Administration, Congress Trying to Give Gensler the Brooksley Born Treatment over Derivatives Reform

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.

Wetjen Better Markets Letter on Dodd Frank Implementation

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  1. jake chase

    Why do I suspect any Gensler victory will be Pyrrhic?

    Because ChaCha Renteria is warming up to do a half gainer for her First Booster. The fix is in. It wouldn’t surprise me if the DF exemptions are made retroactive and the banks simply ignore the DF requirements, which only a handful of people understand and nobody really has standing to enforce, right?

    Nice work though.

    1. Yves Smith Post author

      The probable route out is through the upcoming trade reform bills, which will allow a lot of financial regulation to be challenged as trade restrictions. However, said trade bills are also big Trojan horses for US tech cos. We can hope that the elevated distrust of the US in matters related to the Internet will stymie these bills.

      1. Banger

        Indeed, I’m really interested in the conflict between various parts of the oligarchy. Because there is such a cultural gap between Wall Street and the tech companies I’d be interested to know more.

        Can you say more about the effect of these trade talks which few of us really know much about on tech sector? Remember, the tech sector is in a position to dictate terms to the rest of the oligarchy because of the information they hold and the back doors in computer systems that I know are there.

        1. jake chase

          The tech sector cares about patent protection and cheap labor. It will settle for that and let other people worry about the next financial meltdown, which really won’t matter(except temporarily) to tech barons.

          1. C

            I disagree. Much of what is called the “Tech Sector” these days is dominated by the investors. Indeed many of the current crop of tech companies are driven more by how they are funded than by actual technology. Silicon Valley has chafed under finance rules that force them to handle IPOs in public and many of the wealthier angel investors, who make money not by supporting good products but by generating “buzzy IPOs” and then selling out, will be happy with gutted finance regulations at least in the short term. I don’t see them fighting against the finance giants they work with hand-in-glove but collaborating to pass bills that restrict what we can do with our CDs but open up what they can do to us.

      2. nonlassical

        “probable route out through trade reform bills”-exactly…TPP…+ TPIP..

        trade reform indeed…

    2. jl

      I think you’re absolutely right. Gensler won’t budge, but everyone else will simply choose to ignore the new rules until a compliant stooge is in place.

      1. Banger

        Indeed this is so but to make the effort is still worthwhile. The Senators who wrote the letter are identified and the left, if it existed, could make a strong case against them. But, alas, politics is about force and the left has very little force–the truth, rational planning and so on is simply not enough. Until the left side of the political spectrum decides to face the real power-relations in this country and give up sermonizing, reform that benefits citizens is impossible. The best we can hope for is that the system remains relatively robust (which I believe it is at present) and those in charge at least are able to look after their own collective self-interest. In that case we will have the good fortune of being gradually rather than quickly impoverished.

        1. jake chase

          The American left greatly resembles the post War industrial unions, eager to collaborate with power in exchange for healthy benefits for themselves. Call is the George Stepanopolis Cokie Roberts National Pubic Radio syndrome.

      2. Yves Smith Post author

        He’s in place till the end of the year. I haven’t researched what exactly he could do re fines. But if he can impose them per transaction, he’d force compliance. Margins are skimpy on a lot of derivatives (the plain vanilla type, like currency swaps).

        And any workarounds have a fixed cost component (systems, papering up transactions differently, etc). If some types of transactions went to exchanges, customers might not fully migrate back even if stooges changed the rules later (as in the customers might prefer the changed way of doing business).

        So this might not be totally reversible.

        1. Susan the other

          I can only say that this was way interesting. In spite of not knowing how exchange traded commodities work as opposed to Over the Counter stuff. OTC avoids paying fees, etc? It is nice to know that the CFTC does not answer to treasury. Does it answer the the Ag Department? Or anything? There are two huge pigs in the python: One is today’s trade bill which will open the gates for immigration-to-work and screw our college grads; the other is the TAFTA agreement, and TPP, soon to be cramed down us all on the way in and up us on the way out. NY Senator Naughty Schumer is a very sinister guy. He wants to destroy government asap by cutting off all operating revenues. He’s a corporatist if there ever was one. Using the mother ship for the sole advantage of his real (shadow) constituents. So on the other hand if TAFTA is a done deal and bank deregulation is also, then making commodities regulated through an exchange might be a way to offset that which wouldn’t harm the big banks much at that point. There’s a tradeoff in the wings and I’m way too dumb to figure it out.

