After all the excesses and fiascoes the financial community (and country) has undergone – and continues to undergo – you would think that Washington would be more than motivated to keep the foxes out of the hen house.
Especially when it comes to Wall Street's love of building derivatives that fall just shy of being illegal, but certainly self-serving. You would think that this populist-sounding president would be keeping his regulatory Cerberus, which guards the Securities and Exchange Commission (stocks and bonds) and the Commodities Futures Trading Commission (futures, derivatives, options), hungry, alert and only well-fed on investor injustice.
Well, the fact is, not so much. Seems Wall Street has thrown a juicy steak over the fence of the CFTC… again.
As proof of the Washington axiom that no good regulator goes unpunished, President Obama appears set to nominate an inexperienced Senate aide to replace current CFTC Chairman Gary Gensler.
Even though President Obama nominated Gensler, whose term isn't up until year-end, rumors are flying that Amanda Renteria, the former chief of staff to Senate Agriculture Committee Chairwoman Debbie Stabenow, D-Mich, will be nominated as the next head of the regulatory agency that oversees the $630 trillion derivatives markets.
A New Sheriff in Town
Gensler, whom I respectfully call Gary Genslinger, has been taking aim at big banks' risky derivatives trading, much of which was responsible for bringing the financial world to its knees in 2008.
But Gensler hasn't often had his way. Intense lobbying by bank advocacy groups and lawmakers, as well as pushback from fellow commissioners, has stymied the chairman's efforts to complete Dodd-Frank-mandated rules and regulations.
Gensler recently was forced to relent on a personal crusade to have the commission implement final proposals to make swaps trading more transparent.
He fought for months to move bilateral trading conducted primarily by phone through derivatives brokers, including ICAP Plc., GFI Group and Tullett Prebon, as "voice-brokering" intermediaries, onto electronic trading platforms called Swap Execution Facilities (SEF), called for as part of the Dodd-Frank overhaul. And, Gensler wanted prospective swaps customers trading with swap-dealing banks to be offered a minimum of five quotes by different dealers before entering a trade.
With fellow commissioners voting against him, Gensler relented last month, yielding to the power of the voice-brokers, including ICAP which has been implicated directly in the Libor scandal and enmeshed in another multi-trillion dollar manipulation scheme involving swaps pricing, to allow voice-brokering to continue and cap the quote requirement at only three offers, as opposed to the more competitive proposed requirement of needing five quoted offers.
A Stone in Wall Street's Shoe
Another fight is looming among the commissioners as a July 12 deadline approaches.
The CFTC, against Gensler's advocacy, granted big banks a temporary exemption from rules governing cross-border swaps, based on bank lobbying efforts to quell the rules that they say would disadvantage U.S. banks in the global marketplace for swaps.
The exemption expires in July and pressure is mounting on Gensler to grant an additional two-year exemption. The chairman's articulated fear is that another extension will only give banks time to have the rules watered down or undone entirely.
The move to nominate a new chairperson before Gensler's term is up would not only shut him out from seeking another term and make him a lame duck, it would also signal a significant victory for big banks, their lobbyists and the lawmakers whose campaign war chests are flush with siphoned-off bonus pool money from their darling constituents.
As chairman of the five-member CFTC, Gensler has drawn fire from big banks, the Treasury Department, U.S. lawmakers, foreign regulatory agencies and activist lobbyists over his attempts to shoot holes through the opaque walls that surround trading in the extremely lucrative swaps market. The swaps market is principally controlled by the G-16 dealers, composed of the world's largest trading banks.
One commissioner on the five-member CFTC panel, Mark Wetjen, a former aide to Senate Majority Leader Harry Reid, D-Nev., was the frontrunner to replace Gensler as chairman until his obvious Wall Street leanings exposed him as a jaded bank cheerleader.
So, with the July exemption extension looming and big banks' inside man outed, the once presumably public-minded and former bank-bashing president of the United States looks ready to undercut Dodd-Frank safeguards he championed and signed into law, by castrating his 2009 chosen CFTC man and putting forward a more pliable candidate.
Nominating Ms. Renteria, who according to Senate staffers, "worked on Dodd-Frank but didn't play a significant role," and labored on Senator Stabenow's behalf on the healthcare overhaul and the auto bailout, suggests the administration prefers an inexperienced and light-touch regulator as opposed to a hard-charging, fix-what's-wrong rule-maker and enforcer.
While Ms. Renteria worked for Goldman Sachs Group Inc. as a financial analyst after graduating from Stanford University and later went to Harvard Business School, there's nothing in her background to suggest any depth of knowledge about the arcane intricacies of the most complicated and dangerous product mix that comprises the derivatives underworld.
However, Senator Stabenow said in an e-mail last Thursday Ms. Renteria would be a "tremendous asset to the administration" because "she's known for building bridges to find consensus and get things done."
Whatever that means. And I'm guessing it's not good news for anyone outside of Wall Street.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.