City Versus Country Battle Over Credit Derivatives

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From Oklahoma to credit derivatives. gem66/Flickr hide caption

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There seems to be a battle brewing between Rep. Barney Frank (D-MA) and Rep. Collin Peterson (D-MN) over who gets to rule over derivatives.

Barney Frank, of course, runs the House Financial Services Committee. He is looking to fundamentally overhaul financial market regulation. We keep hearing that he wants to have ALL financial market regulation under his committee's umbrella. Which makes some sense: one system, one unified approach.

But then there's Collin Peterson. He runs the Committee on Agriculture. His most famous contribution is the controversial, much loathed and much loved (depending on your zip code) Farm Bill. Peterson wants derivatives to fall under his committee.

What do financial derivatives have to do with agriculture? And why are these two Dems fighting?

The answer might affect all of us.

The financial products that eventually became derivatives started (more than 150 years ago) as simple wheat and other agricultural futures.

When the federal government started regulating options and futures in the 1920s, they were still largely agricultural. So, it made a lot of sense to put them under the Ag Committee.

Of course, financial derivatives have grown up and the agricultural component is less and less important. But the Commodity Futures Trading Commission is still under the Agriculture Committee.

As more and more derivatives are likely to fall under strict federal oversight, the CFTC wants to continue to run that particular show.

Why? It's not entirely clear.

There's always a bureaucratic desire to hold on to and expand power. But there's a potentially more dramatic reason.

Collin Peterson's most important job is to deliver on the Farm Bill every six years or so. When you hear about subsidies for farmers, that's the Farm Bill. Depending on your perspective, the Farm Bill is either a massive and unfair transfer of wealth from city people to a handful of huge agribusiness or it's a vital tool in maintaining the American way of life.

There is nothing more important to Collin Peterson, his constituents and the 30 or so congresspeople who represent the districts that get the most benefit from the Farm Bill.

The last fight—over the 2008 bill—was long and ugly and it was the closest the farmers ever got to losing. The next fight—which starts in a couple years—is expected to be even closer and tougher.

Some are saying Peterson wants to have a bunch of points of leverage when he fights that battle. And what better point of leverage than to be the man who regulates a big chunk of Wall Street.

Frank and Petterson did release a public statement:

... we agree there must be strong, comprehensive and consistent regulation of OTC derivatives. As Chairmen of the Congressional Committees who share jurisdiction on this issue, we will work closely together to achieve that goal.

My handy Congress-speak decoder ring tells me that "we will work closely together to achieve that goal" means, in regular English, "this is a vicious street fight and each of us is going to do everything we can to crush the other guy."

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