The Bush administration has decided to leave hedge funds largely unregulated, reports the New York Times. Greater regulation was in the works to protect less sophisticated investors as well as avoiding the kind of catastrophic failure that nearly occurred with the 1998 collapse of the inappropriately named Long Term Capital Management.

Back then, the fund was bailed out because its failure would have hit big banks and national economies hard, said then-Fed Chairman Alan Greenspan. Now the government has concluded that the trillion-dollar industry will not sink the economy or major institutions because they both are so robust.

The conclusion that neither hedge funds nor private equity operators need more regulation reflects, says the paper, both "the strong antiregulatory ideology of the administration and the formidable influence of Wall Street and the increasingly wealthy hedge fund industry among both Democrats and Republicans in Washington."

That may be but it will probably only last until the first big hedge fund scandal, which will either rob retirees of savings or threaten a major institution. At that time, as with Enron, there will be a bipartisan clamor for better hedge fund governance.

In a quirky coincidence, a New York bankruptcy judge has stung Bear Stearns (and other banks) with damages because the bank should have known that the fund for which it was acting as "prime brokerage" was a fraud, reports the New York Times. The suit was filed in the bankruptcy court on the theory that Bear Stearns was a transferee of the fund's money because it was using it to cover short positions. A bit of a stretch on traditional bankruptcy law but so too is the hedge fund a real stretch on sound banking priciples.

It remains to be seen if good intentions and a high threshold for individual investors will protect the hedge funds from further regulation when the first failure bites the average investor or retiree.