Not Only Bankers Like Derivatives

There seems to be a consensus in Washington and among the general public that fancy derivatives are just tricks that bankers use to swindle nice people out of their money. An article in the Wall Street Journal today debunks that myth. It turns out corporations who have nothing to do with banking also like to use derivatives to hedge their costs. The WSJ was also nice enough to support their claim in one, easy to read, chart:

Non-Financial Lobbying.gif

Here's why non-banks care, from WSJ:

Companies from Caterpillar Inc. and Boeing Co. to 3M Co. are pushing back on proposals to regulate the over-the-counter derivatives market, where companies can make private deals to hedge against sudden moves in commodity prices or interest rates.

And please note, in that graph, the yellow bar is only for the first quarter of this year. That's a staggering increase in lobbying. But it's a smart move, because as I've mentioned before, political risk is growing and growing these days. Like it or not, lobbying is one of the few ways to mitigate that risk.

But as I've also said in the past, while this trend is necessary for businesses, given the climate they face in Washington, it's terrible for the broader economy. All those millions of dollars they're spending on lobbying could have prevented layoffs or have been put into research and development to produce growth. Instead, they're investing in the status quo.

Yet, that status quo is important, the WSJ explains:

The companies argue the White House plan will make it more expensive to manage risks and force them to put aside cash as collateral that could otherwise be used more productively.

In other words, excessive derivatives regulation will [surprise!] increase companies' costs. A brilliant move for government to make in a deep recession -- increasing companies' costs. Let's hope those lobbyists are effective.

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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