Polarization of US politics distorts conversation about regulation. The oil and gas industry has witnessed too often the default assertion that one side supports regulation while the other opposes it. This is absurd. Regulation exists. It exists for good reasons and cannot reasonably be opposed. What reasonably can be opposed is poor regulation. To oppose regulation because it promises to usurp liberty, yield more cost than benefit, produce undesirable results, or fail in any of many other possible ways is not the same as opposing regulation in general.
A loss of at least $2 billion on trading activities reported this month by JP Morgan Chase does not, as some are saying, discredit challenges to problematic banking regulations as attacks on financial regulation overall. What the Chase fiasco does is underscore the importance of getting regulation right.
Political event?
The trading loss is more an offense against Chase shareholders than a political event. It led to the prompt termination of at least one insanely remunerated bank executive and will claim more gilded careers. It showed that the supposedly brilliant aristocrats who run financial institutions are no less prone to error than any of the more financially challenged and increasingly resentful mortals with whom they share humanity and that they can be as reckless as anyone else with other people's money.
The loss does not threaten Chase's viability. It doesn't weaken national or global economies. It doesn't jeopardize depositors' accounts or evoke claims to publicly underwritten deposit insurance. In fact, Chase's status as a federally insured bank is the only sound reason for the loss to raise political questions at all.
But Jamie Dimon, Chase chief executive officer, has been outspokenly critical of the Dodd-Frank financial reform bill signed into law in 2010 in response to the global financial crisis. Until now, he has spoken with the authority of a leader who kept Chase off shoals that wrecked other financial behemoths. So when the trading loss surfaced, supporters of the Dodd-Frank law, which is not yet fully implemented, snatched the chance to assail his credibility. "The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today," said Rep. Barney Frank (D-Mass.), whose name is on the law.
Dimon didn't dispute the need for new rules; he challenged specific elements of the Dodd-Frank measure, which many observers consider to be so overreaching and complex that it will work against constructive reform unless repaired. The law can't get better when defenders parry questions about questionable parts as attacks on its very existence.
The controversy might infect a separate financial issue in which the oil and gas industry has a more direct interest. President Barack Obama wants Congress to allow the Commodity Futures Trading Commission to raise margin requirements in oil futures trading. The aim is to limit speculation, popularly blamed for volatility of oil prices.
Price volatility hurts the oil and gas industry. Regulation limiting it would be helpful. Whether raising margins-deposits made by traders to ensure contracts are honored-would achieve that aim, however, is open to question. Proponents obviously think so. They say raising margins would stabilize markets by discouraging the activity of uninformed risk-takers.
Opposite consequences
Not everyone agrees. The International Energy Agency argues in its May Oil Market Report that large margin requirements might produce a system in which "few traders, especially large traders, participate in the price discovery, leading to more volatile, rather than more stable, oil markets." If IEA's right, the regulation would have consequences opposite its intention.
To oppose the move on that basis, like opposing parts of Dodd-Franks, is not to oppose regulation in general. It's to implore the government to avoid making a costly mistake. How Congress approaches the question will test whether lawmakers want regulation to solve real problems or slay populist dragons.
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