Barney Frank’s Committee to Rebuke Dodd-Frank’s Derivative Rules

Washington, D.C., November 30, 2011 — This afternoon, the House Committee on Financial Services, formerly chaired by retiring Rep. Barney Frank (D-Mass.), is set to cast bipartisan votes for bills easing Dodd-Frank rules for derivatives.

Below is a statement by John Berlau, director of CEI’s Center for Investors and Entrepreneurs, on the irony of this rebuke of Frank just after he announced his retirement and the positive impact these bills will have on the markets:

There are other factors at play, but has anyone noticed how much the stock market has surged since Rep. Barney Frank (D-Mass.) announced he is retiring? And for the U.S. economy this week, developments in the wake of Frank’s announcement just keep getting better.

Today, for instance, the banking committee that Frank used to chair with an iron fist is set for bipartisan votes that will be a substantial rebuke to Frank’s seminal legislation, the Dodd-Frank financial “reform.” According to American Banker, the bills set for markup this afternoon in the House Committee on Financial Services would “require regulators to rethink their approach to some of the thorny questions that have arisen during the implementation of the 2010 law’s new derivatives rules.”

In implementing derivative regulations pursuant to Dodd-Frank, the Commodity Futures Trading Commission has taken actions that have stoked bipartisan outrage. Its definition of “swap dealers” facing costly new requirements was so broad that it may have ensnared even small farm co-ops. And at a time when American Airlines just filed for bankruptcy in part due to fuel costs, both airlines and manufacturers may have been required to lay out billions more in cash to buy derivatives to hedge oil prices.

The bills expected to be voted out of the committee with bipartisan support would restore sanity and certainty. They would get rid of 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 will say this is not a reversal of Dodd-Frank; it’s 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 Fannie and Freddie that Frank championed.

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.”