{"id":542062,"date":"2010-04-23T13:43:20","date_gmt":"2010-04-23T17:43:20","guid":{"rendered":"http:\/\/washingtonindependent.com\/?p=83095"},"modified":"2010-04-23T13:43:20","modified_gmt":"2010-04-23T17:43:20","slug":"the-banks%e2%80%99-unfair-fight-against-derivatives-reform","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/542062","title":{"rendered":"The Banks\u2019 Unfair Fight Against Derivatives Reform"},"content":{"rendered":"<div id=\"attachment_53012\" class=\"wp-caption alignnone\" style=\"width: 490px\"><a href=\"http:\/\/washingtonindependent.com\/wp-content\/uploads\/2009\/07\/Stimulus-Budget-159.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"size-large wp-image-53012\" title=\"Blanche Lincoln\" src=\"http:\/\/washingtonindependent.com\/wp-content\/uploads\/2009\/07\/Stimulus-Budget-159-1024x682.jpg\" alt=\"Blanche Lincoln\" width=\"480\" height=\"319\" \/><\/a><\/p>\n<p class=\"wp-caption-text\">Sen. Blanche Lincoln (D-Ark.) has written an aggressive proposal to regulate the derivatives market. (WDCpix)<\/p>\n<\/div>\n<p>This week, Sen. Chris Dodd&#8217;s (D-Conn.)  financial regulatory reform <a id=\"qkhn\" title=\"bill\" href=\"http:\/\/www.google.com\/url?sa=t&amp;source=web&amp;ct=res&amp;cd=4&amp;ved=0CBIQFjAD&amp;url=http%3A%2F%2Fbanking.senate.gov%2Fpublic%2F_files%2FFinancialReformSummary231510FINAL.pdf&amp;ei=HdbRS5vYIcb58AafheXrDg&amp;usg=AFQjCNEzQHuEYbwB9sR7nTPRJFEuST1psQ&amp;sig2=dEWZsqcx8U3wTsbdL9wz4Q\">bill<\/a> moved to the floor of the Senate. And  with that bill close to passage, Wall Street and lobbyists turned their  attention to Sen. Blanche Lincoln (D-Ark.) and the Senate Agriculture  Committee&#8217;s <a id=\"f9xt\" title=\"proposal\" href=\"http:\/\/lincoln.senate.gov\/newsroom\/2010-4-16-2.cfm\">proposal<\/a> to regulate derivatives, a $450  trillion market and a major source of investment-banking profits.<\/p>\n<p><div id=\"attachment_2754\" class=\"wp-caption alignleft\" style=\"width: 140px\"><img loading=\"lazy\" decoding=\"async\" class=\"size-thumbnail wp-image-2754\" title=\"debt\" src=\"http:\/\/www.washingtonindependent.com\/wp-content\/uploads\/2008\/08\/debt-150x150.jpg\" alt=\"Image by: Matt Mahurin\" width=\"130\" height=\"130\" \/><\/p>\n<p class=\"wp-caption-text\">Image by: Matt Mahurin<\/p>\n<\/div>\n<div class=\"floatButtons\">\n<div style=\"float: left; margin-right: 10px; margin-bottom: 10px;\"><script src=\"http:\/\/digg.com\/tools\/diggthis.js\" type=\"text\/javascript\"><\/script><\/div>\n<div style=\"float: left; margin-bottom: 10px;\"><script type=\"text\/javascript\"\n\tsrc=\"http:\/\/d.yimg.com\/ds\/badge2.js\"\n\tbadgetype=\"square\">\n\t<?php the_permalink(); ?><\/script><\/div>\n<div style=\"float: left; margin-right: 10px;\">\n\t<script type=\"text\/javascript\">\ntweetmeme_source = \"TWI_news\";\ntweetmeme_service = \"bit.ly\";\n<\/script> <script src=\"http:\/\/tweetmeme.com\/i\/scripts\/button.js\" type=\"text\/javascript\"><\/script>\n<\/div>\n<div style=\"float: left;\"><a name=\"fb_share\" type=\"box_count\" href=\"http:\/\/www.facebook.com\/sharer.php\">Share<\/a><script src=\"http:\/\/static.ak.fbcdn.net\/connect.php\/js\/FB.Share\" type=\"text\/javascript\"><\/script><\/div>\n<\/div>\n<p>Derivatives are essentially a type of financial insurance. They let two  parties trade a contract derived from the price of some underlying  security, currency or commodity. For instance, say you were a major  airline. You might go to your bank to purchase a derivative locking in  the price of gas, just in case a summertime oil shortage pushed up  prices at the pump. In this case, you would be an &#8220;end user,&#8221; meaning  you actually take delivery of the good. About 90 percent of the  derivatives market involves financial firms trading derivatives like  credit-default swaps back and forth for profit &#8212; and just 10 percent  involves end users, non-financial firms using derivatives to mitigate  risk.<\/p>\n<p>Still, end users have become the unlikely center of the  fight on derivatives legislation. With the reputation and credibility of  big financial firms weak, companies in industries from agriculture to  aviation came forward to say that this legislation might not only dampen  big business\u2019 profits but also hurt them. On Tuesday, the U.S. Chamber  of Commerce and other business lobbies &#8212; via a group called the  Coalition for Derivatives End-Users &#8212; took to the Hill for a flurry of  meetings between corporate representatives of those worried end users  and members of Congress.<\/p>\n<p>&#8220;The  legislation has the potential to take hundreds of billions of dollars  out of the economy through margin and capital requirements,&#8221; says Cady  North, a lobbyist at Financial Executives International and a member of  the Coalition for Derivatives End-Users&#8217; steering committee. &#8220;We  estimate that the bill could require up to $900 billion in capital  expenditures.&#8221; Moreover, the Coalition argues, the bill will increase  the cost of derivatives for end users. (The Coalition declined to  provide a list of participating executives or their companies, or a list  of the legislators or assistants with whom they met, and the Chamber of  Commerce did not respond to repeated requests for comment.)