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.
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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.
Would he also be more of an expert in derivatives, at least more than the other guys at the Big Table, if the SHTF given his experience at the CFTC?
Yes, that helps, since international regs are an issue, but banks like to flummox regulators with their knowledge of tradecraft (admittedly, there isn’t much tradecraft in traditional banking, we are taking the trading markets part). My understanding as to why Gensler was effective in holding the line on bank efforts to push back on Dodd Frank (in the areas where he had some say) was his technical knowledge, and that has at least as much to do with him having managed FX and currency operations at Goldman.
The other issue that stuck me was that regulators who have been really bad have been lawyers and/or economists. These two professions are part of the infrastructure. I believe Gensler is a more traditional quant: basically a physics PhD, (or perhaps ABD)
Who would replace him at the CFTC? As Chair there he shows every sign of doing the right and hard things. Is there a successor who is up to this? Getting at the perfectly dumbfounding issues plaguing the swaps markets and banks’ role in them is, next to getting deficits under control (more a political problem than a regulatory one and likely impossible anyway), the most important domestic, even the most important global, financial challenge facing us. That’s up to the CFTC and the SEC, the latter of which ought to and probably will largely follow the lead of the CFTC in these matters. And this job can actually be significantly advanced during the remaining years of this Administration. We know from the defeat of former CFTC Chair Brooksley Born on swaps by the other members of President’s Working Group years ago, however, that sometimes being CFTC Chair is sometimes not enough. But with Dodd-Frank in hand now, barring interference by FSOC, of which Treasury has the deciding vote, and armed with broad rulemaking and enforcement authority over the swaps markets, maybe being Chair of the CTFC is sufficient today. Being Secretary of the Treasury involves many other distractions and carrying out that job, like how and whether to deal with the deficit, taxes, and so on, has to and will bow to White House policy and the vagaries of Congress. What goes on at the CFTC does not. Maybe I just don’t know enough about what a Secretary of the Treasury can do if wise and able to win some or most of the battles — and I do not know whether Mr. Gensler would be a wise or winning Treasury Secretary — but, until convinced otherwise, it seems to me that he ought to stay where he is, doing well what he is doing and what is doable now.
I know Gary Gensler fairly well on a personal level, and Orin Kramer less so personally but have dealt with him on a number of ocassions. I agree with Yves assessment of both people. Gary is the rare individual who is not a tool of those around and above him but is his own man. Also, he made a lot of money at Goldman Sachs, and left when he was satiated financially, so he’s also the rare individual who isn’t looking to spin through the revolving door. My one question about him is why he wants to be undersecretary of the Treasury. He already had that job under Larry Summers in the Clinton administration. As for Kramer, the most telling fact about him is that he has never spoken up on behalf of public pension funds about how they get fleeced by investment managers, something I expect him to be knowledgeable about given his background as an investment manager. Ultimately, this suggests to me that he is a go-along-to-get-along guy.
I don’t know Gensler, and am therefore highly skeptical, but I do realize that under Gensler, the CFTC did a study of commodity futures trading and arrived at the conclusion that 90% of it was speculative and speculative ONLY, in nature. Not a true hedge arrangment.
That and that alone is quite a recommendation for Gensler.
“Go along to get along guy.” Could be. Could be he’s pragmatic that way, making the best of a corrupted system.
But that is an attribute of a good manager. The person at the top of the organization is not supposed to be a good manager. They are supposed to be a good leader setting the tone for the way the organization is run.
At the CFTC he is says “Status quo is good, just try to take your job seriously.”
When I hear all this quite convincing evidence of Gensler’s competence and integrity, it doesn’t say to me that he should get promoted, it says he should be outside the tent pissing in: from a TIRI-type transparency NGO like Occupy the SEC, for instance.
All indications are that Gensler protected Jon Corzine in MF Global collapse. He could have stopped the non-sense of tacitly agreeing for chapter 11 bankruptcy instead of chapter 7, destroying over a century of commodity tradition and trust. Once a GS always a GS.
He is not a progressive reformer, I will give him that much.
And that brings us back to why we should all be highly skeptical of Gensler in any position!
I would be more impressed if Gary was to finally release the study of manipulation in the silver market that the CFTC has been conducting for over four years, and on which he is currently sitting.
It’s not that Gensler is pure evil. But pulling for the most upstanding guy at Treasury is like advocating increased influence for El Chapo in Nuevo Cartel de Juárez. Treasury is terminally corrupt. Only external forces can change that.
Gensler! Best of the worst! hip hip Horaay! hip hip Horaay!
Yawn. Wake me up when he does something about JPM controlling 95% of the silver short futures equal to most of a years production of silver mining, and does something about Obama’s buddy Corzine that single handedly flushed MF-Global, but of course as noted JPM has all but been made whole at the expense of “less equal than others” MF Global customers.
2 data points isn’t a pattern but can be extrapolated as a trend…
He got money out of a foreign bank which is being written off as a cost of doing business. No one went to jail for a crime. He did not stand on a table and demand that someone got to jail for a crime. That is not a person who should be fighting banksters.
He’s probably ‘good people’ like Toney Soprano says. He is also someone who has lost his vocal cords about criminal behavior.
I simultaneously agree there probably aren’t better serious candidates and Gensler’s record doesn’t show any meaningful change of pace at CFTC. It looks like others have mentioned MF Global and JP Morgan, so let me add to the trifecta of the CFTC interfering with FERC’s attempt to regulate futures.
http://www.bloomberg.com/news/2013-03-15/ferc-ruled-lacking-authority-to-regulate-futures-contracts-1-.html
But more generally, what does Gensler offer that can change anything meaningfully? Has he quietly pushed for a return to the rule of law in ways that are not accessible to the general public?
What’s so refreshing about Gensler is his mea culpa regarding his tenure under Clinton with regards to Swap deregulation and Glass Stegall repeal.
Yves,
While I support Gensler, in a any regulatory role (he publicly apologized to Brooksley Born during the re-regulation hearings, to me that showed honesty) however, I doubt he would take the position. He has already served as Undersecretary of the Treasury, under the Clinton administration; paired with his chairmanship of the CFTC, I would think he’d have more interest in the lead role at Treasury.
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