News Journal: An exception to Washington’s Wall Street leaders

The revolving door that takes Wall Street leaders into government jobs and then back to Wall Street isn’t a new phenomenon, but it has gotten out of hand in the past couple of decades.

I can name dozens of people now working in financial regulatory agencies who are charged with overseeing what they themselves once did in the private sector and, in all likelihood, will go back to doing when they leave government. I don’t question their honesty or ethics, but I do think they are all too likely to rationalize their behavior. How tough do you think it is it to enforce regulations that might have a negative impact on the industry you once worked in, and want in a year or two to work in again?

Too tough, I think, for the vast majority of those who are part of Washington’s revolving-door culture. But there are exceptions – does the exception prove the rule?– and I’d like to recognize one in this column.

Gary Gensler, who recently retired as the chair of the Commodity Futures Trading Commission, spent five very tough years in Washington fighting for realistic regulation of Wall Street. President Obama appointed him in 2009, about the same time I entered the Senate. One of my top priorities was to put in place effective regulation of the derivatives market, which I believed had been at the center of the financial meltdown we had just experienced. Gensler was coming back to government after a lucrative stint at Goldman Sachs, a leading trader of derivatives, and the CFTC was going to be at the epicenter of the battle for regulation of that market. I remember thinking, talk about the fox and the chicken coop.

I shared Warren Buffet’s opinion of derivatives. In Berkshire Hathaway’s 2002 annual report he wrote, “I view derivatives as time bombs, both for the parties that deal in them and the economic system. Basically these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices, or currency values. … In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

How lethal became apparent six years later, when a bunch of derivatives did blow up, almost destroying the world’s financial system.

How, I thought, could a Goldman Sachs partner be entrusted with regulating a market that had been so central to that firm’s profitability? I met with Gensler and was impressed with his knowledge and commitment to getting control over derivatives, but I was still doubtful.

I firmly believe you are known as much by your enemies as your friends. To my delight, I watched Gensler make a lot of the right enemies in the next few years. Every proposal he made to implement the Dodd-Frank provisions to disarm the derivative weapons was met with screams from the usual Wall Street suspects. He also had to fight tooth and nail with other CFTC commissioners not as committed as he was to real reform. Nevertheless, he was able to get unanimous CFTC approval of 70 percent of the derivatives rules required by Dodd-Frank.

He didn’t win everything he wanted. He fought hard for a rule that would have required derivative buyers to get price quotes from a minimum of five dealers, making trades more transparent and opening up the market beyond the big players (including Goldman Sachs) that dominate it. Those big players lobbied hard and won. Only two quotes (three after a phase-in period) will be required.

He did win an even more important battle. Although industry groups are suing the CFTC about them, new trading guidelines close a gigantic loophole that would have allowed overseas bank subsidiaries of U.S. banks to trade derivatives without oversight from U.S. regulators. We learned from JPMorgan Chase’s “London Whale” experience how easy it was to shift trading to an overseas office and lose $6 billion in the process.

Gensler’s enemies are breathing a sigh of relief as he leaves the government. But I wish the revolving door produced more people like him. I second what Bart Chilton, another retiring CFTC commissioner, was quoted as saying in the Financial Times: “We needed an aggressive and persistent advocate for implementation of the law Congress passed.

That wouldn’t have happened if we had some milquetoast bureaucrat. And Gary Gensler is anything but a milquetoast bureaucrat.”

Ted Kaufman is a former U.S. senator from Delaware.