The Wall Street Journal sank to a new low in political hackery yesterday with a front page story entitled “Financial Overhaul Hits Farmers.”
The story purports to document how the sweeping financial reform bill, which Senate Democrats hope to finally pass this week despite relentless opposition from Wall Street, is already disrupting heartland farmers in Nebraska who use derivatives to hedge against crop prices. According to another headline, the bill is casting a “long shadow over the Plains.”
But the doesn’t come within a country mile of delivering the goods. The story offers not one example of anybody who has been “hit” by the new legislation. It glosses over basic information about the bill that contradicts the thesis. It includes “worries” that have nothing to do with farmers, like those of a pay-day lender who frets about consumer regulations. (He probably should be worried; payday lenders charge rates that routinely top 100 percent. But that’s far afield from farmers.)
Written by Michael Phillips, the story appears to offer a vivid and home-spun validatation of the narrative that JP Morgan Chase, Goldman Sachs and groups like the Chamber of Commerce have been peddling for more than a year. That narrative goes like this: financial derivatives aren’t some Wall Street casino that needs to be tightly regulated; financial derivatives are crucial tools that Main Street companies need to hedge against routine risk, and strict regulation will hurt hurt those business and cost jobs.
Phillips parrots this line closely but vaguely:
Designed to fix problems that helped cause the financial crisis, the bill will touch storefront check cashiers, city governments, small manufacturers, home buyers and credit bureaus, attesting to the sweeping nature of the legislation, the broadest revamp of finance rules since the 1930s.
Michael Phillips is a smart reporter, a very nice guy and a casual acquaintance of mine. He’s also honest enough to include information that undercuts his premise. But I came away convinced that he allowed himself to be used by the Journal’s increasingly ideological news editors to spread bogus propoganda.
Where to start?
For openers, the story fails to offer a single example of anybody who has actually been “hit” by the bill. Instead, it offers a handful of people — a farmer, a feedlot owner, a trucker who transports steer — who worry about the possible effect on the cost of hedging prices for corn, fuel, electricity and foreign currencies. These people haven’t seen any impact. They are not even sure there will be an impact. They’re just “anxious.”
The question for these farmers is whether such rules will make hedging more expensive. Some say new requirements on big players will create higher costs for small players, including the cash dealers will have to put aside to enter into private derivatives transactions. Some brokers think restrictions on big-money banks and investors will drain the amount of money available to the everyday deals farmers favor.
One can argue that being “anxious” about a pending bill is the same as being “hit” by it. But most readers would assume that “hit” — especially in a front-page headline — refers to tangible consequences. There aren’t any such consequences in this story — not even anticipatory price hikes by commodity brokers or swap dealers.
Even the “worries” are a badly documented mouthful of mush. The iconic farmer in the story, Jim Kreutz, never actually says he is worried that the bill will drive up his hedging costs — it’s his futures broker at AG West who frets about that, but offers no specifics. Kreutz’s brother-in-law, who buys Kreutz’s cattle and hedges against the swings in livestock prices, “can’t tell yet if it [the bill] will hurt or help.” Executives at a big meat-packing company, JBS USA, “haven’t been able to nail down the precise impact of the legislation” but “aren’t changing the way they use derivatives.”
In fact, some Nebraskans — not named — think the financial overhaul bill might actually help farmers: “Others predict the opposite effect, pushing money from the private market to the exchanges and creating more competition that will benefit farmers.” Excuse me? That sounds important. Who are these unnamed optimists? Is there anything to what they say?
It gets worse. For all the apparent handwringing about farmers and feedlots, the story then slips in this show-stopper: “Faced with intense lobbying, Congress partially exempted businesses that use derivatives for commercial purposes. So, farmers and co-ops probably won’t face new collateral requirements.”
Say what? Farmers and other end-users are exempt from the new rules? Then why are we being subjected to this article?
The truth is that the only players who most certainly stand to lose are the big banks, like JP Morgan Chase and Goldman Sachs, that will have to either spin off their derivatives-trading operations or put them into separate subsidiaries that require higher capitalization.
The new bill does require that most financial derivatives, like the credit default swaps that brought down A.I.G., be traded on regulated exchanges or through clearinghouses. This is a very good thing. It means that purely financial traders –like banks and hedge funds — will have to post margin requirements that reflect the riskiness of their positions. That should reduce the risk of future bailouts. But it might actually reduce hedging prices, because trading over exchanges will be more transparent and thus more competitive.
But the main point here is that almost all “end-users” — not just farmers, but airlines, manufacturing companies, exporters, eletric utilities and many others — are exempt from the requirements to trade through clearinghouses and exchanges. If anything, the bill exempts too many “end-users” who are really just financial traders.
Finally, the derivatives used most in agriculture — crop futures, electricity futures, pork-belly futures — have been traded over exchanges for more than a century. Hello? That’s why they created the Chicago Board of Trade and the New York Merc. And Phillips acknowledges that not much changes for any of that:
Those that trade derivatives on regulated exchanges, such as the Chicago Board of Trade, are less likely to see immediate impacts than those conducting private over-the-counter deals, which will face federal regulation for the first time. The goal is to make such deals transparent.
It’s nice that Phillips acknowledges a few facts that undermine his story. But that doesn’t excuse him for painting a lovely but false picture that serves a clear political agenda. Remember, the Senate is scrambling this week to pass this sweeping bill amid relentless and shameless opposition from Wall Street. The Journal used to be better than this.
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Edmund
Reading your background, I'm willing to take the wild guess that you have never spent so much as one day working in the grains/commodities industry. Therefore, your understanding of how an individual farmer/coop/grain company uses futures and options contracts to hedge price volatility is lacking. The key point you are missing is that the new financial regulation will remove liquidity from those markets. What that means is it becomes costlier to do business on them. Current CBOT market depth allows for stable intraday trading, where farmers can hedge out, for example, 100 million bushels of corn. The market is able to absorb those sales because there are people there, other hedgers, speculators (I know,a terribly bad word in your world, I'm guessing as well) who are willing to take on that commodity for physical purposes, and gasp, to make a profit! Removing that liquidity means the ability to push price down or up on less volume is easier, a 1 penny move in corn or soybeans equates to 50 dollars gained/lost, but I'm sure you knew that already.
So, if price is going to be not as stable, and a farmer can't get the price he's looking for, he's losing money. You're probably going to come up with some reasons as to why my argument is wrong; and I expect that.
Shaking my head in disgust.
Corn futures hit the daily trading limit relatively frequently..perhaps if the larger "speculators" in the market are more regulated it would hurt the liquidity of the market…but wouldn't that give more influence to smaller players who actually take delivery of that commodity for "physical purposes"? Anyway, the authors point was that the WSJ piece was one-sided and misleading…do you have something against journalists? Shaking my head in disgust? Really? At a journalist's claim that an article in an increasingly partisan minded newspaper is one-sided? Come on.
where farmers can hedge out, for example, 100 million bushels of corn – Those folks are industrial businesses who farm, they are not "farmers," I don't know Phillips but I do know that news editors insist on stories that contain sympathetic victims, whether the facts justify the alleged abuse. I am surprised that the coverage of this topic has not sunk to the depths of the BP well of mistakes where any dolt can begin a paragraph:
"In the worst case scenarior," and proceed to discribe as potential fact, the destruction of all living things adjacent to the Gulf of Mexico."
In this case the worst case scenario could be that real farmers who actually deliver or take delivery of pork bellies, citrus concentrate or tons of corn will be asked to pay for services delivered and in exchange, see their margin reduced. That's business.