<\/p>\n<p>But there&#8217;s just one problem. The Lincoln bill forces financial firms to  put up collateral and use clearinghouses when they trade derivatives,  but specifically exempts end users from those requirements. Banks are  using their end-using clients as proxies to help kill off the  legislation, lawyers and lobbyists contend. And for most end users, the  opposition to the bill makes little sense.<\/p>\n<p>Other lobbying  organizations representing end-using white-collar companies said they  had no issues with the legislation. For instance, Michael Griffith, a  legislative analyst at the Association for Financial Professionals,  which represents 16,000 of \u201cthe folks that manage your average  companies\u2019 money,\u201d says he has no issues with it. &#8220;We\u2019re pretty happy  with what the Agriculture Committee approved,&#8221; he says. &#8220;It has a broad  end user exemption on it, and we haven\u2019t had many complaints from our  members.&#8221;<\/p>\n<p>&#8220;I know the banks  are screaming about it,&#8221; says Brian Kalish, the director of AFP&#8217;s  finance practice. &#8220;[My members are] getting panicky emails from their  bankers. But [of] my members, no one\u2019s panicking.&#8221;<\/p>\n<p>But this week, some end users got more than panicky  emails from their banks. Lawyers and lobbyists say that banks clearly  misled companies about how the legislation might impact their business  costs. In one case, a derivatives broker told a company that the  legislation would force it to pay the same fees and put up the same  collateral as financial firms, even where it explicitly would not.<\/p>\n<p>&#8220;I&#8217;ve  heard of a few folks who use derivatives [as end users who] called up  their banks to talk about the legislation,&#8221; another lobbyist said. &#8220;Of  course, their bankers told them to expect the whole market getting  disrupted, price increases, collateral calls. Now, for most of them,  they\u2019re buying swaps to hedge. The legislation specifically exempts  them.&#8221;<\/p>\n<p>Legislators this week repeated the concern. Senate  Banking Committee Chairman Dodd said he sees evidence of the bankers&#8217;  influence when end users lobby him. &#8220;The end users have been basically  used by the major investment banks,&#8221; he <a id=\"p8q3\" title=\"told\" href=\"http:\/\/www.google.com\/url?sa=t&amp;source=web&amp;ct=res&amp;cd=1&amp;ved=0CAYQFjAA&amp;url=http%3A%2F%2Fwww.huffingtonpost.com%2F2009%2F11%2F11%2Fwall-street-banks-trickin_n_352635.html&amp;ei=rtfRS5f_FJSutQPlnbHdDg&amp;usg=AFQjCNEJZ0AlX-Frq4_cYBJ96nnceXat_A&amp;sig2=OI2uAk7Enuw_EKbi32-gog\">told<\/a> the Huffington Post&#8217;s Ryan Grim on  Tuesday.<\/p>\n<p>Indeed, Lincoln took pains to ensure most end  users are not impacted by the legislation. Some firms with &#8220;captive  finance entities&#8221; &#8212; financial-products divisions within big,  diversified companies, like Cargill &#8212; might not qualify as end users on  some transactions, and might have to post collateral when they use  derivatives to speculate rather than hedge. But they represent a small  proportion of end users, who represent a small portion of derivatives  users.<\/p>\n<p>Furthermore, the legislation might eventually  drive end-users&#8217; costs down. Many derivatives experts &#8212; off of Wall  Street, at least &#8212; believe that Lincoln&#8217;s reforms will increase  competition and transparency, reducing prices. Robert Litan, a  derivatives expert at the Brookings Institution, explains, &#8220;In a world  of nontransparency, the world the derivatives market is in right now,  the way I understand it, if you try to call four or five dealers, to  shop around, none give you a real price. They might quote you an  indicative price. If you commit, then they give you pricing  information.&#8221;<br \/>\nThe White House concurs. Jen Psaki, the deputy  communications director, recently <a href=\"http:\/\/www.whitehouse.gov\/blog\/2010\/04\/17\/wall-streets-talking-points-now-available-memo-form\">argued<\/a>,  &#8220;The unregulated OTC derivatives markets were at the center of the  recent financial crisis. The Wall Street banks that dominate this market  want to keep it unregulated so they can make money off regular firms.&#8221;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Sen. Blanche Lincoln (D-Ark.) has written an aggressive proposal to regulate the derivatives market. (WDCpix) This week, Sen. Chris Dodd&#8217;s (D-Conn.) financial regulatory reform bill moved to the floor of the Senate. And with that bill close to passage, Wall Street and lobbyists turned their attention to Sen. Blanche Lincoln (D-Ark.) and the Senate Agriculture [&hellip;]<\/p>\n","protected":false},"author":6662,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-542062","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/542062","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/6662"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=542062"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/542062\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=542062"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=542062"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=542062"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}