David Dayen: Jack Lew Shows His True Colors By Forcing Deregulation of Derivatives on the CFTC

By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen

I don’t know of any clear-eyed analyst who held out much hope that the handover of the Treasury Department from Tim Geithner to Jack Lew would herald a new era of stringent financial regulatory reform. Lew, outside of a stint at Citi, didn’t have much expertise with the matter; he’s more of a budget wonk. And when, at his confirmation hearing, he pronounced that Dodd-Frank solved the Too Big to Fail problem, he told you exactly who would have his ear at Treasury. This was further confirmed when Mary Miller, the undersecretary for domestic finance, denied the existence of TBTF in a speech to the Minsky conference in April.

But the most obvious reminder of the Geithner-Lew continuity was the recent upending of what would have been Gary Gensler’s final and most triumphant act at the Commodity Futures Trading Commission. Gensler was trying to finish off the cross-border derivatives rule from Dodd-Frank, which would have given CFTC oversight of any affiliates which execute more than $8 billion in trades, no matter where the location of the entity. This would have arrested a race to the bottom, where the mega-banks that control 95% of all trades fan out overseas to park their trading desks away from CFTC oversight.

Gensler was putting the screws to his commission and demanding a clean vote, intimating that he would allow a temporary exemptive order to expire July 12, putting the plain language from the Dodd-Frank statute (which clearly permitted cross-border regulation) into effect. This was some real hardball designed to get Mark Wetjen, a bank-friendly Democratic commissioner, to play ball.

Enter Jack Lew. We knew the hints of his intervention previously (I wrote about it in July), but Silla Brush and Robert Schmidt have done a deep dive into the matter for Bloomberg. The details on the July 3 meeting with Lew, Gensler and the SEC’s Mary Jo White are fascinating.

Banks and lawmakers, as well as financial regulators from around the world, had besieged Lew with complaints about Gensler’s campaign to impose U.S. rules overseas.

The July 3 meeting in Lew’s conference room with a view of the White House grew tense, according to three people briefed on it. Gensler argued his plan was vital if the U.S. hoped to seize meaningful authority over financial instruments that helped push the global economy to the brink in 2008, taking down American International Group Inc. (AIG) and Lehman Brothers Holdings Inc. and igniting the worst recession since the 1930s.

Lew insisted that Gensler coordinate better with the Securities and Exchange Commission, whose new chairman, Mary Jo White, was also present. Gensler, who was deep into negotiations with his European counterparts, was surprised by Lew’s demand. He’d been hearing the same request from lobbyists seeking to slow the process, and he told the Treasury chief it felt like his adversary bankers were in the room, the people said.

Gensler subsequently apologized to Lew for the outburst. He also softened his demands, cutting a deal with the European Union a week later. Gensler, chairman of a historically obscure agency called the Commodity Futures Trading Commission, had again pushed an idea to the brink until forced to settle.

What we got was the concept of “substitute compliance,” meaning that any overseas regulator deemed comparable to US rules would oversee derivatives trades made in their own countries. In actuality, that drives a stake through the heart of the regulation; the rule starts from the presumption that foreign rules are equivalent.

This was a pure power play. The CFTC budget is a scant $200 million. By contrast, the IT budget for a major global bank is about $1.3 billion. Giving this relative backwater agency control over the multi-trillion-dollar derivatives market is something of a designed failure. And that’s particularly true when a political actor like Jack Lew basically calls the chairman of the agency on the carpet for daring to want to regulate. This is Robert Rubin and Brooksley Born all over again.

Brush and Schmidt estimate that the final rule will cover less than 20% of the entire derivatives market, a far cry from the initial goal. If you remember, the long-departed Blanche Lincoln, then-chairwoman of the Senate Agriculture Committee, faced a challenge from the left in a primary, and subsequently surprised everyone by writing a fairly strong derivatives rule for Dodd-Frank. That got whittled down in the conference committee, cut back to a nub in what got signed into law (the article plays it with Gensler giddy about the law’s language, but it definitely changed from the Lincoln draft to the final version), and further dulled by the rule-writing process, including one of Geithner’s final acts, exempting foreign exchange swaps. Banks have also taken to calling their swaps “futures” to get around the regulations.

Gensler tried to make the best of a bad situation and he had some victories along the way, but the deck was so stacked against him (particularly with the bank shill in his midst, Mark Wetjen) that any rule he successfully navigated through the process could only be described as “the best he could do under the circumstances.” The cross-border rule mattered more than all of them, because if mega-banks could just pass off derivatives trading to one of their thousands of affiliates overseas to evade scrutiny, you can bet they’ll do it. Gensler said that a bad cross-border rule would mean “we will have repealed derivatives reform altogether.” Well, we got a bad one.

