Posted on 10 Jul 2009
Any doubt about how broadly U.S. corporations rely on fancy financial instruments vanishes with a look at who's lobbying Congress to forestall tougher regulation.
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.
Many in Congress blame such instruments for exacerbating the financial crisis last fall. To fix the problem, a White House plan unveiled last month calls for more of the trades to take place on exchanges where regulators can monitor them, and requires dealers -- and ultimately companies -- to put more money aside to secure against big losses if trades turn bad.
This naturally has Wall Street in a stir, but it has also sent dozens of big manufacturers and other major corporations scurrying to Washington.
Caterpillar, which uses derivatives to offset increases in the price of copper, says new regulations may drive U.S. companies to seek financing overseas.
MillerCoors LLC, Bayer AG's U.S. unit., and Delta Air Lines are among those lobbying on derivatives, which they use to manage fluctuations in materials prices, commodities, fuel, interest rates and foreign-currency swings.
At least 42 non-financial companies and trade associations are lobbying Congress on derivatives, according to a Wall Street Journal analysis of lobbying disclosure forms filed through April.
That's more than triple the 14 non-financial companies that lobbied on derivatives in all of 2008 and zero in 2005. The figures include only companies that specifically name derivatives as a lobbying issue.
"Not all derivatives have put the financial system at risk and they should not all be treated the same," Janet Yeomans, treasurer of 3M, wrote in a letter to Sen. Mike Crapo (R., Idaho).
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.
Treasury officials say their aim is to prevent another financial meltdown caused by hidden exposure to derivatives risk.
The issue will be fleshed out Friday as lawmakers question Treasury Secretary Timothy Geithner in a joint hearing hosted by the House Financial Services and House Agriculture committees as they grapple with crafting legislation. Some lawmakers say they hear the concerns and fear the new rules will hurt American companies, but there are others who want to push for more regulation.
Companies use derivatives to hedge risk. A company that borrows money at a variable interest rate might buy instruments to turn the borrowing into fixed-rate debt. Others use derivatives as protection against swings in currencies or the price of commodities such as food and oil.
Lobbyists say at least 90% of Fortune 500 companies use over-the-counter derivatives.
The administration's proposal calls for all "standard" derivative contracts to be cleared through a central body and traded on an exchange or equivalent electronic platform.
The clearinghouse would require daily pricing of the assets, which could require companies to post additional collateral, in the form of cash or short-term securities. Customized contracts would be
permitted, but the proposal would require higher levels of capital to secure against risks.
Non-financial companies say it's unfair for them to be put in the same boat as Wall Street speculators, some of whom use derivatives to make bets on market movements. They also say they typically have collateral backing the risk and standardized contracts aren't necessary.
Chesapeake Energy said it had $6.3 billion in over-the-counter derivatives as of June 2008, against which it posted $11 billion in collateral, backed by letters of credit and mortgages on its gas and oil properties.
"This is how most end-users utilize this market and, as a result, help alleviate systemic risk," Chesapeake said in a letter to the Treasury Department.
Energy companies are particularly worried because the swings in oil and gas prices are so wide. Barry Russell, president of the Independent Petroleum Association of America, warns that restricting hedging would have "a devastating impact."
The National Association of Manufacturers has intensified its meetings with lawmakers, officials said, as has the Business Roundtable and U.S. Chamber of Commerce.
At a recent hearing, Sen. Crapo said he agrees regulation is needed to protect the economy against systemic risk, but "if Congress overreaches ... I believe there could be very significant negative implications on how companies manage risk."