A Good Counterintuitive Piece on an Ex-Goldmanite

There are a lot of reasons to like this Bloomberg profile of Gary Gensler.

First, it’s into the weeds of the financial regulatory system, in this case the CFTC, which Gensler heads, and the legislative sausage-making surrounding it. We like that.

Second, it’s counterintuitive. Here is an ex-Goldmanite using his vast powers for good and not for evil.

Gensler’s years at Treasury and Goldman Sachs — at age 30 he became one of the firm’s youngest partners — make him a formidable foe for Wall Street, CFTC Commissioner Bart Chilton said. In agency discussions on how firms trade and account for their transactions, “we’ve had times when someone says, ‘The banks tell us they can’t do that,’” Chilton said. “And Gary says, ‘That’s crazy. I used to do it all the time.’”

Bloomberg collects endorsements of Gensler’s work from Brooksley Born, her ex-deputy Michael Greenberger, and, for good measure, the Consumer Federation. This is basically the pro-regulatory trifecta, so I know the Bloomberg premise, announced in the headline, is supported:

Gensler Turns Back on Wall Street to Push Derivatives Overhaul

Here’s what Born says:

“I think Gary Gensler is committed to robust regulation of the derivatives markets and the prevention of excessive speculation,” Born said in an interview.

For most people, that proves it. She’s not exactly a chatterbox.

Indeed, it’s a turnaround story. As a Clinton-era Treasury official under Larry Summers, Gensler pushed for the now-infamous Commodity Futures Modernization Act of 2000, a Christmas-eve surprise that exempted over-the-counter derivatives from regulation. That law, Bloomberg reminds us, “has been blamed for allowing the rapid growth of leveraged markets in derivatives such as credit-default swaps, contributing to the $1.7 trillion in losses banks have suffered since 2007.”

Besides that, it was fine.

Third, the piece gets into the weeds. I hadn’t realized Gensler wants tougher regulation than even Obama has proposed and a tougher bill than one already passed by the House.

Congress is considering tightening oversight of derivatives as part of a broader revamping of financial industry rules. Gensler wants the Senate to toughen a bill passed by the House in December that would impose stricter trading rules on dealers, including JPMorgan Chase & Co. and Goldman Sachs, while allowing exceptions Gensler opposes for end-users, typically non- financial companies that use derivatives to hedge risk.

Gensler’s goal is to move OTC derivatives to transparent trading systems that regulators can monitor. Once traded, he wants most deals to be processed through clearinghouses, which are privately owned third parties that guarantee transactions and keep track of collateral and margin. Gensler agrees with lawmakers that the legislation should not be as rigid for customized derivatives that are written for a particular client and do not actively trade, which he has estimated is 20 percent of the market.

Besides increasing transparency, putting derivatives on an exchange would crash banks’ profit margins. I think of this as the Schwab-ization of derivatives. Check out these revenue numbers:

The five biggest U.S. players in derivatives — Goldman Sachs, Bank of America Corp., JPMorgan Chase, Citigroup Inc. and Morgan Stanley — had $52.83 billion in revenue from trading derivatives and cash securities in the first nine months of 2009, according to Federal Reserve reports. Goldman Sachs was the largest with revenue of $19.8 billion, followed by Bank of America’s $10.64 billion and JPMorgan’s $9.34 billion. Citigroup showed revenue of $6.84 billion and Morgan Stanley, $6.21 billion.

Ka-ching. No wonder the lobbyists are in overdrive,

The big fight is over how to deal with end-users, non-financial firms that use the products for what they are actually for—managing risk.

Gensler is lobbying senators to strike an exemption in the House-passed measure that would relieve end-users from costly requirements to clear their derivatives deals, post collateral and pay into margin accounts.

But a lot of non-financial firms are opposed:

In a Feb. 3 letter to all U.S. senators, about 180 companies and groups representing end-users said some of the proposed reforms “would place an extraordinary burden” on them. “The loss of these important risk-management tools would be detrimental to businesses, the economy and job creation,” they wrote. Ford Motor Co., Procter & Gamble Co.,Boeing Co. and Walt Disney Co. were among the companies.

