Auditors Urge
                   Tighter Broker-Dealer Oversight

                   By MICHAEL SCHROEDER
                   Staff Reporter of THE WALL STREET JOURNAL

                   WASHINGTON -- Government auditors admonished top financial
                   regulators for failing to recognize sooner the perilous condition of
                   Long-Term Capital Management LP, the hedge fund that threatened to
                   disrupt financial markets in the fall of 1998.

                   In calling for tighter regulatory oversight of broker-dealers, the General
                   Accounting Office said the Federal Reserve, Securities and Exchange
                   Commission, and Commodity Futures Trading Commission overlooked
                   lapses in risk-management practices at banks and securities firms. "In
                   particular, federal regulators were ineffective in coordinating their
                   regulatory efforts to identify potential risks across industries and markets,"
                   the GAO said in a report issued Friday.

                   In September 1998, the Fed orchestrated a $3.63 billion private-sector
                   bailout of Long-Term Capital, based in Greenwich, Conn., to avert a
                   possible meltdown in the financial markets. The hedge fund, which was
                   operated by a team of well-regarded Wall Street executives and Nobel
                   laureates, was financed with as much as $125 billion in loans from major
                   banks and securities firms. After the debacle, two lawmakers asked the
                   GAO, the investigative arm of Congress, to evaluate the government's
                   response to LTCM and to consider how regulators can better avert such
                   episodes in the future.

                   The agency's report comes on the heels of separate studies on hedge funds
                   and derivatives prepared by the President's Working Group on Financial
                   Markets, which includes top officials at the Treasury, Fed, SEC and
                   CFTC.

                   In April, the Working Group called for banks and securities firms to
                   develop better risk-assessment tools. The regulators also proposed
                   more-detailed disclosures from hedge funds, which are largely unregulated
                   investment companies that cater to wealthy investors.

                   In another study issued earlier this month, the panel recommended against
                   new regulation of the multitrillion-dollar over-the-counter financial
                   derivatives market. Hedge funds are big users of OTC derivatives, which
                   include swaps and other off-exchange transactions that are used to hedge
                   against unexpected movements in interest rates, currencies, commodities or
                   other underlying securities.

                   Regulators already have begun implementing some of the things the GAO
                   has proposed, including doing a better job of coordinating the way they
                   examine lenders. But the GAO report said the regulators' proposals fall
                   short in an area that would leave some lenders "without firmwide
                   risk-management oversight by financial regulators." For instance, the report
                   recommended that Congress enact laws to give the SEC and CFTC
                   authority to oversee unregulated affiliates of Wall Street firms and futures
                   dealers that are marketing an increasingly bigger slice of the derivatives
                   business. While the regulators have full authority over registered
                   broker-dealers and futures merchants, their ability to assess the risk of
                   portfolios is hampered because unregulated affiliates are growing so fast. In
                   1998, for instance, the assets held in affiliates of the four largest firms had
                   grown to 41% from 22% in 1994.

                   The two lawmakers who requested the GAO study, Sen. Byron Dorgan
                   (D., N.D.) and Rep. Edward Markey (D., Mass.), introduced legislation
                   last week that would grant the regulators new authority to oversee
                   affiliates. The measure likely will face opposition from broker-dealers and
                   investment banks, which have threatened to move operations out of the
                   country if new regulations and reporting requirements are imposed.

                   "Working Group representatives testified to Congress that they found no
                   meaningful difference in the way the regulated and unregulated firms had
                   performed. So there was no justification for extending regulation to new
                   types of firms," said Mark Brickell, a managing director at J.P. Morgan &
                   Co.

                   Write to Michael Schroeder at mike.schroeder@wsj.com