Some will blame “lobbyists,” in this case from Wall Street banks to multinationals that do a lot of hedging, for this outcome. The article does this in part. Bull-pucky. Lobbyists don’t win unless sympathetic regulators in a position of power allow it. Gensler, a Goldman alum who preferred deregulation during a previous stint at Treasury, but got religion after seeing derivatives play a starring role in the financial crisis, wouldn’t budge. Wetjen, and ultimately Jack Lew, would. And they held enough power to take whatever teeth remained out of the rules. Meanwhile, Gensler, for daring to try to do his job, ruined his career:

In the end, Gensler also sacrificed his ambition, creating so many political enemies in Congress and the industry that his chances for a second term as chairman are dim.

“He burned a lot of bridges getting it all done, within the commission and internationally,” said David Hirschmann, president of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.

I’ve heard the Administration wouldn’t offer him anything above an ambassadorship.

The story is really good. It goes into detail about Wetjen’s betrayal of the swap execution facility rules (particularly on the number of bids sellers would have to solicit before making a trade, which got whittled down to two, the least possible improvement from a fully private system). It highlights the changes to the definition of a “swaps dealer,” allowing major traders like BP, Shell and Koch Industries to get out from under the CFTC’s watch. It calls out Chuck Schumer for flacking for the banks in a letter to the CFTC urging them to stop the cross-border regulations, essentially arguing in favor of outsourcing from New York City and moving derivatives desks overseas.

The big story here, however, is Lew. In the end, even Geithner, who at least paid lip service to the importance of cross-border regulation in 2011, comes out looking better. Lew asking that Gensler “better share information with his European counterparts and the SEC” is tantamount to telling him to back off. The Euro regulators didn’t want the CFTC overseeing European banks (who represent a large percentage of registered swap dealers). Sarah Bloom Raskin, the Fed Governor with a consumer protection profile, is headed over to Treasury to become Lew’s #2, and an important counsel on financial reform matters. The derivatives debacle shows the Raskin appointment to be window dressing, and probably more of a way to get a liberalish voice out of Larry Summers’ Fed while “proving” that the Administration can promote women. In reality, Lew will follow the bankers’ dictates.

Gensler puts a brave face on this in the article, claiming the system is safer. In reality, Treasury ensured that the banks will still get to gamble virtually at will, without any pesky regulator monitoring their risk. This quote says it all:

“The banks are going to be fine,” said Sunil Hirani, chief executive officer of trueEX Group LLC, who helped pioneer electronic trading of derivatives. “They are going to make a ton of money.”


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About David Dayen

David is a contributing writer to Salon.com. He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.


  1. psychohistorian

    Well, what is going to be?

    Either the next bubble is the US dollar (which I have been saying for some time) or derivatives. It certainly looks like the pieces of the global derivative bomb are being put into place to force a huge financial crisis.

    When it blows, “rule of law” to enforce the first position of derivatives globally will be enforced by American nukes….that should be fun, not!

  2. Hugh

    Jack Lew is a Clintonista. He showed us his true colors years ago. He is one of the most powerful persons in the Administration of a virturently corporatist, anti-progressive President. Did anyone seriously think he wasn’t going to push the kleptocratic agenda to the hilt?

  3. Conscience of a Conservative

    This move was coming almost regardless of who was Treasury Secretary. The CFTC took too long and the tide has swung in favor of the banks. Jack Lew is of the Rubin camp so this was easy for him.

  4. der

    Brooksley Born was on to something. Gambling at will is the fools game the banks have been playing for so long that now, in so deep, the need to feed the addiction in order to stave off financial collapse world wide is a bit too obvious to those outside the beltway that circles “This Town.”

    If you haven’t seen it yet here’s Greg Palast on Larry Summers, the Three Marketeers and The Committee to Save the World: http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=10627&updaterx=2013-09-02+12%3A09%3A42

    And here: http://www.gregpalast.com/larry-summers-and-the-secret-end-game-memo/

    Brilliant, the plan worked so well. The Best and Brightest created it, have no control over it (except to feed their insatiable narcissistic lifestyles), and don’t know how to fix it, geniuses. Feminism’s ruined everything. We.Are.Screwed.

  5. Ms G

    Lew (and his crew) Brookley-Borned Gensler.

    Interesting that Mary Jo White was present at the nasty meeting. No report in the article as to how she participated, but I’d hazard a guess that she wasn’t there as Gensler’s ally.

    1. s spade

      You really don’t have to waste time examining the profiles of all these corporatist shills. All are trained to line up and pee in the same direction. Nothing will improve until the next crash, maybe not even then.

  6. Schofield

    Does “ill-will” have a color? (“Jack Lew shows his true colors.”)Or is it invisible and odorless like a greenhouse gas?

