Rep. Peterson is in thick of derivatives struggle

WASHINGTON - More than a year after a historic financial collapse nearly derailed the U.S. economy, Minnesota Democrat Collin Peterson has emerged as an unlikely player on Capitol Hill in crafting legislation to bring Wall Street to heel.

A former small-town accountant and onetime farmer, Peterson has spent a lifetime mastering the financial web that undergirds the nation's farm economy. Now he has waded into the thick of an attempt to bring order to vast swaths of the financial sector that operated for years without oversight.

The targets in Peterson's sights are derivatives -- financial transactions based on the changing values of a given asset. Derivatives can be used to essentially bet on something's future worth, and companies often employ them to ensure predictable revenue by avoiding market fluctuations.

Peterson's role may seem an odd one for a House Agricultural Committee chairman, but derivatives have a long history in agriculture, and that makes Peterson particularly well-suited to take aim at Wall Street's power players.

The problem, as Peterson sees it, lies not with many of the traditional derivatives traded over regulated exchanges. Rather, his focus is the $400 trillion "over-the-counter" derivatives market in which parties deal directly with each other instead of going through an exchange. It was over-the-counter derivatives, in various forms, that were cited as a major accelerator of the 2008 financial meltdown.

Long before they became a Wall Street staple, however, derivatives were used by farmers to ensure that revenues from such farm commodities as corn, wheat and pork bellies remained stable and predictable.

Trading at regulated exchanges like the Minneapolis Grain Exchange and the Chicago Board of Trade, farmers use derivatives to avoid surprises by locking buyers into a fixed price for future purchases. Because of this, the House Agriculture Committee oversees the primary derivatives regulator: the Commodity Futures Trading Commission.

Exotic derivatives emerged

But over the last several decades, financiers developed more exotic derivatives that could be used largely under the government radar -- like "credit default swaps," which allowed financiers to insure bundles of risky mortgages in the event homeowners defaulted.

Peterson, in a sense, wants to bring a dose of Main Street transparency to Wall Street. The financial sector has responded with a ferocious lobbying effort to resist regulation.

"It's amazing," Peterson said. "They don't think they did anything wrong and they should just keep doing what they've been doing. That's basically their attitude."

After months of committee work, Peterson is in the final stages of crafting a bill with Financial Services Committee Chairman Barney Frank that would require OTC derivatives transactions to be approved by regulated clearinghouses and would force much of the trading onto open exchanges. A committee staffer said it is slated for a vote this week and will be combined with several other pieces of legislation geared toward the financial collapse.

One of Peterson's primary concerns has been crafting a bill that targets Wall Street without hurting nonfinancial companies that use derivatives mostly to stem price volatility.

Peterson argues that these so-called end-users, which account for roughly 10 percent of the derivatives market, did not cause the meltdown.

Take Cargill, the Minnetonka-based agribusiness giant that sells agricultural products around the world. Cargill relies on over-the-counter derivatives to stabilize prices for its customers, like cutting deals to ensure a restaurant chain pays stable prices for chicken.

Cargill's director of federal government relations, Jon Hixson, says that some proposals being considered could severely limit Cargill's ability to use derivatives in that way.

Peterson has tried to build in exemptions to protect Cargill and similar companies from some of the new requirements, like those that force companies to put up a certain amount of collateral before a transaction.

Agriculture watching closely

Though the regulation of OTC derivatives will most affect those in high finance, Minnesotans in agriculture are paying attention to make sure their already-regulated markets aren't crippled under new legislation.

"This affects everybody," said Jim Angel, a professor at Georgetown University who specializes in financial regulation. "And if there are disruptions in our agricultural markets, it causes real disruptions everywhere down the line."

Layne Carlson, treasurer at the Minneapolis Grain Exchange, worries that the clampdown on Wall Street could put onerous regulatory burdens on agriculture markets if crafted incorrectly.

"Let's just not have the pendulum swing so far to the wrong side of this that it interferes with the whole purpose of what we're doing," Carlson said.

Kevin Paap, a Blue Earth County farmer who also is president of the Minnesota Farm Bureau, emphasized that farmers need derivatives markets to survive in a very unpredictable business.

"There's a lot of risk in agriculture, a lot of risk in farming. ... What farmers need is to be able to accurately manage that risk and to price their crop," Paap said.

Eric Roper • 202-408-2723