Last week, Simon Johnson pumped for Gary Gensler, now chairman of the CFTC, to become the Deputy Treasury Secretary. Frankly, it would have been better if Gensler were Treasury secretary (an idea Johnson also promoted), but we are past that point. Obama is serious about selling catfood futures via deficit scaremongering, and he’s tagged budget maven Jack Lew as his perfect front man.
Gensler, along with Sheila Bair, has been one of the few financial services regulators who has stood up to industry demands and scored some wins, the most notable being the settlements with major banks for manipulating Libor. Keep in mind that various regulators (including Treasury) had been alerted to the gaming, and they chose either to ignore it, or, as Geithner did, to dump the matter on someone else (in Geithner’s case, the Bank of England). Gensler, by contrast, took the matter seriously and the CFTC spearheaded the investigation and got the bulk of the settlement with Barclays. It says something about the state of regulations here that news of the Libor manipulation charges kicked off a press firestorm in England, leading to hearings grilling top officials at the Bank of England on what they knew when, and leading in short order to the resignation of the chairman, CEO, and president at Barclays. Can you envisage any scenario that would lead to a similar defenestration at, say, Citi or JP Morgan?
The lack of the same degree of official and media consternation in the US is the even greater degree of regulatory capture. The Bank of England and (when it was alive) the FSA would hector the banks and occasionally stare them down (the Barclays resignations were the direct result of it trying to shift blame to the Bank of England in hearings). By contrast, the closest we’ve seen to a display of spine in regulators here is Ed DeMarco’s putback suits against 17 banks, alleging fraud involving $200 billion of original face amount of mortgage backed securities.
As Johnson wrote:
Mr. Gensler has worked hard to make markets more transparent and to push market participants away from activities that can be destabilizing to the macroeconomy….f you look across the current set of officials, few are really willing to take on the industry lobby in a sustained way. Mr. Gensler stands out in this category…
Independent observers, such as Dennis Kelleher of Better Markets, give Mr. Gensler high marks for his efforts – and for his accomplishments. “Chairman Gensler has done an exceptional job and has been a tireless advocate for implementing the critically important financial reform law designed to protect the American people from Wall Street and another devastating financial collapse and economic crisis,” Mr. Kelleher said recently….
Jeff Connaughton, a leading critic of the revolving door (see his book “The Payoff: Why Wall Street Always Wins”), thinks Mr. Gensler is an exception to the usual rule that industry insiders make ineffective regulators. In Mr. Connaughton’s assessment, “It would be difficult to find someone better suited than Gensler — who now has consistently shown determination and exceptional capability — to be a more effective regulator of complex banking and derivatives issues.”
Now let’s look at a serious reason to want Gensler in the job: who is at and likely to be at Treasury. We have Lew at the helm, a member of the Rubin club by (among other things) having a short, grotesquely lucrative stint at Citigroup. As we discussed at length, his pay deal was unseemly both by virtue of his being overpaid (given a hard-to-rationalize increase on his indefensibly high package at NYU) and having his pay level increase as the bank was hemorrhaging money and going on life support, when other financial firms were slashing compensation, particularly among the executive ranks.
Who are the leading contenders for the deputy slot? Candidates who have financial services industry experience, we are told. But that covers a multitude of sins. Given that the odds of a Eurozone breakup are high enough to be a real concern, the ideal candidate would have trading market experience. Instead, who are the prime contenders? Per Bloomberg:
Raymond J. McGuire, the head of advisory business at Citigroup Inc., and Orin Kramer, a general partner at Boston Provident LP, for deputy Treasury secretary…
McGuire, whose unit at Citigroup consults for clients on mergers and acquisitions, is one the highest-ranking blacks on Wall Street. Kramer served in President Jimmy Carter’s administration. Both would bring a deep understanding of capital markets to the position, said the person, who requested anonymity to discuss personnel matters.
Um, running an investment banking business does mean you have had some interaction with markets, but it is not tantamount either technical or operational expertise. And Orin Kramer?His firm manages hedge funds, and as the chairman of the investment committee for the State of New Jersey, he pushed hard for the state to invest more in hedge funds. From a 2009 New York Times article:
Three years ago, the New Jersey state employees pension fund led the pack as an early, and enthusiastic, investor in hedge funds. Now, facing losses of $800 million, it is shying away. New Jersey has stopped putting more money into hedge funds, after its $4 billion investment shrank to under $3.25 billion. And, like many other public pension funds, it is beginning to rethink its relationship with hedge funds, and taking a harder look at all alternative investments that did not live up to their billing….
In New Jersey, there is a lively internal debate about the way forward. Critics, like Jim Marketti, a union representative on the State Investment Council, said that the state fund ignored the unions’ pleas over the last few years to move cautiously as it diversified into hedge funds. “If we had invested in the mattress, we would have done better,” Mr. Marketti said.
Much of New Jersey’s foray into hedge funds came as Orin Kramer, a hedge fund manager, became chairman of the New Jersey funds’ oversight board. While New Jersey does not invest in Mr. Kramer’s fund, he remains a defender of these investments, saying that they still did better than the stock market.
Earth to base, it’s awfully disingenuous to suggest that the only alternative to investing in a hedge fund is to put your money in US stocks.
And as for the real reason for Kramer being on the short list, it’s undoubtedly due to his being a monster bundler for Obama. I’m clearly behind the times; I thought fundraising payoffs were limited to ambassadorships and heading organizations like the Export-Import Bank. Now I infer you can buy yourself a seat at the table. In 2008, the New York Observer called him “King of the New York Obamasaurs“. In 2012, WNYC listed Kramer as one of only two New York bundlers who had raised more than $500,000 for Obama for 2008 and 2012. And this was as of February 2012!
Now I know there are some of you who are still going to object to the idea of Gensler at Treasury. I’ve noticed in past posts that many of you go Manichean on the topic of regulators: if they haven’t been perfect, they are no good. In case you missed it, overseers are swimming in a swamp of neoliberal, anti-regulatory ideology, and are also up against well funded lobbyists who offer innocuous-sounding rationales for the pork they seek. If anyone manages to make any meaningful progress against opponents like that, they’ve done well indeed.
Now with Gensler, there’s a more specific lapse that has a lot of people pissed off at him for having approved a Chapter 11 for MF Global rather than a Chapter 7 liquidation, which favored creditors like JP Morgan (we have a long discussion of that matter here). This looks more like a lapse than a scheme to help JP Morgan.
The biggest concern is that this would take Gensler out of a role where he is useful now, namely, at the CFTC. But all in all, if I had a choice, I’d rather have him at Treasury. In all the accounts of the crisis, the CFTC was a non-player. If a financial eruption were to occur, Gensler would have more influence than his formal role given his considerable managerial experience. He would not be able to create the sort of outcomes we’d like; too many senior slots are filled with the wrong people. But he would likely be able to curb some of the excesses we saw the last time around.