This week's most exciting news was the release of the Counterparty Risk Management Policy Group III's report. Wait, do not doze off! There are summaries in the Times and in the Washington Post of the report, made by honchos from Goldman, Citigroup (like Citi should be advising anyone on anything, says the disgruntled stock owner), Lehman, and JP Morgan Chase, but what caught my eye was at the end, in the section on emerging issues—in which the industry titans address hedge funds and "near banks," and the issue of their oversight.

The report says:

To some extent, and in some jurisdictions, hedge funds have over the past few years become subject to some limited forms of prudential oversight, but not of the nature and scope that is commonplace for traditional banks and the major investment banks in the United States.....

On the whole, regulated institutions have done a credible job in managing their exposures to hedge funds even in the midst of the virtually unprecedented turmoil of the past 12 months. We have not, to date, witnessed a re-run of the hedge fund-driven systemic issues raised by the LTCM episode. On the other hand, it cannot be denied that the activities of at least some hedge funds (and some private equity funds) were important contributing factors to the reach and severity of the crisis....

In the current circumstances, some attention has been given to a modified form of direct, but standby, supervision. Under this approach, the authorities (i.e., the Federal Reserve in the United States) would step in when problems at one or more hedge funds raise systemic concerns. While such an approach will no doubt be debated in public and official circles, CRMPG III believes that this approach too raises moral hazard questions.

For the layperson, let's turn to the Economist glossary: "Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected."

So! Once again, this august body comes out against supervision of hedge funds because if anyone does supervise them, it means they'll behave even worse than they currently do. So when the whole hedge fund thing comes crashing down in 2010, we'll at least know who, in part, to blame.