This month, a House subcommittee and possibly the entire House will consider a passel of bills to repeal several reforms that Congress approved in the 2010 Dodd-Frank Wall Street Reform Act.
Sponsors will parade the bills as technical corrections, non-controversial, or important for the economy.
Untrue, untrue, and untrue.
Here are brief summaries of these bills along with questions that members who are wary of their true impact might raise in committee hearings or during floor debate.
HR 634: The Business Risk Mitigation and Price Stabilization Act
This bill would forbid Wall Street banks from requiring “margin” for swaps if their gambling partner is a small business or bank. Margin here plays the same role as good faith money. If you bet a banker $100 that the Washington Nationals will beat the San Francisco Giants, he’ll want to see at least $10 on the table to make this bet real. And if the score is 10-0 Giants in the eighth inning, he’ll want to see another, say, $50 on the table in “variation” margin. Requiring no margin might be acceptable for smaller bets. But what about a $1,000 bet? Some limits may be required. That’s prudent banking.
Wall Street argues that requiring margin would squander Main Street capital that could be better used elsewhere. Main Street can benefit from derivatives as hedges, such as locking in a price for fuel. But hedges cost money. Banks can only engage in swaps because the national bank regulator interpreted them as the functional equivalent of a loan. No prudently managed bank could or should offer a loan or a hedge “for free.” In fact, as MIT Professor John Parsons explains, no bank does. Those swaps without explicit margins cost more in price—like a mortgage without points, but at a higher interest rate.
A question for this bill’s backers: If requiring margin from Main Street clients for swaps contracts ties up capital, should banks be prevented from charging periodic interest on commercial loans, and instead simply ask for repayment with interest at the end?
