WASHINGTON -- Key House lawmakers on Wednesday renewed their call for legislation that would tighten banking regulators' oversight of banks' derivatives activities.
"Courts and regulators are not policy makers," said House Banking Committee Chairman Henry B. Gonzalez, D-Tex. "You have to have policy."
During a heating he called to explore the issue, Rep. Gonzalez described investments in the complex financial instruments as "incredibly risky, if not out-and-out gambling."
The Texas Democrat warned that "vacuums are created" when Congress fails to act on issues such as derivatives.
Rep. James A. Leach, R-Iowa, who cosponsored derivatives legislation with Rep. Gonzalez this year, echoed the chairman: "There are certain things that cannot be accomplished without legislation."
However, a lone industry voice told lawmakers that problems caused by derivatives have been blown out of proportion by press accounts.
"Much of the press is using the 'D' word as the latest scare story," said Lewis Teel, executive vice president at Bank of America. "For every story that appeared in the press about a derivatives user that has lost money on an ill-advised transaction, there are hundreds, probably thousands, more that have benefited from their use."
Mr. Teel recommended against Congress' introducing legislation, calling derivatives "the cheapest, least risky, and most efficient way to reduce risk."
"It's not possible to legislate away risk-taking," Mr. Teel said. "By suggesting that derivatives are speculative and excessively risky, it could deter a broad range of potential issuers and investors ... from taking advantage of these instruments."
BankAmerica Corp., Bank of America's holding company, recently had to pump $82.9 million into two money market mutual funds in order to maintain the market value of the funds at $1 a share. Derivatives were not behind the decision to infuse the fund with capital, Mr. Teel said.
Instead, he said that Securities and Exchange Commission warnings in June about the use of structured notes by money market funds, as well as "continuing references to these instruments as 'derivatives'" by the press, led to increased redemptions in the funds.
"The investment decisions were mismatched to the highly interest-rate-sensitive client base of the fund in the rising interest rate environment in which we found ourselves," Mr. Teel added.
Although Mr. Teel said that risks to investors in his corporation's funds were "clearly disclosed" on the prospectus, Rep. Richard Neal, D-Mass. who also testified before the committee, said that the average investor suffers from the misconception that mutual funds are a safe, federally insured investment.
"Many consumers believe that any type of investment instrument from a depository institution is covered by federal deposit insurance," said Rep. Neal, who introduced legislation last year that aimed to increase disclosure of noninsured investment products sold in banks.
"As our financial instruments become more complicated and more global, certain types of investments may not be suitable for the average investor or public institutions," he added.
Charles County, Mr. lost $1.3 million when the county deputy treasurer invested approximately $10 million of the county's $30 million portfolio in the financial instruments.
Roger Lee Fink, Charles County attorney, said that derivatives present "more than a tangible, objective forecasting challenge to the investor."
"The likelihood of gain or loss is, at best, incredibly difficult to predict and, at worst, an outright gamble," he added.
Derivatives are financial contracts whose value depends upon the value of underlying instruments or assets, such as commodities, bonds, equities, or currencies.
The legislation introduced by Reps. Gonzalez and Leach is intended to tighten oversight of derivatives activities in banks. It is not expected to win Congressional approval this year.