Businesses differ on derivative reform

Marketplace Staff Apr 20, 2010

Businesses differ on derivative reform

Marketplace Staff Apr 20, 2010


Kai Ryssdal: The financial reform bill comes up for a key vote in the Senate Agriculture Committee tomorrow. Yes, I did say the agriculture committee. Derivatives contracts are a major part of that bill. Contracts that were first used by farmers as a way to sell their crops in advance. Derivatives trading has gotten amazingly more complex since then, as has the plan to regulate them.

Brett Neely reports now from Washington.

BRETT NEELY: Derivatives were boring and safe for a few hundred years. Then after deregulation in 2000, banks and hedge funds didn’t have to trade derivatives on public exchanges anymore. The banks set the price, and the price was kept private. And no one knew how exposed those firms were to risk.

We all know how that story ended.

Now, the biggest banks like Goldman Sachs and JPMorgan don’t want to go back to the old ways when clients could compare prices for the service, says David Min at the Center for American Progress. They like it the way it is.

DAVID MIN: Because there’s not efficient pricing there, these big five derivatives dealers can really charge through the roof for these derivatives products and that’s one big reason why they’ve been so profitable.

JPMorgan makes at least $700 million a year off of trading derivatives.

The banks argue that derivatives help airlines and manufacturing companies hedge risk by locking in prices for essential goods from fuel to steel. That way they can at least count on steady costs, if not steady sales.

David Hirschmann is with the Chamber of Commerce, which wants major industries exempted from regulation.

DAVID HIRSCHMANN: The whole point of the exercise is to transfer that risk somewhere else so that you can be in the business of producing beer or making widgets or whatever it is you do.

But not every business agrees that huge industries should be exempt.

Sean Cota runs a family-owned heating oil business in Vermont. He says using derivatives purely to speculate on the price of oil has hurt his business and consumers’ wallets.

SEAN COTA: We calculate that this unregulated market has encouraged speculative fervor that costs about a $1 per gallon.

If the Senate Agriculture Committee approves the legislation, it heads to the Senate floor.

In Washington, I’m Brett Neely for Marketplace.

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