House panel ready to pass sweeping reform of exotic finance

McClatchy NewspapersOctober 14, 2009 

WASHINGTON -- A key congressional panel is poised to approve Thursday a sweeping overhaul of laws governing the trading of complex and often exotic financial instruments that helped trigger a near meltdown of global finance.

The House Financial Services Committee on Wednesday cleared away the procedural underbrush and prepared to vote final approval Thursday of the Over-the-Counter Derivatives Markets Act of 2009.

The legislation builds on proposals suggested by the Obama administration and would create first-ever regulation for some complex products such as credit-default swaps. Those insurance-like products triggered the near collapse and taxpayer rescue of American International Group.

The market for derivatives grew faster than the ability of regulators to keep pace in recent years, and when the financial crisis created uncertainty over who owed what to whom, credit markets froze. The continuing lack of credit has severely hurt U.S. businesses, large and small alike.

The bill also would create the kind of clearing and settlement of complex transactions in financial derivatives that take place on regulated exchanges where stocks, bonds and commodities are traded.

Because the measure is only one component of what is sure to be the broadest rewrite of financial regulation since the 1930s, the hearing room and a spillover room were filled beyond capacity by well-dressed financial lobbyists. The scene was reminiscent of the 1986 tax reform legislation that became known as Showdown on Gucci Gulch.

On its own, finance is complex, and exotic financial instruments known as derivatives are even more so. They involve private contracts, often designed to work like insurance to spread risk, that are entered into by two parties to hedge against the risk of default, changes in interest rates or shifting values of a given currency.

While much of the bill introduced by Committee Chairman Barney Frank, D-Mass., deals with the Wall Street firms that deal in these often opaque instruments, business groups lobbied hard for more safeguards to ensure that end users such as farmers, airlines or oil producers can continue to hedge risks without significant new costs.

Frank offered substitute language that sought to address these concerns. That language and other amendments will be put to final votes Thursday morning.

Judging by Wednesday's debate, the vote on derivatives legislation will split along party lines. Republicans are betting that high unemployment will help in next November's mid-term elections, and they hammered home concerns that the legislation will hurt jobs.

"Our concern should be jobs, jobs, jobs," said Rep. Jeb Hensarling, R-Texas.

Republican lawmakers called Frank's legislation an overreach that will create more bureaucracy, and they repeatedly suggested that problems in derivatives markets were limited to AIG.

"Warren Buffett doesn't think so. I think there was derivatives volatility, and I think it was part of a lot of the financial institutions (that failed) failing," Rep. Frank told reporters afterward.

Billionaire investor Warren Buffett famously called derivatives financial weapons of mass destruction. His support for bringing more transparency and regulation to this market -- valued in the trillions of dollars -- gave lawmakers an important conceptual push.

Once the panel finishes with the derivatives bill, it will turn to an even more controversial measure, which would create a new Consumer Financial Protection Agency to regulate consumer credit products such as mortgages, credit cards and payday loans.

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