Wall Street titans, recognizing that they have something of a credibility problem when it comes to opposing regulatory reform, are enlisting more sympathetic, everyday folks to lobby on their behalf on Capitol Hill.
Bankers, brokers and swaps dealers have been browbeating their clients -- farmers, fuel companies, airlines, municipal power companies -- who are the "end users" of financial derivatives: Lobby Congress against reform of the derivatives market, the bankers say, or the cost of your derivative deals will skyrocket.
"There are many end users who just don't understand the issue, so they're heavily influenced by anybody who does," said Jim Collura of the New England Fuel Institute.
"Many of these guys are influenced by one or both of the following: It's either someone from the financial community whom they've known or respected. It may be their broker, their financial adviser, their swap dealer, whoever. Or they're a member of a trade group and they're getting hammered constantly with: 'You're going to be put out of business; you're not going to be able to hedge; you're not going to be competitive anymore' -- including some of my members," Collura said.
Senate Banking Committee Chairman Chris Dodd (D-Conn.) said he sees evidence of the bankers' influence when end users lobby him. "The end users have been basically used by the major investment banks," he told HuffPost Tuesday.
Dodd explains to them that, contrary to what they may have been told, one purpose of regulating derivatives is to protect people like them against predatory bankers. "When you tell them how they benefit from this, they say, 'Well, no one told us this part.'"
The question being debated: Should derivatives - oil or corn futures, or foreign-currency or interest-rate swaps, for instance - be traded in the light of day on a regulated exchange? Or should this multi-trillion dollar market that was a major cause of the last financial crisis continue to just swash around in the dark?
So far, the forces of darkness are prevailing with the end users. Early last month, the International Swaps and Derivatives Association (ISDA) pulled together a coalition of end users who drafted a letter to Congress repeating the precise fears that brokers have been instilling in them. "[S]ome reform proposals would place an extraordinary burden on end-users of derivatives in every sector of the economy--including manufacturers, energy companies, utilities, healthcare companies and commercial real estate owners and developers. Specifically, proposals that would require all OTC derivatives used by business end-users to be centrally cleared, executed on exchanges or cash collateralized or subject end-users to capital charges, would inhibit companies from using these important risk management tools in the course of everyday business operations. These proposals, which would increase business risk and raise costs, are at cross purposes with the goals of lowering systemic risk and promoting economic recovery," reads a letter signed by several pages worth of end users and provided by ISDA.
[UPDATE: A spokesperson for the ISDA insists that the group did not "put together the end users coalition" nor initiated or wrote the letter. Our sources said, however, that ISDA was among those encouraging members to join the effort.]
Such arguments worked wonders in the House. The reform legislation in the lower chamber contains gaping carve-outs for end users, which could effectively undermine any effort to bring light to the dark pools of capital that the system nearly drowned in last fall.
Dodd's bill, unveiled Tuesday, contains no such loophole. "I don't have any [carve-outs]," he said. "I mean, you start down that road, it's endless."
Wall Street traders, however, are very keen on taking Congress down that endless road, which is why they've encouraged each individual user to lobby for a specific exemption.
"Some of our heating oil dealers have heard directly from their investment companies and their traders that they work with," said Sherri Cabrera of the Petroleum Marketers Association of America. Those traders, she said, have pushed the companies to lobby their representatives for an exemption from the regulated derivatives exchange for heating-oil companies.
Sean Cota is the president of Cota & Cota, Inc. a small fuel company in Bellow Falls, Vermont - just the kind of firm that has influence and credibility with home-state lawmakers.
"We had a consensus amongst everybody that this was all a great thing," he said of reform efforts, "until ISDA, the International Swaps and Derivates Association, with the big players and the money in the over-the-counter market, said 'You've got to figure out who your biggest accounts are and start telling them that it's going to get really expensive to do these hedging programs for you folks in the physical market. So you need to make sure that financial reform doesn't happen,'" said Cota.
There's nothing intrinsically wrong with derivatives. Lots of companies rely on them to hedge against risk. A farmer or oil producer may want to lock in a future price to avoid the fluctuations of the market and enable financial planning and budgeting. Manufacturers concerned about interest-rate fluctuations or the rise or fall of the dollar can minimize risk by using currency or interest-rate swaps.
But major investors who don't care at all about the price of corn can also game the system by overwhelming a market and driving the price in one direction. Remember $4 gas? Right now, finding out who is doing what in the over-the-counter derivatives market is as hard as determining who's controlling the drug trade.
Financial players in the derivatives market are hugely leveraged, sometimes as much as 400 times -- meaning they have very little of their own money actually in the game. Hundreds of trillions of dollars are traded in the derivatives market -- many times the size of the global GDP.
Having such massive amounts of money floating in the dark can lead to a system-wide seizure if investors' confidence in the scheme suddenly wanes. Reformers are pushing to have all derivatives put on exchanges similar to the New York Stock Exchange.
Such a reform would mean smaller profits for banks and would deprive them of a market that's remarkably easy to manipulate with enough money. But it wouldn't require much, if any, sacrifice from end users.
But that's not what they're being told by people they trust. "First we heard it with the large natural gas users, particularly the municipal systems. That was the first one. And then we've heard it from a number of other large players in the market, saying, 'You know, we're all for this reform. It's going to be good for everybody - but except for me.'"
Cota and others say the persuasion goes on under the radar -- from a trusted adviser to a longtime client.
"It's been targeted. Nothing in writing. Just personal calls. I've had to answer a few folks to explain what the scenario was and that it's going to cost them less because these derivatives have their credit built into them right now. They understand it once I explain it to them," he said. "So we have to defend ourselves against them within our own board of governors...My suspicion is it's happening all over."
Sen. Jon Tester (D-Mont.) said he's been lobbied by end users and has gotten the sense that Wall Street is behind what they're saying.
"They're going to use anybody they can to try to influence us," he told HuffPost, saying that he's in the unusual position of reverse lobbying. "I think, as with anything, it's going to be an education process."
In order to get a handle on the derivatives market, there have to be consequences for betting billions or trillion and losing, said Tester. But banks can use those potential consequences to frighten companies into opposing reform.
"It's clear we have to do some things to add more transparency and have some people get some skin in the game in this thing. And I'm sure that's exactly what they're going to tell their farmers and their businesspeople, that, 'You know, you're going to have to put money up front.' But the truth is, there has to be skin in the game on this or otherwise we're going to be in the same boat. And we don't want to have another situation like we had a year ago."
And yet, while banks tell their clients that reform means they'll have to put money down up front, what they don't often tell them is that same amount of money - sometimes more - is baked into the fees and costs they already pay brokers.
Sen. Maria Cantwell (D-Wash.), whose background in the business sector gives her an advantage in discussions with colleagues, is pushing to make sure there are no loopholes and that all derivatives are traded through an exchange.
Right now, she's working to educate the lobbyists themselves that reform is in their best interests. "There are people who have been around for a long time who saw how damaging a dark market can be to the price of their business. And while some people have made a lot of money off of it, others have suffered greatly.
"I think these individual users [being] used as a façade to push more loopholes instead of properly regulating this market is a mistake," she told HuffPost. "So we hope to bring some of them out to talk about why it's so important to actually have transparency."