Financial services reform moves forward

WASHINGTON -- The Senate is moving to take up financial services reform legislation that involves members of the Senate Agriculture Committee such as Sen. Kent Conrad, D-N.D., Max Baucus, D-Mont., Amy Klobuchar, D-Minn., and Tom Harkin, D-Iowa, i...

WASHINGTON -- The Senate is moving to take up financial services reform legislation that involves members of the Senate Agriculture Committee such as Sen. Kent Conrad, D-N.D., Max Baucus, D-Mont., Amy Klobuchar, D-Minn., and Tom Harkin, D-Iowa, in a subject that seems far from agriculture but has a behind-the-scenes impact on the industry: financial derivatives.

Conrad told Agweek the bill to rein in financial derivatives "will reduce risk in the economy and help make credit more available for producers at a reasonable rate."

At press time, Republicans in the Senate were trying to stop the start of debate, but Sen. Susan Collins, R-Maine, was refusing to go along with the Republican leadership. Democratic leaders think voters want strict regulation of Wall Street and that some Republicans eventually will support their proposal.

Most financial issues in Congress go through the banking committees, but anything to do with the futures industry goes through the agriculture committees because the futures industry started out in grain, livestock and mineral futures and the ag committees have jurisdiction over that.

As part of financial services reform to try to make sure that the kind of financial crisis that occurred in 2008 does not occur again, Congress is trying to set up a stiffer regulatory regime for financial futures, including derivatives, which are obscure insurance-like contracts that companies use to try to offset the risk that interest rates, for example, may rise. In 2008, the American International Group had written derivatives contracts but did not have the capital to back them up when the financial crisis occurred, and a government bailout was required to avoid a meltdown of the financial system.


Regulating risk

Senate Agriculture Committee Chairman Blanche Lincoln, D-Ark., had been working for months with Senate Agriculture ranking member Saxby Chambliss, R-Ga., on a derivatives regulation proposal that consumer critics thought would be weak, but now she has shifted gears and made a proposal for regulation stricter than what even the Obama administration had proposed. Chambliss said the White House was putting pressure on her, but political analysts said pressure from Arkansas Lt. Gov. Bill Halter, who is running against her in the primary, pushed her toward the new proposal. Halter said Lincoln was protecting Wall Street and big banking interests.

Lincoln was having trouble getting support from her Democratic colleagues for her proposal with Chambliss, but they quickly signaled they would support her tougher regulatory regime.

Emerging from a meeting with Lincoln and other members of the Senate Agriculture Committee, Harkin said, "She is on the right track. She has done great work. She has a good, strong bill." Harkin, who chaired the ag committee before Lincoln took it over, had introduced a tough regulatory bill, and critics had feared that Lincoln would take a softer approach.

Conrad said, "This would be a major advance in regulating systemic risk."

Sen. Sherrod Brown, D-Ohio, added, "I think we have made a lot of progress. I like the way it is going."

Lincoln was scheduled to release a draft of her proposal April 16. She said in a news release that it would be "historic" reform.

"It will include strong mandatory trading and clearing requirements as well as real-time price reporting that will bring 100 percent transparency and accountability to Wall Street. My bill will vigorously reform unregulated markets, close all loopholes and protect jobs on Main Street. Proposals that I have seen from the Administration have not gone far enough to prevent bail outs of 'too big to fail institutions' and could contain loopholes. If we pass reform, it needs to be real reform. My proposal will go further than any other Congressional or Administration proposal to prevent future bailouts."


Putting up capital

Details of the proposal were unavailable, but it appeared that Lincoln plans to put limit clearing requirements to only commercial firms that use derivatives to hedge against risk and require that all financial firms clear their trades. That decision could have an impact on how some agribusiness firms and co-ops do business because it would require them to put up capital or the equivalent of capital to back the derivatives. Lincoln's bill also would require banks to spin off their swap desks, which could cost them billions in revenue.

Agricultural firms such as Cargill and the big rural electric co-ops have expressed concerns that the regulatory bill would force them to use more capital to back the derivatives they buy in the course of business, but Commodity Futures Trading Commission Chairman Gary Gensler has said that firms must put up more capital or its equivalent to avoid future financial meltdowns.

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