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Derivatives Market No Place for Politics


New regulations could thwart growth.

If you don't understand derivatives, regulate them.

That's what the Obama Administration -- claiming that the US economy took a hit last year because the derivatives market blindsided the government -- seems to be saying.

Private companies say the proposed regulations will make it more expensive to manage risk, and force them to use cash they'd prefer to spend expanding their businesses for collateral. If companies are unable to expand, it could mean slower growth when the economy rebounds.

Keep in mind, the proposed regulations on derivatives will be drawn up by the same folks in Congress who had a hand in the mortgage mess. Congress also passed the $787 billion stimulus bill, which looks like it's designed to do little besides grow the federal government. In any case, it's done little so far to improve the economy.

Is there any reason to think Congress can get derivatives right?

The value of derivatives is derived from something else, such as commodities or mortgage-backed securities. Derivatives are generally used to hedge risk: A company borrowing money at a variable-interest rate could use them to convert the borrowing into fixed-rate debt; they can also be used to protect against manic swings in commodities and currencies.

Major companies -- including Caterpillar (CAT), 3M (MMM), and Boeing (BA) -- oppose increased regulation of the over-the-counter (OTC) derivatives market, arguing that they make private deals in order to hedge against spikes in commodities or interest rates.
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