Peterson takes on Wall Street

Rep. Collin Peterson
Minnesota 7th District Congressman Collin Peterson chairs the U.S. House Agriculture Committee.
MPR Photo/Dan Gunderson

Peterson's entry point into the world of credit derivatives trading is his agriculture committee chairmanship. The panel has jurisdiction over a variety of derivative financial instruments, such as futures contracts for corn, soybeans and oil. A year ago Peterson watched prices skyrocket as financial investors poured billions of dollars into those commodities.

"This investment money coming into these commodities markets drove those markets beyond fundamentals in oil, even in wheat and corn and soybeans and so forth," he said.

Credit default swaps
The total face amount (also known as notional amount) of credit default swaps outstanding has topped $55 trillion. Source: Bank of International Settlements
MPR Graphic/Bill Catlin

Peterson said the resulting commodity bubble led him to investigate other forms of trading.

When some major U.S. financial houses collapsed, he turned his attention to the credit derivatives which got them in trouble. It's an arcane world populated with complex financial instruments carrying names like synthetic collateralized debt obligations, credit default swaps and even naked credit default swaps.

It's a huge business. No one knows its true size, but estimates range into the tens of trillions of dollars. Banks use these hedging tools to try to limit risk on their business deals.

What surprised Peterson most about the industry is that it's almost completely unregulated. He said banks don't know if a potential business customer is at risk of collapsing under the weight of undisclosed credit derivative deals gone bad.

"We have no information on them. We don't know who's holding what," said Peterson. "And not only we, but the financial institutions don't know who's holding what. And I think this is contributing to the credit freeze-up."

"What I'm doing is forcing people's hands."

Peterson's legislation would require that credit derivatives trading information be made public. He also wants limits placed on some forms of transactions. And he wants the agency his committee oversees, the Commodity Futures Trading Commission, to regulate the credit derivatives market.

His legislation has drawn plenty of criticism. The financial instruments Peterson is focusing on include credit default swaps. They've gotten a lot of blame for spreading the contagion that produced the financial crisis.

Robert Pickel, with the International Swaps and Derivatives Association, testified at one of Peterson's hearings. He said Peterson's reporting requirements on credit default swaps are too stringent.

"We believe that the restrictions that are contemplated there could effectively eliminate that business here in the United State," said Pickel.

A credit default swap is basically insurance. It protects a bank or other lending institution against losses on things like loan defaults and interest rate hikes. Pickel said if the business is regulated out of existence, it will deprive banks and other institutions of a necessary tool to manage credit risk.

Author and financial risk consultant Satyajit Das said Congress lacks the authority to solve the problem. He said since the banking systems of different nations are connected, one nation can't fix what is really a world-wide financial problem. But he said many countries are trying to do just that.

"We have the Germans and the Swiss for instance whose banking systems have been less affected by this, but not unaffected, saying things like, 'Well, you know, this is an Anglo-Saxon problem,' meaning Britain and the United States. 'So we're going to go our own way.' And I think we've seen a reversal from a global approach to a highly national approach which complicates this issue quite considerably," he said.

Das said Peterson's bill might backfire and stifle an economic recovery with too much regulation.

Minnesota Congressman Collin Peterson, though, believes the opposite. He said his bill is a needed step towards a turnaround.

"Basically what I'm doing is forcing people's hands here," said Peterson, "which I think needs to be done."

He expects there will be other bills introduced. Some members of Congress want either the Federal Reserve or the Securities and Exchange Commission to have regulatory control over credit derivatives.