Morning Bell: The Wall Street Bailout Bill Threat to Your Bottom Line

Conn Carroll / April 20, 2010

This past Friday, President Barack Obama again threatened to veto any financial reform bill that fails to tightly regulate financial derivative products which many blame for the 2008 economic crisis. Derivatives work like insurance to protect certain investments, and provide stability to the price of most goods and services. For example, farmers buy derivatives on the price of their crops, so if the price of their crop plummets, the price of the food at the grocery store won’t change that much. Airlines buy derivatives on oil, so if the price of oil goes up drastically, they won’t have to immediately hike ticket prices.

Lehman Brothers CEO Dick Fuld shares President Obama’s view on derivatives. He also blames them for the downfall of his Wall Street firm. But a closer examination of Lehman’s failure shows that derivatives may just be a convenient scape goat. Bankruptcy examiners found that it was bad business decisions hidden by complex accounting tricks, not addressed by the current Wall Street Bailout Bill at all, that brought Lehman down. In fact, Lehman’s derivatives positions represented only about 3.3 percent of its net assets, and the bankruptcy examiner found its derivatives trades were reasonable and more carefully monitored than Lehman’s other assets.

So whenever Sen. Chris Dodd (D-CT) says his Wall Street Bailout Bill “would have prevented that kind of events from happening” he needs to explain how. If anything, the Dodd plan will only make future Wall Street bailouts more likely and more costly while also stifling consumer choice. (more…)