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If Dodd-Frank passes, U.S. companies could be forced to put up an additional $1T in collateral...

If Dodd-Frank passes, U.S. companies could be forced to put up an additional $1T in collateral to continue using derivatives to reduce their business risk. FMC Corp. (FMC) says some companies will need to post hundreds of millions in additional margin - cash or committed credit that can't be used to build plants, hire workers or fund R&D.
Comments (6)
  • MarketGuy
    , contributor
    Comments (3983) | Send Message
     
    Dodd-Frank...the true test (and eventual failure) of "two negatives make a positive" science.
    6 Jul 2010, 05:23 PM Reply Like
  • phoneranger
    , contributor
    Comments (350) | Send Message
     
    I call bullshit. This has been a balance sheet game. Now these corporations will have to tell the world just how much they have at risk with their derivatives financing. Way better for all concerned except IBankers and chickenshit CFOs.
    6 Jul 2010, 05:31 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (5219) | Send Message
     
    Warren Buffett and no doubt others lobbied for an exception for existing derivative contracts, hard to argue with that because the government shouldn't be retroactively modifying existing deals.

     

    Warren appears to have won on this issue. How about bond insurers such as MBIA or Ambac that wrote credit protection in CDS form? Part of the deal and a key provision was that they do not have to post collateral. As such, they withstood stress far better than AIG. Unfortunately excessive collateral requirements invite manipulation of the markets, since the party receiving additional collateral can gain by gaming the system, as Goldman Sachs did on AIG insured CDOs.

     

    It might be a good idea to have the collateral held by a disinterested third party, a trustee with fiduciary obligations, not the victor in an argument about market values on illiquid and thinly traded stuff like CDS.

     

    Setting collateral requirements high enough might force speculators out of these markets and leave them to those who actually have an exposure to the risk in question and need to hedge it. That would get these things back to their original intention and purpose and reduce manipulation in the markets.
    6 Jul 2010, 05:45 PM Reply Like
  • Broken
    , contributor
    Comments (32) | Send Message
     
    Agree with Phoneranger. Big derivative players create volitility and then sell "volitility insurance" to those affected. This game is a tax on the non-finance part of the economy and needs to be pared back.
    6 Jul 2010, 06:14 PM Reply Like
  • If U Say So
    , contributor
    Comments (348) | Send Message
     
    I'm banking on a number of large banks becoming penny stocks again, later followed by reverse splits. These banks will have NO chance to raise more capital. There will not be any new stock offerings. Who would invest more money into companies that are going to likely lose this highly profitable business?
    6 Jul 2010, 06:24 PM Reply Like
  • john266
    , contributor
    Comments (8) | Send Message
     
    Big Corporation are not building plants here. They are not hiring here. Sorry, no pity for them.
    6 Jul 2010, 06:58 PM Reply Like
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