Bipartisan Dodd-Frank Derivatives Deregulation Advances In House — And Main Street Cheers

This afternoon, members of the House Agriculture Committee with strikingly different views on many issues came together to provide much need regulatory relief from the albatross of Dodd-Frank. The seven bipartisan bills that just cleared the committee, six of which passed on a voice vote, reflect a growing recognition by both parties that the 201o law intended to reform Wall Street has claimed Main Street farms and factories as some of its biggest victims.

In implementing derivative regulations pursuant to Dodd-Frank, the Commodity Futures Trading Commission, led by Obama-appointed Chairman Gary Gensler, has taken actions that have stoked bipartisan outrage. Its definition of “swap dealers” facing costly new requirements — such as implementing very expensive technology to provide “real time” price quotes — is so broad that it may have ensnared even small farm co-ops. And months after American Airlines filed for bankruptcy in part due to fuel costs, both airlines and manufacturers may be required to lay out billions more in cash to buy derivatives to hedge oil prices.

The bills voted out of the committee today with bipartisan support are a first step toward sanity and certainty. They would ease margin requirements, which force those buying derivatives to put up immediate cash rather than using assets as collateral, for”end users” of derivatives such as airlines and manufacturers. And they would force the CFTC to only regulate as swap dealers those entities that have a certain number of participants, sparing most farm co-ops from the agency’s reach.

Democrats supporting these bills have said they are not a reversal of Dodd-Frank, but a clarification. They will say the regulators got it wrong, and the law never intended for farm co-ops to be regulated as “swap dealers,” or for airlines and manufacturers to be forced to put up billions more in cash to buy derivatives to hedge oil prices. But the fact that the original law’s language in this area was so broad and vague highlights the flaws of the process under which Dodd-Frank was rammed through Congress in 2010.

The majority of derivatives did not play any role in the financial crisis. Southwest Airlines’ buying over-the-counter derivatives to successfully hedge oil prices (and keep the low airfares their customers love) did not cause the mortgage meltdown. Rather, it was mortgage-related credit default swaps that were problematic, and they were problematic precisely because of the bad policies that had fueled the mortgage bubble — policies such as the expansion of the government-sponsored enterprises Fannie Mae and Freddie Mac and the mandates of Community Reinvestment Act that a new study from the National Bureau of Economic Research now confirms led to reckless lending.
Dodd-Frank is both a distraction from the real causes of the financial crisis and a burden on businesses that had nothing to do with it. Today’s bipartisan vote is a first step in reforming this very flawed “reform.”