    3. allcoppedout

      “Pyrrhic defeat theory” is a way of looking at criminal justice policy. The system needs to fight crime, to some extent at least, but to an amount only to control it and ensure it stays in a prominent position in the public eye, not enough to eliminate it. Durkheim suggested that crime is functional for society, and part of the very tapestry that holds it together. The classic book was Reiman’s (1979) ‘Criminal Justice Through the Looking Glass: The Rich Get Richer and the Poor Get Prison’.

      We are certainly told we need the banksters for society to function and we must not regulate them much or the sky will fall. Yet we must be seen to regulate them. Given the letter suggests a $12 trillion heist in the US alone there seems to have been little effective regulation – and this is the plan. We’ve just had a banking review in the UK that says the banks were ‘very, very naughty’ and we may have to put them in prison if they repeat ‘reckless misconduct’ in the future. This is all face work. Gensler’s Pyrrhic victory is likely the intended plan.

      1. TC

        Quite completely agree and wondering how plans to pilfer customer accounts might fit into the scheme during what might be assumed impending chaos, post 7/12, particularly now that the SEC has moved to final defeat in the MF Global saga.

    4. Chauncey Gardiner

      I agree, Jake. But I would further posit that what ChaCha does or doesn’t do during her next gig will ultimately prove to be irrelevant.

      The proponents of unregulated derivatives trading – which they presently use as a primary tool to control and manipulate markets, men and nations (the very antithesis of “free markets” spun by Neoliberal ideologues) – are engaging in activity which I believe will ultimately destroy the very system from which they and their ideological heirs derive their wealth and power.

      The recent global liquidation of assets by Chinese debtors, the clear interconnectedness of global markets which registered the plunging asset prices, and the resultant threat to derivatives triggers, was just another shot across the bow. Despite the financial collapse of 2007-09 and the recent evidence of their continuing inability to foresee and prevent all eventualities, they remain so arrogant and intent on defending their personal revenue streams, power and privileges that they continue to think and act myopically.

      Although this registers as unbridled greed and worsening sociopathic behavior in the public mind, I believe it will be the concurrent difficulties of multiple Lehmans that will ultimately lead to systemic collapse and their downfall. IMO they will subsequently find that their accounts through brass nameplates on doors in the Caymans and the Isle of Man provide them little shelter. Like the dolls sing in a popular ride at Disney World, “It’s a small world after all.”

      They should allow Gensler and Chilton to save them from themselves… but they won’t. And quite frankly, at this point why should any of us care? They’ve passed far beyond the point where those they’ve abused will react in a constructive manner.

  2. allcoppedout

    The letter almost hits the nail on the head. The literature goes nowhere slowly, making it plain that we plebs outside the trades don’t understand the need for the complexity of small print on documents already unreadable in terms of who is covered for what.
    The word ‘extraterritoriality’ crops up a lot without much concern that the US can pass laws that those of us in other sovereign jurisdictions can’t vote on. The need for global agreement is stressed everywhere, but all the language is in bureaucratic do-nothing style. Transparency has to be weighed against liquidity – with no questioning of how we have got into the need for the obscure. I skimmed over 100 papers looking for detail on who gets fees for what under which rule changes and found nothing on who gets to do the business or whether the changes Gensler may pen into action would mean more fee extraction cake for the US.
    More than 5 years of “deliberation” merely leave us waiting for Gensler’s pen to protect the US tax payer against the nasty foreign banks and their useless, captured regulators?

