Chamber Cheers Derivatives Loophole


As the battle over financial regulatory reform continues on Capitol Hill, the US Chamber of Commerce is rallying behind an amendment to the Senate’s bill—one of more than 125 proposed amendments—that would exempt a large chunk of companies who use derivatives, the complex financial products used to hedge risk but also to recklessly gamble on fluctuations in, say, the housing market. Yesterday, the Chamber sent a letter, cosigned by trade groups from the oil, manufacturing, financial services, and real estate industries, backing an amendment offered by Sen. Saxby Chambliss (R-Ga.) exempting from regulation “end-users” of derivatives—the utilities, farmers, oil titans (like BP), airlines, and other companies who use derivatives to hedge risk. The letter claims that between 100,000 and 120,000 jobs could be lost because, as the bill looks now, it would require these end-users to set aside cash and other collateral for trading through the more transparent, safer derivatives clearinghouse proposed by Senate lawmakers.

That end-user exemption is opposed by the Senate’s architect of financial reform, Sen Blanche Lincoln (D-Ark.), by many Senate Democrats, and by top administration officials like Gary Gensler, chairman of the Commodity Futures Trading Commission, who says (pdf) there should be no exemptions in derivatives regulation. Supporters of complete derivatives transparency cite reports like this one (pdf), from the Congressional Research Service, which says that a broad end-user exemption could essentially gut new regulations altogether. CRS found that nearly two-thirds of derivatives trades involve an end-user, and “[i]f all end users are exempted from the requirement that OTC swaps be cleared, the market structure problems raised by AIG still remain.” In other words, it would be the loophole that ate the rule.

The job losses figure cited by the Chamber is undoubtedly cause for concern; no one wants to proactively cut jobs, especially with the 9.9 percent unemployment rate we have now. (An aside: I’m trying to track down the actual report on job losses used by the Chamber to make sure it’s been cited accurately—and not twisted to fit an agenda. I haven’t found it yet, but rest assured I am digging into this.) Then again, the out of control over-the-counter derivatives market played a huge role in the financial crisis—a meltdown that’s caused millions of Americans to lose their jobs and their homes. A record 6.72 million workers who want to work have been unemployed for 26 weeks or more, the highest since the government started counting this figure in 1948; that number began its vertiginous climb in—you guessed it—the fall of 2008, when Wall Street crumbled.

Even if the Chamber is right to say tough derivatives regulation will result in the loss of jobs, you have to look at the bigger picture and broader gains here. 100,000 jobs is tough to swallow. But tougher still is not fixing the derivatives markets and setting the stage for the next meltdown—and the millions of job losses that come with it.

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