StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Hack journalism at the Wall Street Journal on financial reform

14 Jul 2010
Posted by Edmund L. Andrews

The Wall Street Journal sank to a new low in political hackery today with a front page story entitled "Financial Overhaul  Hits Farmers."  

The story purports to document how the sweeping financial reform bill, which Senate Democrats hope to finally pass this week despite relentless opposition from Wall Street, is already disrupting heartland farmers in Nebraska who use derivatives to hedge against crop prices. According to another headline, the bill is casting a "long shadow over the Plains." 

But the doesn't come within a country mile of delivering the goods.  The story offers not one example of anybody who has been "hit'' by the new legislation.  It glosses over basic information about the bill that contradicts the thesis.  It  includes "worries" that have nothing to do with farmers, like those of a pay-day lender who frets about consumer regulations. (He probably should be worried; payday lenders charge rates that routinely top 100 percent.  But that's far afield from farmers.)

Written by Michael Phillips, the story appears to offer a vivid and home-spun validatation of the narrative that JP Morgan Chase, Goldman Sachs and groups like the Chamber of Commerce have been peddling for more than a year.  That narrative goes like this: financial derivatives aren't some Wall Street casino that needs to be tightly regulated; financial derivatives are crucial tools  that Main Street companies need to hedge against routine risk, and strict regulation will hurt hurt those business and cost jobs.

Phillips parrots this line closely but vaguely:

Designed to fix problems that helped cause the financial crisis, the bill will touch storefront check cashiers, city governments, small manufacturers, home buyers and credit bureaus, attesting to the sweeping nature of the legislation, the broadest revamp of finance rules since the 1930s.

Michael Phillips is a smart reporter, a very nice guy and a casual acquaintance of mine.  He's also honest enough to include information that undercuts his premise.  But I came away convinced that he allowed himself to be used by the Journal's increasingly ideological news editors to spread bogus propoganda. 

Where to start?

For openers, the story fails to offer a single example of anybody who has actually been "hit'' by the bill.  Instead, it offers a handful of people -- a farmer, a feedlot owner, a trucker who transports steer -- who worry about the possible effect on the cost of hedging prices  for corn, fuel, electricity and foreign currencies. These people haven't seen any impact. They are not even sure there will be an impact.  They're just "anxious." 

The question for these farmers is whether such rules will make hedging more expensive. Some say new requirements on big players will create higher costs for small players, including the cash dealers will have to put aside to enter into private derivatives transactions. Some brokers think restrictions on big-money banks and investors will drain the amount of money available to the everyday deals farmers favor.

One can argue that being "anxious'' about a pending bill is the same as being "hit'' by it.  But most readers would assume that "hit'' -- especially in a front-page headline -- refers to tangible consequences. There aren't any such consequences in this story -- not even anticipatory price hikes by commodity brokers or swap dealers.

Even the "worries'' are a badly documented mouthful of mush.  The iconic farmer in the story, Jim Kreutz, never actually says he is worried that the bill will drive up his hedging costs -- it's his futures broker at AG West who frets about that, but offers no specifics. Kreutz's brother-in-law, who buys Kreutz's cattle and hedges against the swings in livestock prices, "can't tell yet  if it [the bill]  will hurt or help."  Executives at a big meat-packing company, JBS USA, "haven't been able to nail down the precise impact of the legislation" but "aren't changing the way they use derivatives."  

In fact, some Nebraskans -- not named -- think the financial overhaul bill might actually help farmers:  "Others predict the opposite effect, pushing money from the private market to the exchanges and creating more competition that will benefit farmers."  Excuse me?  That sounds important.  Who are these unnamed optimists? Is there anything to what they say?

It gets worse. For all the apparent handwringing about farmers and feedlots, the story then slips in this show-stopper:  "Faced with intense lobbying, Congress partially exempted businesses that use derivatives for commercial purposes. So, farmers and co-ops probably won't face new collateral requirements."

Say what?  Farmers and other end-users are exempt from the new rules?  Then why are we being subjected to this article?

The truth is that the only players who most certainly stand to lose are the big banks, like JP Morgan Chase and Goldman Sachs, that will have to either spin off their derivatives-trading operations or put them into separate subsidiaries that require higher capitalization. 

The new bill does require that most financial derivatives, like the credit default swaps that brought down A.I.G., be traded on regulated exchanges or through clearinghouses. This is a very good thing.  It means that purely financial traders --like  banks and hedge funds -- will have to post margin requirements that reflect the riskiness of their positions.  That should reduce the risk of future bailouts.  But it might actually reduce hedging prices, because trading over exchanges will be more transparent and thus more competitive.

But the main point here is that almost all "end-users" -- not just farmers, but airlines, manufacturing companies, exporters, eletric utilities and many others -- are exempt from the requirements  to trade through clearinghouses and exchanges. If anything, the bill exempts too many "end-users'' who are really just financial traders.

Finally, the derivatives used most in agriculture -- crop futures, electricity futures, pork-belly futures -- have been traded over exchanges for more than a century.   Hello?  That's why they created the Chicago Board of Trade and the New York Merc.  And  Phillips  acknowledges that not much changes for any of that:

Those that trade derivatives on regulated exchanges, such as the Chicago Board of Trade, are less likely to see immediate impacts than those conducting private over-the-counter deals, which will face federal regulation for the first time. The goal is to make such deals transparent.

It's nice that Phillips acknowledges a few facts that undermine his story.  But that doesn't excuse him for painting a lovely but false picture that serves a clear political agenda. Remember, the Senate is scrambling this week to pass this sweeping bill amid relentless and shameless opposition from Wall Street.   The Journal used to be better than this.



I read that article this

I read that article this morning and had the exact same reaction you did. In fact, I even thought to myself, if I had a widely-read blog, this would be exactly the thing I'd post about today. Thanks for doing it for me!