    Frankly, all this sounds as likely as British action against the tax havens that have London as their hub (current Cameron-speak came off Labour politicians’ lips in the 60s and 70s). Just as offshore has grown like Topsy underneath pious rhetoric for decades, the basic derivatives scam will continue as a scramble to get round whatever new regulations are brought in. Nothing I’ve read at BoE, BIS, ECB and so on considers the real costs of the financial system in denying us democracy. Banking is essentially a smuggling racket working behind a high street front. We are conned again and again by regulatory sabre-rattling and the odd patsy thrown to the legal-political system the banks run as another front operation.
    The Emperor’s New Clothes is salutary here – the tale as told is that all returns to normal good times once the young child points out the ‘invisible cloth’. We are supposed to believe that a mad idiot and his brown-nosing retinue did a good job before the lunacy and are fit to do so again after the reality test. Gensler as the kid with his finger in America’s dyke, saving honest Uncle Sam against a tide of foreign banks looks equally unlikely.

  3. McWatt

    I think the the US kids are going to wake up about the tech companies push for more H1b visas. These US kids buy Apple and Microsoft products by the boat load, sign up for unbelievable amounts of student debt while going through college to get the degrees that would allow them to get jobs at Apple and Microsoft which then pulls the old switcheroo on them and legally hires cheaper overseas labor and brings them into the US. How fair is that?

  4. Schofield

    In Ireland the IRA ignoring the Rule of Law used to regularly knee-cap ( shoot in the knee ) those individuals it didn’t like. In the name of greed the American Plutocracy repeatedly “knee-caps” the United States or any other country that stands in its way of easy pickings. Indeed it would seem the “Wild West” never truly went away!

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  6. down2long

    Thanks Yves for keeping up with this. I need a little hope.

    As I recall, Mr. Gensler worked with Broooksley Born, so he is well aware of the Machiavellian shitbag the kleptocrats like Charles Schumer (may he never chair Banking!) are capable of throwing. He knows their game well. Good luck, Mr. Gensler.

    1. JEHR

      No, I don’t think Mr. Gensler worked with Brooksley Born:

      ‘Sanders’ office said that Gensler “had worked with Sen. Phil Gramm and Alan Greenspan to exempt credit default swaps from regulation, which led to the collapse of AIG and has resulted in the largest taxpayer bailout in US history.” He also accused Gensler of working to deregulate electronic energy trading, which led to the downfall of Enron, and supporting the Gramm-Leach-Bliley Act, which allowed American banks to become “too big to fail.”[15]’


      “As Under Secretary of the Treasury, Chairman Gensler was the principal advisor to Treasury Secretary Robert Rubin and later to Secretary Lawrence Summers on all aspects of domestic finance. The office was responsible for formulating policy and legislation in the areas of U.S. financial markets, public debt management, the banking system, financial services, fiscal affairs, federal lending, Government Sponsored Enterprises, and community development. In recognition of this service, he was awarded Treasury’s highest honor, the Alexander Hamilton Award.

      “Prior to joining Treasury, Chairman Gensler worked for 18 years at Goldman Sachs, where he was selected as a partner; in his last role he was Co-head of Finance.”

  7. JEHR

    No, Gensler did not work with Brooksley Born; he worked with Robert Rubin and Larry Summers; however, Born said that Gensler was doing a good job.

      1. down2long

        HAH! Thanks JEHR I was unsure and am happy to be corrected. I do remember he did play a role in the Frontline piece on Born.

        Thanks Beavis for the echo. Fuck Charles Schumer from his hair plugs on down. What a conniving waste of human excrement.

  8. Kim Kaufman

    So I called Wetjen’s office. The phone answerer said they had gotten a few calls.

    I remember TARP: Dianne Feinstein received 91,000 calls against TARP and 5,000 for it from Business. Guess which way she voted.

    Sometimes it helps, though. The Ag bill was killed in the House with $40b in SNAP (food stamp) cuts. Although both Boxer and Di-Fi voted for the Senate version – with $2b in food stamp cuts and horrible derivatives provisions. And I had to sit at Netroots and listen to Boxer get cheered as she talked about Republicans and rape and other nonsense knowing she had taken that awful vote the previous week.

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