Monday, July 16, 2018

Proposed Finance Reform Will Hurt Main Street

Credit: Politico
Frank and Dodd collaborate on finance reform package

U.S. companies that use derivatives to hedge against risk of currency and price fluctuations will be negatively affected by the reach of the proposed finance bill.

As the summer heat in Washington, D.C. hits 100 degrees, the looming battle in the Senate over the Dodd-Frank financial reform bill plans to increase the temperatures in an already sweltering town. The Senate is expected to vote on this legislation which passed in the House last month in the next few weeks. One provision in this voluminous bill which was added at the 11th hour before the House vote by Congressman Barney Frank, D, N.Y., and Senator Christopher Dodd, D, Conn has raised serious concern by corporate America over its negative impact on their normal business affairs. This is the extension of the new rules on derivatives beyond financial institutions to all companies which requires additional collateral to be posted to enter into a derivatives contract.

If there has been one common thread throughout all of the Obama administration’s major policy and legislative initiatives it has been the expansion of government into Main Street’s business. The Dodd-Frank bill which has not yet become law has already caused concern for corporate treasurers. According to an article in the Wall Street Journal “A Trillion Unintended Consequences”, Tuesday, July 6, 2010, corporate America which was not the cause of the financial downturn faces $1 trillion of additional collateral to fund its normal derivatives business. This collateral will replace funds that could be used for job growth, plant expansion and research. The irony of this provision which was added by Messrs Frank and Dodd during an all night session held in June is that the provision was rejected by the House in December by a bipartisan majority. House Democrats who voted for the bill last month now say that they were unaware that this provision had been reinstated in the bill. However, they cannot amend the bill without having both chambers start over in the legislative process – a result that the Obama administration is firmly against.

Now that this late night corporate derivatives legislative expansion which has Main Street ringing alarm bells become evident to Senators on both sides of the aisle, the question is whether Republicans will stand together to block its passage. If they do, then Main Street will have avoided another attempt by the Obama administration to alter the way that it does business and to expand the government’s control and reach. There will be pressure on Democratic Senators to pass the bill with corridor assurances that there will be rules written by regulators that prevent the extension of the law to Main Street. It is expected that Obama will also use any Republican resistance as a reason to excoriate them as a party against Wall Street reform. His pattern will be the same as used in the Obamacare situation where he blamed the country’s problems on the insurance companies and railed against Republicans for not helping the uninsured poor. This time is different as the balance in the Senate with the election of Senator Brown and the death of Senator Byrd has leveled the playing field. Many Senators, Democrats and Republicans alike, know that Americans are circumspect about the expansion of the Government’s regulatory reach and the bureaucracy that follows it.

In the Wall Street Journal article, it quoted a treasurer of an energy company who estimated that the bill would cause it to post $1.5 billion in additional collateral to conduct its normal level of business. This is money, or an asset, that will be redirected away from business expansion and growth toward compliance with a new governmental regulation. If there ever was a time for a political party to stand together and face the heat of an articulate and rhetorical president, the time is now.

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JJFCPA is an editor for BrooWaha. For more information, visit the writer's website.
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1 comments on Proposed Finance Reform Will Hurt Main Street

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By alan handwerger on July 07, 2010 at 05:54 am

Thanks for your cogent explanation of the impact of derivatives. I find that you're pretty good at laying things out in layman's terms. Perhaps my life would have taken a different turn had I had you as my economics professor.

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