Elizabeth Warren and plenty of media liberals are in a panic that the Omnibus bill, nicknamed “CRomnibus,” is some sort of horrible right-wing Trojan Horse that will grind us all into domination by investment banks.
Nope.
While the Dodd-Frank bill allows Democrats and Republicans to repay big investment banks’ campaign contributions by “unwinding” their exposure to bankruptcy the next time they use a government program to aid and abet criminal behavior, the changes made by Republicans don’t allow these banks to engage in the “toxic” derivative plays that ushered in the Great Recession.
The horrible, nasty Republicans opened up derivatives trading needed by farmers.
Granted, the whole concept of the omnibus bill is corrupt, lumping spending into 1,600 pages of bloat on programs that should be voted upon individually.
It’s very unlikely you will ever read the bill, so it’s easy for liberal columnists and reporters to create rabid unicorns of death lurking within then bill’s dark caverns.
Rep. Jim Himes, Democrat and key architect of the section in Dodd-Frank that put derivatives under regulatory control, supported the revision, as did 57 House Democrats.
His spokesman, Greg Vadala, told reporters the revision would cover “plain vanilla” swaps, not the “toxic’’ variety that brought down insurance giant American International Group at the beginning of the recession.
“Jim and others in Congress have long argued the most dangerous derivatives would still be kept away from government-backed banks under the provision,” he said.
Here’s how it works: Porky Spintail raises hogs and is a bit nervous about the prices for hogs and their famous bellies rising and falling for no apparent reason. In order to make a profit on his little piggies, Porky calls investor Barry Madcow to agree on a futures contract.
Barry agrees to pay 90 cents per pound when the hogs are ready for slaughter in five months, regardless of the market price. If, at that time, the price is a dollar a pound, Barry gets a nice profit as he buys the piggies for less than market cost and sells them on the market at a higher price.
If the price goes below 90 cents, Porky is relieved as he sells the piggies for more than he would get in the open market. He’s protected from price fluctuations. That’s a form of derivative investing.
Dan Freedman reports, “Himes and other supporters argue the law should permit banks to help farmers, airlines and others manage risk while maintaining controls on other kinds of derivatives trading that are too risky.”
That’s the point Himes, agreeable Democrats and the Republicans are making.
These derivatives are market trades on future prices for commodities and financing agreements. Farmers and their suppliers depend on derivatives for financial stability, unlike the failed mortgage-backed securities hawked by Goldman Sachs.
I asked John Anderson at The American Farm Bureau to give us a little more knowledge.
“Many of the downstream firms and input providers that farmers do business with do make use of more complicated financial instruments to manage risk in their normal operations. For example, a major grain dealer may use a swap to hedge against foreign exchange risk on grain that it plans to export at some point in the future. To the extent that these kinds of tools allow these firms to reduce risk and/or reduce costs, they are able to pass that along to farmers in the form of better terms on contracts and/or lower prices for farm inputs or other services. For this reason, it is important to farmers that bona fide hedging activities - that is, market activities that have a real risk-reducing function for firms as opposed to purely speculative activities that increase risk - are not inadvertently curtailed by Dodd-Frank provisions.”
I don’t think Democratic Party leaders hate farmers. They hate Republicans, especially when Republicans might get credit for helping working people.
Democrats seeking animosity toward Republican additions to the omnibus bill might consider raging about cattle ranchers and dairy farmers being excluded from the potential carbon taxes they would like to impose on their cows’ burps.
That’s surely giving liberals gas.
Contact Rick at rick@wdel.com, or follow him on Twitter @Jensen1150WDEL