This was a vote on an amendment offered by Rep. Frank (D-MA) that would have permitted federal regulators to set the requirements for the amount investors would have to deposit as collateral to cover their credit risk on financial instruments known as “derivatives”. Derivatives are sensitive financial instruments whose value is tied - - or derived - - from other instruments such as bonds whose value is backed by the amount of mortgages that are paid in a timely manner.
The amendment was offered to H.R. 4173, a major financial reform bill which implemented the most significant changes in the regulation of the financial industry since The Great Depression. A number of commentators had expressed the view that the improper use of derivatives had contributed significantly to the recent financial crisis the country had experienced.
Americans for Financial Reform, a coalition of progressive organizations, including The AFL-CIO, The Consumer Federation of America and AARP expressed its support for the amendment on its web site. The site included the statement that passage of the amendment “would significantly reduce systemic risk by giving regulators a more comprehensive view of market size, players, and dynamics as well as the tools to mitigate . . . risk.”
Speaking in support of his amendment, Rep. Frank noted that its language would allow the Securities and Exchange Commission and other regulators to establish the amounts require. He emphasized that this would not be a mandate that the commission establish that amount. Frank said “the question is should we say that the regulators should be denied what they have asked for . . . where they think this is important to avoid the kind of imbalances we had before.”
Franks also said: “The purpose (of the amendment) is . . . to prevent again the situation where one party or the other makes commitments it is unable to live up to. And this is a requirement--this is an empowerment of the regulators to act where they think there's a problem to prevent this from happening.”
The U.S. Chamber of Commerce web site expressed its opposition to the amendment. Part of the explanation given for that opposition was that: “(M)argin requirements imposed upon end-user transactions would require companies . . . to divert significant amounts of working capital to margin accounts — capital that companies could otherwise use to grow, create jobs or invest in new technologies.” The description of the amendment on the House Republican web site noted that, “Members may be concerned that, (if it passed), many businesses may abandon the derivatives markets or pass (some of their financial) costs to the consumer.”
Rep. Garrett (R-MD) was among those who opposed the amendment. He first claimed that “neither the administration nor the (Democratic) majority nor the (Securities and Exchange Commission) chairman has provided any substantial evidence whatsoever of (how) . . . derivatives . . . cause a financial crisis . . . Derivatives are something that the companies use to try to hedge the risk. Clearly, we must make sure there's transparency and accountability . . . and we can do so in a way . . . that will not hamper their ability to control costs . . . This (amendment) would all hurt that.”
Garrett went on to argue: “Derivative dealers and their customers, the end users, they're in the best position to determine what are the appropriate margin requirements, not giving more authority to the Securities and Exchange Commission or . . . any other financial regulators.” Rep. Bachus (R-AL) also opposed the amendment. He argued: “Requiring greater margin and capital requirements on companies that never got in trouble leads to fewer jobs.” Bachus cited testimony by an official of the John Deere tractor company who said: “We have a number of (derivative) contracts that extend well into the future. If these existing contracts are not permitted an exemption from . . . collateral requirements, we would have to terminate the transactions at a significant cost.''
Frank responded to the opposition by claiming: “As to it costing a lot of money, the amendment specifically says that they should be allowed to use noncash collateral. That means they could pledge certain of their own assets, which could mean no cost.”
The amendment was defeated by a vote of 150-280. One hundred and forty-nine Democrats, including a majority of the most progressive Members, and one Republican voted “aye”. One hundred and seventy-three Republicans and one hundred and seven Democrats voted “nay”. As a result, language was not added to the major financial reform bill, which required that all swap transactions be executed on a registered facility.