A street sign on Wall Street outside the New York Stock Exchange in New York April 18, 2007. The new kings of Wall Street -- as the managers of booming private equity and hedge funds have been dubbed in the business press -- will come under unaccustomed scrutiny on Wednesday before the U.S. Congress. [Reuters]

In three separate hearings on Capitol Hill, lawmakers asked whether these secretive and wealthy financiers pay enough taxes and whether the Bush administration does enough to protect the economy and investors from them.

Rapid hedge fund growth could pose risks to financial stability if risk management practices are not strengthened, Federal Reserve Board Governor Kevin Warsh said at a hearing before the House of Representatives Financial Services Committee.

Bills have been introduced in the Senate and House that would raise tax rates on both private equity and hedge fund leaders, many of whom are billionaires but are largely out of the public eye.

Senate Finance Committee Chairman Max Baucus said at a separate hearing on tax issues he wants to find out "whether some people who are earning great wealth are also avoiding their full and proper share of the burden of taxation."

The Montana Democrat added: "There is also a good argument that the fund managers who are becoming publicly traded partnerships are stretching the law."

The Finance Committee hearing focused on "carried interest," or the 20 percent cut of profits above targeted returns typically kept by senior partners of private equity and hedge funds on major transactions.

A bill already introduced in the House would raise carried interest taxes to as much as 35 percent, the top income tax rate, from the present capital gains tax rate of 15 percent.

Backers of the House bill -- including powerful House Ways and Means Committee Chairman Charles Rangel, a New York Democrat -- say it would close a loophole that lets a fortunate few dodge paying income taxes on carried interest.

A senior U.S. Treasury Department official urged caution on possibly changing taxation of hedge funds and private equity.

"We must be cautious about making significant changes to partnership tax rule that have worked successfully to promote and support entrepreneurship for many decades," said Treasury Assistant Secretary for Tax Policy Eric Solomon.

A House Financial Services Committee hearing looked into systemic economic risks that may be posed by hedge funds.

Committee Chairman Barney Frank, a Massachusetts Democrat, said at the hearing, "We're not rushing to regulate, but regulation shouldn't be a bad word."

Frank asked Bush administration officials whether Congress should pass a law requiring all hedge funds to retain documents.

"We would have to be very careful with something like that," responded Erik Sirri, director of market regulation at the Securities and Exchange Commission. Sirri said that additional costs could force some hedge funds to move abroad.

The Fed's Warsh said the best way to limit systemic risks is to strengthen market discipline among large, global, commercial and investment banks.

Later on Wednesday, a hearing before the House domestic policy subcommittee will focus on small investors' exposure to hedge fund risk and the recent $4.13 billion initial public stock offering of private equity firm Blackstone Group.

Rep. Dennis Kucinich, the Ohio Democrat who chairs the subcommittee, unsuccessfully asked federal regulators to delay Blackstone's IPO last month pending further examination.

Blackstone was the first high-profile private equity firm to bring in investors as a publicly traded partnership (PTP).

Fearing that a wave of similar IPOs could erode the tax base, Baucus and Iowa Republican Sen. Chuck Grassley have introduced a bill that would more than double the tax rate on PTPs. Vermont Democratic Rep. Peter Welch has introduced a similar bill in the House.