Ever since the housing market's collapse and subsequent economic downturn in 2008, banks and lenders have been subjected to increased scrutiny and a laundry list of new government regulations.
Among the most polarizing of those enactments has been the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which aimed to rectify some of the risky practices and short-sighted techniques employed by many across the financial industry that ultimately contributed to the recession. The Dodd-Frank rules cast a wide swath, applying many of the same provisions designed to monitor big banks to local credit unions and independent small businesses, and for many, its breadth has suppressed wholesale economic recovery.
A measure of resistance
The U.S. House of Representatives recently passed a bill to repeal Section 716 of the Dodd-Frank Act, a provision that specifically required banks and other businesses to export large portions of their derivatives trading. With bipartisan support, the bill passed by a vote of 292-122, buoyed by language restructured by lobbyists from all pockets of the financial sector. And although it stands little chance of being enacted into law - both the Senate and the White House have previously made public their opposition to its passing - the discussion regarding federal government regulations that many feel have encroached upon business operations is reaching the point of heated debate.
House Committee on Financial Services chairman Jeb Hensarling, R-Texas, skewered the Dodd-Frank provision for its lack of wiggle room, noting in particular that where regulation of big-bank derivatives may be prudent it can serve to hinder business for the other, smaller fish it nets.
"This bipartisan bill will relieve manufacturers, farmers, ranchers and Main Street businesses of unintended consequences of one section of the Dodd-Frank Act," Hensarling told the House floor following the bill's adoption. "Now many Americans may not realize it but farmers, ranchers, manufacturers and other employers use a product called a derivative to manage risk and protect themselves from extreme fluctuations in the price of things like fuel, fertilizer and commodities."
The use of such derivatives - limited for even smaller businesses under the current Dodd-Frank provisions - helps gauge risk levels and hedge against trends that might influence future investments. Furthermore, in forcing such services to be exported, the regulations in place actually end up transferring more cost to the consumer while punishing many American businesses whose employment of such practices had little to do with the Act in the first place.
"And although not one single hospital patient, not one single farmer, not one single grandmother, not one single trucker caused the financial crisis, they were all swept into Section 716 of Dodd-Frank," Hensarling said. " Section 716 requires financial institutions to 'push out' almost all of their derivatives business into separate entities. This not only increases transaction costs, which are ultimately paid by the consumers, it also makes are financial system less secure by forcing swap trading out of regulated institutions."
Have things really changed?
Still, for many who oppose the House bill - officially titled the Swaps Regulatory Improvement Act - the misdeeds and careless practices of those at the top of the financial food chain are too recent and too impactful to be so soon forgiven. The use of derivatives, which are essentially contracts allowing companies to take calculate risk and make speculations regarding market trends, was a primary contributor during the credit and housing finance industry collapses that marred 2008. In particular, the use of credit derivatives was one of the primary culprits in bringing insurance firm American International Group to its near-demise.
The activities of J.P. Morgan Chase traders in London, who totaled $6 billion in losses in 2011, have done nothing to reassure many on the other side of the House floor regarding Dodd-Frank, according to the New York Times. The rules were, after all, put in place with firms like J.P. Morgan Chase and Citibank in mind.
"It is clear that Wall Street has not learned its lesson," Rep. Collin Peterson, D-Minn., told the House. "This bill would effectively gut important financial reforms and put taxpayers potentially on the hook for big banks' risky behavior."
Even if the bill is stalled in the Senate as expected, the bipartisan support it received in the House has gained attention. Financial lobbyists drafted multiple versions of the legislation in an effort to gauge how it would be best received by House Democrats and the Financial Services Committee, and the vote marks the eighth time in 2013 that a bill recommending the repeal of Dodd-Frank provisions has been approved. The Swaps Act, though, serves as the most significant piece of legislation yet moved forward, not only for the derivatives issue it addresses but because of how increasingly heated the discussions have become during its debate.