Also, you didn't mention this tidbit. Just after talking at length about how exchange trading derivatives would be a bad and costly thing that these farmers are anxious out about, the article explains how one agricultural coop routinely uses exchange-traded derivatives to lock in fuel prices: "[In 2004, the local agricultural coop] CPI hedged on the New York Mercantile Exchange, buying a futures contract on heating oil." (emphasis mine). The article itself lets slip that farmers already have exchange-traded derivatives that are working out very well for them.

So, contrary to the articles implication that exchange-trading derivatives would be a bad thing, farmers have already been buying derivatives for years because it is precisely something that they find useful and cost-effective.

Historically the WSJ has done a good job of insulating its news pages from the idiocy of his opinion pages. I worry for its future if it cannot continue to do so.

The WSJ is living in a fantasy world

When farmers need to protect themselves against price volatility, they sell their crop to the local elevator even before the growing season is over. This is called a forward sale. I doubt very much whether this type of transaction is regulated by the new legislation.

While it's certainly possible for farmers to enter into futures contracts or purchase derivatives, this isn't a common practice. Futures and derivatives are complex and many farmers don't have the time and experience needed to deal with them.

Furthermore, farmers can obtain easy to understand multiple peril crop insurance through a federal program. This provides price protection comparable to derivatives, with the advantage that the premium is highly subsidized by the US Treasury. Crop insurance is very popular, covering something like 80% of US crop acreage. It's easy to see why farmers prefer it over financial market transactions.

What's in a name anymore?

Goldman Sachs has been infested by blood-sucking leeches who supposedly know how to measure risk... except to their name.

Same with the Journal. Murdoch bought himself a respectable name... for a while. He's fouling another nest.

Farmers and derivatives

That's a devastating critique. As a former WSJ reporter I was shocked to read through the whole story and find no evidence of actual impacts. Worse, there wasn't even any cogent explanation of how any individual farmer was likely to be directly impacted.
I admired the Journal for going beyond the usual Washington-bureau article about vote-counting on the Senate floor and whether there are enough Republicans signing on to make it a bi-partisan bill. We need more stories that look at the real world impact of what Washington does.
But it's disappointing when a reporter goes out to Nebraska, talks to some pretty intelligent farmers, dealers and co-op managers and comes back with a story that doesn't actually demonstrate that the legislation will have any impact. At the least, the reporter should have found someone to say that spreads on derivative contracts are likely to rise by two-cents per hundredweight or something. Then we could get some idea of the magnitude of the issue.
As Ed says, the headline certainly led me to expect more than the story delivered.

hindsight is 20/20


I agree with most of your analysis of the article but I have to ask, do you really need to see an impact to prepare for it? Darwin Award candidates might agree, but I do not.

At the dawn of automobiles, before accidents became common, did we really need to see the results of auto accidents to understand the dangers of driving? It's inherently dangerous yet it took many years before something as simple as a seatbelt was implemented.

I don't need examples of people "hit" by the bill to know that some will indeed be hit by it. The question is not if, but when and how many? And for many people it's an even simpler question: How will it affect ME? And that's a question neither you nor Mr. Phillips can answer.

Oh alas what of the poor

Oh alas what of the poor farmer!!!?

The commodities derivatives market have been running smoothly without creating systemic risk for over a 100 even 100's of years now due to mark to market, cash settlement and margin requirements and commodities futures (which is true, they are a type of derivative) have very little to do with the types of "derivatives" that are actually creating the massive systemic risks interest rate swaps, credit default swaps, synthetic collateralize obligations etc......

Frank and Dodd are using the need for commodity hedging as an excuse to leave those other incredibly dangerous derivatives markets as wide open as ever so that the bankers can continue to push up the leverage (600 trillion notional and counting) and skim and pocket the sham profits until it all blows up

This legislation is just another Wall Street sham that will accomplish nothing.

Dodd was instrumental in passing the Commodities Modernization Act which created the whole derivatives fiasco in the first place and Frank was a key figure behind the housing bubble and all of it in aid of their masters on Wall Street so what kind of reform can you expect from a bill passed by 2 banker owned ass clowns?

WSJ's Schizophrenia takes a new twist

libert stated, "Historically the WSJ has done a good job of insulating its news pages from the idiocy of his opinion pages. I worry for its future if it cannot continue to do so."

I started subscribing to the WSJ while taking undergrad econ classes in the mid-1980s; I completely concur with your point. As a subscriber to their on-line service I also have a new concern, the commenters are almost all economic illiterates. They have far more in common with the Tea Partiers than they do with people who argue only from economically sound premises.

Great blog post. The WSJ

Great blog post. The WSJ reporter either is ignorant of the legislation or deliberately distorted the truth (i.e., "lied").

But what do you expect from the Rupert Murdoch/Roger Ailes cabal?

Missing the point

The point of the article is the bill reaches into many areas of the economy other than "Wall Street." Farmers use futures, or options, or forward sales as a normal course of business. This segment of the economy had very little to do with the recession/housing bubble/financial panic, yet it will be affected, "hit" in some way after the legislation passes.

You criticize the author for not providing specific examples of the hits farmers have taken from a bill that is not yet law. So criticize the headline, but not the author's observation that the way farmers do business will change. Since the bill leaves most of the heavy lifting to regulators, the ultimate impact to anyone is a big unknown.

What was probably left on the editors floor was how other parts of the bill go after other areas of the economy that will be impacted by a bill that purports to save us from future recessions/bubbles/panics. That claim is, of course, absurd. In the meantime it will probably do damage to the economy and impose additional costs on market segments like farmers.

But this isn't about markets, or efficiency, or growth. It's about punishment, revenge and jealously. On that basis the bill is a resounding success.

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