On the Influence of Wall Street in Congress: The Proposal to Distinguish Financial and Commercial Derivatives

In the process whereby financial reform legislation made its way through Congress after the financial crisis of 2008, the U.S. House and Senate had different approaches concerning who would be required to go through a clearing house to buy or sell deriviative securities. According to Michael Masters, "The clearing house would stand in the middle of the transaction and guarantee both sides of the trade. If one counterparty to the transaction fails, then the central counterparty absorbs those losses, protecting the system as a whole from collapse."  Masters claims that "Wall Street firms hate this idea because their prodigious profits will dwindle when derivatives are traded in the light of day, letting their counterparties see the true costs. So Wall Street is pushing hard to exempt as many transactions as possible."  Given the culpability of Wall Street in the financial crisis, they were in no position to "push hard." That they did nonetheless is a telling sign of the underlying character, or lack thereof, "on the street."  Furthermore, that the representatives and senators were listening to them ought to cause the voters some concern.  Yet because of the reality of the banks' muscle on the hill, the power of the banks to exploit any loopholes in the final legislation should have been salient as the legislation made its way through Congress. This can be seen in whether to favor the House or Senate version.

According to Masters, "The Senate version of the clearing house requirement, which is currently the base text for the bill, includes a narrow, well-defined exemption that allows commercial end-users a complete exemption from clearing, while denying this exemption to financial players. The House language, however, would exempt anyone hedging "balance sheet risk." Since every financial player has a balance sheet, it is estimated that more than 50% of the outstanding derivatives would go uncleared under the House plan, compared to just 10% under the Senate version."  One might say: Ah, 50% is a pretty wide door--better go with the Senate version (assuming it could resist threats and favors from the banking lobby).

Masters explains the rationale for the Senate's version. There "is a critical policy distinction that must be made between commercial end-users like airlines, and financial entities like hedge funds. For a commercial end-user, risk arises naturally out of the ordinary conduct of business. For a financial entity, pricing and managing risk is their core business. As an example, an airline cannot fly without incurring the risk of wildly gyrating jet fuel prices. Allowing them to hedge their jet fuel exposure without a clearing requirement would provide stability for the airline, confidence for airline investors and ensure that the broad U.S. economy benefits from reliable airline service. A hedge fund, however, starts with no inherent risk. Its mission is to evaluate investment options, balancing risk and reward. If a hedge fund enters into a jet fuel derivatives contract on a bet that prices will increase, then it's nonsense to say that they are "hedging" when they subsequently enter into an offsetting deal to reduce the risk they voluntarily took on in the first place. These semantic charades can easily be carried to such extremes that every transaction a hedge fund enters is "hedging" something. An exemption for hedge funds serves no social purpose and, in fact, it puts our entire financial system at risk."  In other words, there are good business reasons for non-financial companies to be able to use derivatives to hedge for risk related to price volitility even if the companies cannot meet the clearing requirements. Of course, it could be asked what proportion of commercial use should but would not occur were such use subject to the clearing house requirements.  I don't know the answer to this question. I contend, however, that even if it is significant, the danger that the loophole would be exploited such that the financial system would once again be at risk outweighs any such inconvenience.  In other words, in reaching too far for perfect efficiency, we could unwittingly be inviting the irrational exuberance of the market to destroy the market mechanism itself.  We ought not fly too close to the sun or we might get burnt and fall to the ground. Masters concludes that the Senate language is "superior to the House's simply because it forces far more derivatives into the open." This may be so, but what would prevent a financial player from using a commercial user as a front to bypass the clearing requirements? Furthermore, there might be legislative language in the exemption that allows financial firms to obviate the clearing houses without even needing such a front.

In short, I contend that having any loopholes, or exeptions, is an unwise practice when we know (as Sen. Dick Durbin said) that the banking lobby owns Congress. We also know that managers and their lawyers are oriented to exploiting loopholes.  To expect otherwise is to tell a shark that it should not be a feeding machine.  That is, we must accept the nature of business for what it is, and not do what can reasonably be assumed to be taken advantage of.  It is like saying to sharks: those of you who do not eat any swimmers can go through the hole in the net and into the shore area.  It is just too dangerous to have a hole in the first place, even if there are some benefits to having it.

