Wall Street Banks Enlist Big Business In Fight Against Derivatives Regulation

AP070227024836National Journal noted over the weekend that a new coalition of business groups — which includes the Business Roundtable and the U.S. Chamber of Commerce — is starting to criticize the Obama administration’s plans to regulate the vast, unregulated derivatives market, “much to the relief of several big Wall Street banks that had been waging a lonely and uphill lobbying effort.”

The group is calling itself the Coalition of Derivatives End Users, and Wall Street derivatives dealers reportedly “appreciate all the help they can get from corporate end users to ease new curbs.” “End users are very important,” one banking lobbyist said, “because they have the most credibility.”

There are, of course, absolutely legitimate reasons to use derivatives to hedge against fluctuations in various markets. But let’s not lose sight of the fact that the world of derivatives is almost exclusively dominated by a few big Wall Street banks, who are dealing in derivatives as an end, not a means. In fact, 97 percent of the derivatives held by U.S. commercial banks are in the hands of just five banking behemoths — JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup and Wells Fargo — who are not using them the way an airline does.

Felix Salmon today pointed to this data from the Office of the Comptroller of the Currency, which shows that while end-users have reduced their derivative exposure to a seven-year low of $2.4 trillion, Wall Street dealers have upped theirs to an all-time high of $187.6 trillion:


As Salmon wrote, “what has happened in recent years that derivatives dealers now need $78 in nominal derivatives exposure for every $1 in end-user exposure? When Adair Turner talks about ‘profitable activities so unlikely to have a social benefit, direct or indirect, that [banks] should voluntarily walk away from them’, this is surely a prime example of what he has in mind.” BNET’s Alain Sherter, meanwhile, put it this way:

Bankers will say, as they have for years, that derivatives help financial firms manage risks. So they do. But they also help companies make money. The issue isn’t whether derivatives have constructive uses, such as in hedging risk — it’s whether derivatives are more useful in generating profits. If so (and it is so), that can lead to banks acting recklessly, especially when they’re under enormous pressure to boost their financial results.

Michael Greenberger, an adviser for Americans for Financial Reform, said that he believes the end-user complaints are “inspired by banks emphasizing the small, short-term costs of new regulations to their customers against the long-term financial interests of the public at large.” And allowing a huge market to remain in the shadows can only work against that long-term interest.