It’s actually getting amusing to watch the banking industry try to pull out heavy but rusty artillery and aim at a regulator who looks like he is about to *gasp* make them comply with some rules they were certain they’d be able to evade. In this case, the regulator is Gary Gensler, the head of the Commodities Futures Trading Commission, and he has both domestic and foreign derivatives dealers up in arms about the fact that he is standing firm on not extending certain exemptions under Dodd Frank past a July 12 deadline (see this post for details). The industry, not having taken the idea seriously that they might not get their way, is now trying every avenue open to them to force Gensler into line.
The funny bit is that this attack is a ham-handed repeat of a strategy that was used successfully against a Gensler predecessor, Brooksley Born. As readers no doubt know, Born, who was new to her role, took an interest in regulating derivatives, in particular, credit default swaps (which are not true derivatives but are more accurately described as unregulated insurance agreements). Alan Greenspan, Bob Rubin and his then deputy Larry Summers, and SEC chairman Arthur Levitt pressed her repeatedly to back off. When that failed, they end ran her, going to Congress to prohibit her from acting until “more senior regulators” decided what, if anything, to do. Born left shortly thereafter.
The banking industry is again trying to get other regulators and Congress to gang up on Gensler. But apparently no one gave them the memo, that Gensler, unlike Born in 1996, holds all the cards. If Gensler simply sits pat, the regulations the industry wants to weaken or better yet neuter, go into effect. And remember, Obama has already effectively fired Gensler over this issue (he’s announced a replacement), but he apparently didn’t do his usual 11th dimensional check homework. Gensler will still be in his post when the Dodd Frank implementation deadline hits. Obama has already taken his worst shot and it won’t stop Gensler. Now mind you, Gensler may decide to relent, or offer an 11th hour deal, but he’s very much in control of how this plays out.
In light of who holds the cards, the moves afoot to try to stymie Gensler are pretty pathetic. An update from Wednesday’s Wall Street Journal:
A group of Senate Democrats joined foreign officials, large banks and several U.S. regulators in pressuring Commodity Futures Trading Commission Chairman Gary Gensler to delay a July deadline for banks operating abroad to comply with new U.S. derivatives rules.
Six senators sent a letter to Treasury Secretary Jacob Lew Wednesday suggesting the CFTC delay implementation so it can better coordinate with other regulators here and abroad.
“More time is needed for domestic harmonization and sequencing with regulations that occur abroad,” Sen. Charles Schumer (D., N.Y.) and five others wrote in the letter…
European Union Internal Market Commissioner Michel Barnier has called Mr. Gensler’s approach “flawed” and is expected to meet with Mr. Lew next month to push for an exemption for overseas banks, according to an EU official.
Perhaps someone needs to remind Barnier and these Congresscritters that the CFTC is an independent agency and Gensler does not work for Lew. Or (more likely) the letter is just a vehicle for bitching about how mean and unfair Gensler is in having the industry comply with a deadline they’ve known about and appears to have been previously extended (see the original Dodd Frank effective dates). Gensler was also subjected to a ritual roughing up:
Mr. Gensler also faced tough questions during a congressional hearing Tuesday, including from Sen. Chris Coons (D., Del.) who asked whether the CFTC’s approach would put U.S. firms at a disadvantage to unregulated banks abroad.
That is an argument some of Mr. Gensler’s fellow commissioners have been making, with three pushing for a delay to give other countries more time to craft their own rules. On Tuesday, fellow Democrat Mark Wetjen suggested the agency finalize guidance but phase in its application while also continuing to accept comments on what the agency is doing. Mr. Gensler said Tuesday that would amount to an unacceptable delay.
The chairman has argued against delaying implementation of U.S. rules abroad, saying the overhaul of the swaps market would be undone if trades conducted abroad were excluded.
“If U.S. financial institutions are operating overseas and they still have a guarantee from the mother ship back here, if we do not cover those risks then we’re back to that really awful place that we found ourselves in 2008,” Mr. Gensler said at the hearing.
Mr. Gensler has at least one powerful ally in the Senate: Elizabeth Warren (D., Mass.) has joined consumer advocates in supporting Mr. Gensler’s push to move quickly.
“If the CFTC moves in the wrong direction it could create very big and very harmful loopholes in derivatives regulations,” Ms. Warren said in an interview. She said the commissioners shouldn’t try to stall until Mr. Gensler’s term runs out at the end of the year.
With the July 4th Congressional recess virtually upon us, a Congressional Hail Mary pass in the form of sneaky riders worked into existing bills that would be signed into law before the July 12 deadline seem like a non-starter. And remember, it’s going past that date that will force the industry into workarounds, reducing activity levels (cutting the size of the derivatives market!) and/or using exchange traded products in favor or OTC products (greatly reducing systemic risk). Relief after the deadline won’t allow the industry to avoid changing behavior and if the world does not end on July 13, as they’d like the public to believe, their bargaining leverage is considerably reduced.
While the aggrieved bankers are getting the media airtime, advocates of the public interest are pushing on the fence sitters at the CFTC. Bear in mind that Gensler does not need the approval of his fellow commissioners to have the Dodd Frank exemptions expire on July 12. As chairman, he controls the agenda, so he can simply keep it from coming up for a vote. Nevertheless, the optics would be better if he has more support, and Better Markets goes after the Democrat swing voter on the CFTC, bank stooge Mark Wetjen. If any NC readers are having a slow day, I’d suggest you demand that he support Gensler on implementing Dodd Frank reforms and referring to Elizabeth Warren’s support, this post or the Better Markets letter. I bet no one ever other than lobbyists ever contacts him, so 10 or 15 calls from actual members of the public would be a lot. I don’t see an e-mail on the CFTC website, but his number is 202-418-5010. It would be an interesting form of sport to see how his staff reacts.