Source: http://money.cnn.com/2010/06/23/news/economy/congress_derivatives/index.htm

Westboro Church's Anti-Gay and John Galliano's Anti-Semitic Opinions: The U.S. and E.U. Contrasted

The First Amendment protects free speech in the U.S. even if it is as hurtful as signs at a Marine funeral proclaiming "Thank God for Dead Soldiers," the U.S. Supreme Court ruled on March 2, 2011. The Westboro Baptist Church celebrated the death of Lance Cpl. Matthew Snyder in Iraq with signs such as "God Hates You," along with anti-gay messages at his funeral in Maryland in 2006. The late Marine's father sought damages for emotional distress. An appellate court had reversed the $5 million award granted by a district court, and the U.S. Supreme Court concurred with the appellate court's decision.  The Wall Street Journal notes that "Chief Justice Roberts nodded to the wrenching set of facts in the case, writing that 'the applicable legal term— 'emotional distress'—fails to capture fully the anguish Westboro's choice added to Mr. Snyder's already incalculable grief.'"  Crucially, however, the justices of the majority opinion would not fall to the temptation of acting on the emotion that naturally follows hearing of such harm.

Interestingly, on the same day as the American high court's decision, the designer John Galliano was being fired by Dior's CEO and investigated by the French police (for inciting racial hatred with anti-semitic statementsm, which is illegal in at least the French and German states of the EU) for having made anti-semitic insults to a couple with whom he was arguing late at night in a trendy bar (cafe) in Paris. There, the emotions got the best of both the designer and those who reacted to the video posted of his comments (albeit showing only a part of the argument). Perhaps a grieving father at his son's funeral reading signs that thank God for dead American soldiers can be likened to a Jewish couple at a bar hearing that they are lucky their grandparents or parents were not exterminated by the Nazis. It is difficult for the rest of us to know how either feels, or how to compare the pain.

In any case, that any human being would want to hurt another so much is truly a sad commentary on our species that otherwise vaunts itself as being in the image of God. Perhaps the question is what kind of God is being envisioned here. A vengeance is mine, sayth the Lord sort, which Nietzsche condemns in his writings as already discredited on account of having such a sordid divine attribute as vengeance?  The deed is done, according to Nietzsche.  So too, the pain has already been inflicted on the grieving parents and the Jewish couple.  The rest is merely mopping up. 

I contend that the impulsive reaction in Europe to the fashion designer's drunken anti-semetic slurs is inferior to the majority opinion of the American court in the Westboro case because the tolerance of reason is more in keeping with a free society than is vengeance or retribution against a disliked opinion. Chief Justice Roberts emphasized that speech on public issues (of which gays in the military is one) "cannot be restricted simply because it is upsetting or arouses contempt," USA Today reports. Roberts pointed out that the jury at the district court level of the case had been told that Westboro could be held liable for the intentional infliction of emotional distress if the picketing was "outrageous." The chief justice argues that that test is "highly malleable," which is to say, it can change according to what a given person happens to think is outrageous. An old man might think noice in an apartment hallway at midnight is outrageous while a few college students down the hall might simply assume that the party has begun. In such a case, outrageous may have a physiological determinant and thus be innately different depending on the person. Quoting the 1988 case of Hustler Magazine v. Fallwell, Roberts said that liability cannot be imposed on "the basis of jurors' tastes or views, or perhaps on the basis of their dislike of a particular expression." Rather, reason must trump passion in such matters. Regarding the Synder case, Roberts said that the small Topeka-based church's messages "may fall short of refined social or political commentary," but discussed "matters of public import," such as the nation's morality and gays in the military and thus are protected by the first amendment to the U.S. Constitution, which guarantees free speech.  A free society is only really free to the extent that we protect even the opinions of those we loath. Otherwise, society reduces to a primitive matter of excluding those we don't like. Such banal convenience is too decadent for a vibrant republic and society. Reason tells us this. The question is whether we have sufficient impulse-control to proffer the degree of tolerance that is requisite. So actually, the matter pivots on us--Americans and European generally--rather than on Westboro and Galliano. They can make us stronger in spite of themselves if we permit ourselves to rise to the occasion rather than satisfy our immediate gratification.  In the end, it is up to us, not them, what kind of societies we have.

In terms of federalism, the chief justice noted that states can regulate the time and place of the protests, and the church was already contesting some as too restrictive. As of the date of the court's decision, forty six states had enacted laws to minimize picketing near a cemetery during funerals. In terms of federalism, it might be that the states' respective Supreme Courts might have been the proper venue in interpreting the U.S. Constitution in such cases. Generally speaking, if there can be fifty different sets of regulations on protests, there can be fifty different decisions interpreting free speech. It would not be like fifty different foreign policies. As it is, even with fifty different regulations, the final decider is centralized in the U.S. Supreme Court.

Sources:

http://online.wsj.com/article/SB10001424052748703559604576176323629295598.html?KEYWORDS=first+amendment+protects

http://www.guardian.co.uk/lifeandstyle/2011/mar/04/john-galliano-dior-brand

Joan Biskupic and Kevin Johnson, "Westboro free-speech ruling has its limits," USA Today, March 3, 2011, p. 2A.