House Moves to Savage Important Derivatives Reform

April 25, 2012  

House Moves to Savage Important Derivatives Reform

Statement of Bartlett Naylor, Financial Policy Advocate,Public Citizen’s Congress Watch Division

Note: Today, the House approved H.R. 3336, “The Small Business Credit Availability Act.”

Under the U.S. House-approved H.R. 3336, mislabeled “The Small Business Credit Availability Act,” large banks active in the dangerous derivatives market would escape needed prudential oversight. Some House members may believe they merely are expressing to regulators a desire for small-business exemptions from financial regulatory oversight. But they’re playing with live ammunition.

By exempting firms with less than $1 billion in what the bill calls “outward exposure,” the lawmakers really exempt firms that may traffic in as much as $200 billion in notional value of complex instruments, which boil down to bets. (Notional value is the amount on which the bet is based.) By allowing an exemption for hedging, the bill would allow some large firms, such as BP, to escape oversight even when they engage in speculative trading.  

Speculation is driving up gasoline prices, and President Barack Obama has called for an investigation. This bill sends the wrong message to regulators charged with restoring sanity and safety to this and other commodity markets.

While derivatives can serve a valuable role to protect farmers and other business, most are simply bets with no underlying social utility. Reckless derivatives trading figured at the center of the financial crisis. AIG’s unsupervised sale of credit derivatives led to the largest taxpayer bailout in U.S. history.

The U.S. Senate should ignore this misguided bill.

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