It’s all about the language:

If he can’t get rid of the exemption, Gensler said he hopes to narrow it as much as possible so that “hedge funds or other financial actors” can’t slip through the loophole.

Exempting end-users could permit up to 60 percent of standard transactions to escape the rules, Gensler said, citing statistics from the Basel-based Bank for International Settlements. Industry groups have argued that end-user transactions make up less than 15 percent of the standard market.

Bloomberg should have pushed him harder on his Clinton-era hijinks, though. It allows him to merely say that his views have “evolved,” whatever that means.

Bloomberg also reports that he “bristles at the idea that he’s a recent convert to regulation.” But that’s backed up mostly by stuff that happened after 2000.

He helped former Senator Paul Sarbanes
with the 2002 Sarbanes-Oxley Act toughening corporate governance
and accounting rules, he said, and worked with Democratic
Representative Edward Markey of Massachusetts in the 1990s on
strengthening consumer financial privacy protections.

He co-wrote a 2002 book, “The Great Mutual Fund Trap: An
Investment Recovery Plan,” that recommends index-fund investing
to avoid the “mistake of trusting the experts” who try to
outperform the market.

And the book mentioned in the second paragraph has nothing to do with regulation so it doesn’t support the case that he’s a longstanding regulator. Anyway, the important thing was holding him accountable for the 2000 bill and the derivatives debacle that followed.

With that caveat, a good one.

p.s.

Due to some snafu, the link above chopped off a few paragraphs at the end after the colorful quote “confirmation facilities” (hey, I said it was a good story; I didn’t say it was The Bourne Identity).

I’ve appended the missing paragraphs below, which includes the bit about his 2000 role and a nice, reassuring quote as the kicker:

“I don’t see myself going back to Wall Street,” he said.
“That’s very liberating.”

Hey, for us, too.

The chopped-off part is here:

He’s had more success on the issue of transparency. When
lobbyists sought to let dealers use “confirmation facilities”
–existing electronic systems that produce trade-confirmation
reports — rather than forcing transactions onto exchanges,
Gensler told lawmakers that that wouldn’t be transparent to
regulators or the public. The words were removed from the House
bill.

Details Matter

Fighting over words is important because a couple of vague
ones can undermine the bill, Gensler said. “I’m always up there
to persuade,” he said. “In terms of the ultimate legislation,
the detail really matters.”
“The more transparent a marketplace is, the more
competitive it is,” he said in a Jan. 29 speech to an American
Bar Association conference in Naples, Florida. “And the more
transparent a marketplace is, the lower the costs for hedgers,
borrowers, and ultimately, their customers.”
Gensler’s campaign goes beyond what the Obama
administration requested in its August plan for an overhaul of
financial regulation. In a letter to House and Senate committee
leaders sent six days after Obama’s plan was released, Gensler
called for fewer exemptions than Obama would allow.

Views ‘Evolved’

His views on financial regulation have “evolved” since he
was with Treasury, in part because the financial turmoil exposed
a lack of transparency in the market, he said.
Still, Gensler bristles at the idea that he’s a recent
convert to regulation. He helped former Senator Paul Sarbanes
with the 2002 Sarbanes-Oxley Act toughening corporate governance
and accounting rules, he said, and worked with Democratic
Representative Edward Markey of Massachusetts in the 1990s on
strengthening consumer financial privacy protections.
He co-wrote a 2002 book, “The Great Mutual Fund Trap: An
Investment Recovery Plan,” that recommends index-fund investing
to avoid the “mistake of trusting the experts” who try to
outperform the market. One of those experts is Gensler’s
identical twin brother, Robert, a portfolio manager at
Baltimore-based T. Rowe Price Group Inc.
Gensler had at least $15.5 million in stocks, bonds and
index funds, according to a 2008 financial disclosure form filed
with the U.S. Office of Government Ethics. He can take on the
banks, he said, because they are part of his past, not his
future.
“I don’t see myself going back to Wall Street,” he said.
“That’s very liberating.”

Dean Starkman Dean Starkman runs The Audit, CJR’s business section, and is the author of The Watchdog That Didn’t Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.