Bachus Wants Derivatives To Be Transparent Without Doing Anything To Increase Transparency

As the conference committee reconciling the House and Senate’s respective financial regulatory reform bills gets down to business this week, it will be starting with the Senate’s text as the base. When it comes to crafting a regulatory regime for derivatives — the risky instruments that played a large role in the economic crisis, and particularly in the downfall of AIG — this is a good thing, as the Senate bill is much stronger.

Strong derivatives reform will place as much derivatives trading as possible onto public exchanges (like that used for stocks) and force all customized trades that can’t go onto an exchange through a clearinghouse (which ensures that both sides of the trade have adequate collateral). The trouble with the House bill is that it contains a whole host of exemptions to the exchange and clearing requirements, which could allow financial companies that are only using derivatives to speculate to slip through, unregulated.

The financial services industry would, of course, like as many loopholes as possible to exploit down the road, and thus is trying to widen the exemptions. And House Republicans have been all too willing to play along, as evidenced by Rep. Spencer Bachus’ (R-AL) performance yesterday on C-Span’s Newsmakers.

Bachus made sure to pay lip service to the fact that “there needs to be disclosure, there needs to be transparency” when it comes to derivatives, but he then expressed shock that Democrats want to put trading onto exchanges, claiming that doing so “fixed things that weren’t a problem.” Watch it:

Of course, the way in which you bring transparency to the derivatives market is by, you guessed it, moving trading onto exchanges. Exchange trading ensures that both buyers and sellers know what the going rate for a particular product is, and leaves an easy trail for regulators to follow if there is fraud or abuse. Bachus, meanwhile, seems to want to implement transparency by waving a magic wand.

Bachus is using the same tactic that the right-wing has employed throughout the debate over derivatives, singling out end-users (non-financial corporations that legitimately use derivatives to hedge risk) as the poster-children for increased regulation. But remember, 97 percent of derivatives are held by just five mega-banks and there are $78 dollars in derivatives for every single dollar that is used by a company to hedge against risk.

A transparent, functional marketplace that fully utilizes exchange trading will actually bring prices down for the very companies that Bachus is expressing such concern for. And as Commodity Futures Trading Commission Chairman Gary Gensler explained, “exemptions will only come back to haunt us in the future”:

Every exemption for financial companies creates a link in the chain between a dealer’s failure and a taxpayer bailout. Every slice of the financial system that we cut out through an exemption could allow one bank’s failure to spread like fire throughout the economy. It is essential that financial reform does not allow loopholes that leave interconnectedness in the system.

If Bachus has a better idea, I’d love to hear it, but you can’t just snap your fingers and turn an opaque, non-functional market into a transparent one.