Last year, when financial reform regulation first started coming together, big Wall Street banks enlisted the big business community in its fight against regulation of derivatives, the financial instruments that played a large part in the failures of Lehman Brothers and American International Group. At the time, the Wall Street banks were thrilled that their “lonely and uphill lobbying battle” would have some names that might garner more sympathy.
Today, the New York Times reported that Mars, the maker of Snickers, is concerned about derivatives legislation hurting its ability to hedge against fluctuations in the price of sugar and chocolate. Republicans — who last night, along with Sen. Ben Nelson (D-NE), blocked Sen. Chris Dodd’s (D-CT) financial reform bill from coming to the Senate floor — are using these firms concerns to criticize the entire financial reform effort. For instance, Sen. Mitch McConnell (R-KY) falsely said today that Mars is concerned about the literal cost of sugar changing under the Democrats’ bill, and that Democrats are blaming Snickers and Harley Davidson for the financial crisis:
I mean, does anyone really believe that the people who make Harley Davidsons and Snickers bars are responsible for the financial crisis? Does anyone think that? Then why would we want to punish them in our effort to hold Wall Street accountable.
Of course, it’s natural that companies that might be affected by financial reform to express concerns about the legislation. But the GOP is using these concerns to trash a bill that will likely help the very companies cited.
Mars uses derivatives to hedge against changes in the prices of its ingredients, so if the price goes up unexpectedly, the company won’t take a huge hit. So it’s actually in Mars’ interest for the derivatives market to be more transparent and with clear rules of the road, as that will drive down prices and prevent Wall Street banks from keeping these markets in the dark, with prices that aren’t discernible.
The reform legislation would mandate that derivatives be traded on exchanges, like stocks, and go through clearinghouses, which would ensure that the parties in a trade actually have collateral to back it up. As Commodity Futures Trading Commission Chairman Gary Gensler put it, “the more transparent a marketplace, the more liquid it is, the more competitive it is and the lower the costs for companies that use derivatives to hedge risk.” “The best way to bring transparency is through regulated trading facilities and exchanges…A greater number of market makers brings better pricing for businesses and lower costs for consumers,” he added. Plus, hedging of the sort Mars would engage in is specifically exempted from using the exchange under the proposed legislation.
Last year, there were $78 in outstanding derivatives exposure for every $1 that was legitimately used by companies like Mars to hedge risk. Five large banks — JP Morgan Chase, Goldman Sachs, Bank of America, Citigroup, and Wells Fargo — account for 97 percent of the activity in the derivatives market. Making this activity transparent will let investors like Mars know what is going on in the market and make informed decisions, driving down costs. For McConnell to pretend that the bill will unduly regulate the candy-making function of the company is disingenuous.