The Ignorant Investor

In a story about opposition to the new financial reform bill among what I call Business Class America, the NY Times writes:

Generating almost as much opposition in the private sector is the proposed regulation of derivatives, which are used by many manufacturers and producers, in areas including natural gas, food products and agriculture, to hedge their investments against losses. Business lobbyists are seeking to exempt more “end users,” manufacturers and others who invest in derivatives on assets they own, as part of the final Senate package so they will not have to post large amounts of collateral on their investments.

"Insuring against losses" using derivatives sounds like a good idea, and commodity markets have used them to apportion the risk of sudden rises or drops in price among farmers and buyers for generations. But hedging requires a counterparty capable of paying off when the losses come. One of the major issues in the late financial crisis was that when it was time for AIG to pay off it's bad bets, it didn't have the money. The government had to step in. Hedging strategies only work well when they're symmetrical and all the players have the property to back up their bets. Hearing corporations worry about posting collateral is like hearing a poker player complain about being forced to put cash up front because "hey, you know I'm good for it."

Some publicly traded companies are concerned about a section of the Senate bill that would allow “proxy access” to corporate boards and, critics say, would make it easier for unions, hostile investors and others to gain seats on a company’s board.

Employees with a seat on the board? My God, the horror.