Tuesday, April 27, 2010

Financial Reform Needs Will Rogers Exception

One of the ideas being discussed as part of financial reform legislation is additional regulation of derivatives. Those are the financial instruments that are based on some other underlying asset. Trouble is, some firms that are not exactly Wall Street names also use derivatives.

The New York Times reports that "Mars, the maker of M&M’s and Snickers, wants to make sure it can continue dabbling in the derivatives market to protect the price of sugar and chocolate for its candies." Many companies use various types of derivatives to help manage the costs of doing business, like locking in prices ahead of time for a commodity that is used in production. This benefits companies and ultimately consumers. Interfering with this beneficial use of derivatives could have negative consequences.

I'm willing to accept at face value the reassurances from prominent members of Congress that they don't intend to have the current reform bill affect firms that use derivatives in this way. Unfortunately, as we have seen time and again, what lawmakers intend and the consequences of the laws they craft can be two entirely different things.

I can't find it again, but I once came across a quote that, if I recall correctly, was from Will Rogers. He said that commodities futures contracts are contracts between a seller doesn't actually own the thing he's selling and a buyer that never intends to take delivery.

Perhaps it's not possible, but it seems to me that financial reform ought to address the instruments Rogers was describing, but continue to let Mars use derivatives to hedge against a spike in sugar prices. How sweet would that be?

1 comment:

Dad29 said...

No reason they can't be on exchanges, openly traded like commodities.