Hack Journalism at the Wall Street Journal

Edmund Andrews Capital Gains and Games July 15, 2010

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 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.

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.

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Hack Journalism at the Wall Street Journal

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