Trouble With the “End User” Exemption

An unfortunate amount of the politics of financial reform rests on conceptually unsound efforts to draw a line between favored and disfavored forms of financial activity rather than simply acknowledge the need to regulate financial activity. So you see a lot of big bank vs community bank stuff wall street vs main street stuff and speculation vs real economy stuff. This all kind of comes to a head in the notion that “end users” of derivatives should for some reason be exempted from the new rules that will otherwise govern these instruments. The argument for the loophole, such as it is, is that applying the rules would be inconvenient to end users and end users are good guys rather than evil banks. But as I see it, there’s nothing “evil” about banks, it’s just that banking needs to be regulated. And insofar as end users are dipping into derivatives, they’re engaging in some banking and it ought to be regulated. You can draw a semi-arbitrary regulatory line if you want to, but the conceptual distinction is bound to be slippery.

As a concrete example, Kevin Drum notes that exempting end users will preserve a way for these firms to carry hidden leverage off their balance sheets. This isn’t the worst thing in the world on its own terms, but it underscores that insofar as Congress is writing sensible rules for derivatives there’s no especially good reason to exempt anyone from them.