  7. AbyNormal

    Satan’s ICE will remain Frozen at all Cost

    The CME and ICE Rules are anticompetitive and undermine the core pro-competitive principles of the Dodd-Frank Act. By approving these Rules, CFTC changed its original adherence to the pro-competitive principles of Dodd-Frank and instead sanctioned anticompetitive behavior that allowed these clearing houses to require reporting of cleared swap data to their captive swap data repository (SDR).

    Ice burns, and it is hard to the warm-skinned to distinguish one sensation, fire, from the other, frost.

    1. Chauncey Gardiner

      Thanks for the a.s. byatt quote, Aby. Previously unfamiliar with her work, but that will change.

  8. MichaelC

    While I agree for the most part with your analysis of the meeting I have a quibble about the futurization conclusion. It is not simply a re-naming excercise.

    I actually think thats a good result. The conversion of OTC derivatives contracts to exchange traded futures contracts is no small thing. It accomplishes the goal of moving opaque private contracts to exchange traded, and CFTC regulated product.And with commodities swaps, the conversion was swift and effective,
    Shumer lamented on the banks behalf that futurization was an unintended consequence of strict enforcement of the rule. He complained that it was not the intent of the law to cut the banks out of the derivatives market, that it was only intended to regulate (weakly)that activity at the banks,

    Oops,the BANKS lost the business to the regulated futures industry instead. CFTC regulated, no less,

    What’s the problem with that? In one fell swoop a good chunk of unregulated product now trades in CFTC regulated futures markets.

    You got a problem with that result?

    IR derivatives are next up. The non-standard crap will be stranded at the banks and that will be very expensive for them, and their customers.

  9. down2long

    Sillas’ piece in Bloomberg was absolutely riveting to me. It’s like she’s leading you down the rings of hell. You keep seeing the horrible people you are familiar with in more despicable places, and utterly unscathed, their hungry mouths reaching into your gut like the Alian. For Example, Blythe Master, the mother of derivatives, she who recently dodged indictment for lying under oath in the Chase electricity manipulation scandal, head of SIFMA in 2009 doing everything she can to destroy CFTC’s jurisdiction.)

    It is absolutely bone-chilling. Silla describes Geithner as “pro-public platform trading” derivatives. I quibble with that. He is in the ninth circle of hell or maybe even split into several biomasses and sprinkled throughout the inferno, so catatrophic was his dirty work.

    Also, thanks David for further explanations. I came away from this story thinking Gensler really is a hero. He tried really hard. What a snake pit of living serpentine human excrement Washington has become. Time for Mother Nature to send a plague and a cleansing.

  10. allcoppeout

    Pondering on why we should vote GOP/Demo or Tory/Labour used to come down to the more leftist parties being less authoritarian and treating anyone unfortunate enough to be poor, disabled and so on a bit better. We’ve long been clutching at such straws. We pretend one bank regulator will be better than another, one chief police officer will reduce crime and so on. We’re just being phased. Sell them OTC and let banks pocket the fees or on exchanges – why should we care? It’s like all the adverts for payday loans – all full of pratfall junk and no mention of 5000% interest rates. What we need to know is always elided.

    What’s the value of this junk?
    How is it being used in gaining priority in bankruptcy lootings?
    What is the level of parasitism of this on the real economy?

    What we have pretty much everywhere is a ‘choice’ between Party candidates – no choice at all. An example of phasintoing on IR derivatives can be found here: http://www.newyorkfed.org/research/staff_reports/sr557.pdf

    This paper just hacks out the Party line that some fine-tuning will sort all with no penetration into who is holding the rocking horse excrement.

  11. F. Beard

    How does one regulate theft? How much theft is too much? And how much theft is too little since our economy is based on systematic, government-backed theft of purchasing power?

    It’s 317+ years since the BoE was founded and central banking STILL cannot be made to work properly. What’s that definition of insanity again?

    Btw, relatively “prudent” theft is still theft. Being able to return stolen purchasing power plus interest is morally irrelevant.

  12. TC

    Fantasies will rule until dreams are broken. We’ll just have to see how many times Dodd-Frank Title II “bail-in” gets a workout before everyone wakes up. One might assume this provision lends cause to those who claim there are no TBTF banks. Yet several decades of banking industry consolidation do not appear at risk of being broken either by a so-called regulation rationalizing deposit theft or continued insistence there be no effective derivatives regulation, this that fantasy of the system’s unquestioned solvency be extended. So, with continuity of a dream being bolstered by machinations accompanying Gensler’s departure there really is not much cause to be terribly distressed. After all, the living dream of a “free market” will destroy the fantasy of the banking system’s solvency just as effectively as stringent, global derivatives regulation would have. That the industry insists on an architecture promoting opacity should be all the evidence anyone needs to conclude it is hopelessly insolvent and doomed.

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