Monday, November 11, 2013

Memo to Wall Street Bashers: Lighten Up.

     Outrage is often more reflexive than reflective.  A case in point is the blogosphere-wide, anti-Wall Street reaction to the recent passage by the U.S. House of Representatives of a bill listed as H.R. 992 (a good recap comes from the Congressional Budget Office at'll  have to c&p for now, I'm still figuring out linkage).  As it stands now, Dodd-Frank excludes firms that engage in legitimate hedging transactions from financial back-ups provided by the United States and the Federal Reserve.  H.R.  992 would reverse that, significantly expanding domestic markets for affected firms and streamlining their operations by allowing them to bring their separately maintained risk management operations into their corporate folds..  
     There's no question in my (or any rational thinker's) mind that many of Dodd-Frank's provisions were and are imperative in the constant quest for maintaining fair and orderly markets.  This aspect of it, however, is an over-extension that puts domestic banks at a competitive disadvantage against foreign competitors and really has nothing to do with curbing through regulation and oversight the ridiculously speculative extremes that derivatives trading reached during that go-go era that crash-landed a few years ago. Financial institutions have to be reined in from letting this type of trading get out of hand.  Keeping those that engage in the commonly accepted and long standing practice of risk management from going to the federal window and borrowing cash as necessary for the regular maintenance of their operations when money tightens up is an overreach of Dodd-Frank's restrictions.
     Yes, H.R. Bill 992 was crafted by the financial institutions that themselves are subject to its provisions, which is not necessarily the best thing, but to my way of thinking the only practical thing.  Speaking as a 20-year veteran of market-making in stock options and aggressive trading and hedging of grain and livestock futures here in the Dakotas (10 as a member of the Chicago Board Options Exchange, another decade as a principle in a commodity futures brokerage firm), I understand the complexities of derivative-trading and doubt that there's much expertise in the field anywhere in the halls of Congress.  The crafting of a bill as complex as this (try reading it, it's referenced in the CBO site I posted above) is best left to experts and then digested as necessary by congresspeople and their aides, who have plenty of time to consider and come to a reasonable understanding of the nature of the bill before they vote on it.
     As I understand the bill in its CBO recap and a reading of the bill itself, the nature of the trades specified as being exempt from Dodd-Frank's exclusions are hedging transactions similar in nature to those of, say, a corn farmer using the futures and options markets to hedge against a downside risk in prices, or a grain processor hedging against an upside risk in the price of that commodity.  In  this case, the risks being mitigated are more along the lines of volatility in the  interest rate and currency markets.  As with all legitimate hedging transactions, this is all about risk-transfer, not risk-creation.  Those kinds of trades are essentially being brought back into the fold of exemptions allowed by Dodd-Frank.  In the meantime, all generally accepted and required standards of recording and reporting will be a part of these trades.  As ever, transparency is of the essence
     That the bill passed with 292 ayes means that a sizable contingent of Democrats (70 to be exact) joined virtually all of their Republican counterparts in accepting the reasonableness of this legislation.  That  those same congressional types were aggressively lobbied by the financial institutions promoting the passage of H.R. 992 is indeed a sad and disgusting commentary that speaks more to the nature of how legislative business has to get done in this country than the substance of the bill itself.

No comments:

Post a Comment