Blanche Lincoln’s Strong Derivatives Bill Passes Committee

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By Zach Carter

Last week, Senate Agriculture Committee Chairman Blanche Lincoln (D-AR) rolled out much stronger set of rules on derivatives regulation than anyone expected. Today, those proposals passed her committee with the support of every Democrat and Republican Chuck Grassley (R-IA).

The basic point of the bill is to require that all derivatives transactions– the crazy ####### that killed AIG– be traded on an exchange, so markets can see which companies are exposed to what risks.

The bill still includes an exemption for “end-users”– companies like airlines that use derivatives to simplify the cost of fuel and other commodities. The original idea was to exclude ordinary companies who use derivatives for legitimate hedging purposes, but regulate Wall Street speculation. But during the House debate over this stuff, lobbyists pushed hard to make this loophole language flexible, so that private equity firms and hedge funds could slip through. Lincoln’s bill is much stricter, but as Matthew Yglesias noted recently, this very existence of this loophole doesn’t really help anybody, and is an invitation to exploitation.

I don’t actually understand what the problem would be with having end users on the same exchanges and clearinghouses as everyone else. And it’s easy to see how this exemption could, if you’re not super-careful, become a loophole big enough to drive all of Goldman Sachs through.

The U.S. Chamber of Commerce has even organized a coalition of end-user executives to speak out against the bill. But it’s not even obvious that end-users would be hurt by the bill. While there would likely be some very slight increase in the cost of these contracts due to costs of trading over an exchange, the price transparency that exchange-trading creates should drive down costs and make things cheaper for end-users. And however strict Lincoln’s loophole language, bad practices in the marketplace will find ways to make their trades fit into that loophole so their trades can be conducted beyond market scrutiny.

But all of that said, this is much better than I had hoped for. Five big banks are basically responsible for selling all of the $300 trillion U.S. derivatives out there, and the lack of price transparency allows them to make tons of money by basically gouging their customers– J.P. Morgan warned its investors that it could lose up to $2 billion a year from new regulations. And when those five megabanks push really hard something, they almost always get it.

It’s encouraging. There is officially reason to hope for real reform: breaking up the banks and reinstating Glass-Steagall (even John McCain is on board with this) should be the focus of a major push from progressives.

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