CFTC's Chair Turns on Wall Street

In high school, one of the plays we had to read for our English class was about Thomas Becket.  Becket, as you know, was the former confidant of King Henry.  As King Henry's chancellor, he was extremely zealous in collecting taxes due the king from all landowners, including churches.  But when King Henry appointed Becket to the position of Archbishop of Canterbury, Becket's position changed.  Instead of moving to collect taxes from churches for King Henry, Becket consolidated those revenues for the Church.  That essentially was a declaration of war from the Church against the Crown.  Eventually, this struggle led to Becket's death and martyrdom, with King Henry at one point reported to have exclaimed "will no one rid me of this turbulent priest?"

While it's highly unlikely that the chair of the Commodity Futures Trading Commission (CFTC) will end up being beheaded, his transformation in many ways mirrors that of Becket's.  Gary Gensler, a former Goldman Sachs partner, was portrayed by liberal critics as too tied to investment bankers to be an effective regulator.  Gensler was on the staff of then Treasury Secretary Larry Summers when the push to exempt most derivatives from regulatory oversight passed in 2000.  Because of this, democratic lawmakers held up his nomination for five months before finally agreeing to appoint him to his current role.

Gensler said that his transformation came about after seeing the havoc that unregulated derivatives trading wreaked on financial markets.  In fact, some of the people who Gensler tangled with during the push to deregulate derivatives trading, such as former CFTC chair Brooksley Born, now say that Gensler is "committed to robust regulation."  And the director of investor protection for the Consumer Federation of America said that Gensler has "been the strongest advocate of reform" in the Obama administration.

Gensler wants to shine the spotlight on derivatives trading.  Many companies that consume commodities use these as hedges to protect them from price swings in the supplies they need in order to function.  Southwest Airlines, for example, was aided by its hedges in oil at a time where many of its counterparts were filing for bankruptcy.

However, sophisticated traders at five major banks -- Goldman Sachs, Bank of America, JPMorgan Chase, Morgan Stanley, and Citigroup -- dominate trading and reap billions in profits.  Gensler wants to highlight the big margins the traders at these firms enjoy.

Gensler has turned out to be one of the biggest assets that those pushing for regulation have.  When banks claim that regulations being considered are too strict and would destroy their ability to function, Gensler has been known to say "that's crazy.  I used to do it all the time."

In response to the financial crisis and the role derivatives played in them, Congress moved to enact legislation that would require derivatives traders to work through clearinghouses.  These clearinghouses would require the traders they serve to hold capital in order to prevent default on their obligations.  And the CFTC would be able to more easily monitor trading.

However, Gensler says this is not enough.  He is most critical of an exemption that would allow non-financial companies seeking to hedge against fluctuations in fuel, currency swings, and other typical risks to trade outside of the clearinghouses.  He says that even these exemptions, which seem innocent, will allow hedge funds and financial firms to take major risks on derivatives to goose their profits.

This is why Gensler is pushing the Senate hard to enact regulations that clamp down harder on derivatives trading.  He wants to go even further than his boss, President Obama, in regulating derivatives trading.  The reason for this, according to Gensler, is that "interests [of the banks] are not necessarily aligned with the American public's interests."

Gensler says that while he once shared the goals of the bankers he will be responsible for regulating -- maximizing profits and bonuses -- his obligation is now to the taxpayers.  When asked what the biggest obstacle to enacting tough regulations was, he pointed to the bankers in the room and said "you."

Gensler's transformation -- which he hasn't donned a hair shirt like Becket did, it's just as remarkable -- means that the taxpayers and small investors have an ally in the current administration.  Let's hope that he doesn't end up with his head being cut off like Becket did.

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