On one side of the National Mall in Washington DC the Senate held a confirmation hearing on three Commodity Futures Trading Commission nominees, while on the other side the House of Representatives appropriations committee heard yet another desperate plea from the acting CFTC commissioner for additional funding. It’s hard to determine which hearing was the more significant to the future of the regulator and the US economy.
The CFTC is the regulator of previously unregulated over-the-counter traded derivatives contracts that were at the center of the 2008 economic collapse. Since the 2008 collapse these derivative contracts, held mainly by Wall Street firms who operate with the benefit of a government systemic risk guarantee, have only grown in size, now estimated at $400 to $600 trillion in notional value. The world economy is valued at just over $70 trillion, and thus another 2008 style derivatives collapse could destroy the world economy several times over.
Since the financial crisis, Warren Buffett's Berkshire Hathaway has had significant exposure to financial stocks in its portfolio. Q1 2021 hedge fund letters, conferences and more At the end of March this year, Bank of America accounted for nearly 15% of the conglomerate's vast equity portfolio. Until very recently, Wells Fargo was also a prominent Read More
Senate hears testimony from little-known nominee Massad
On the Senate side of the ledger, the Banking Committee heard Timothy Massad, President Obama’s little-known nominee for CFTC Chairman, take a tough law and order stance. “There is nothing more important than a robust enforcement program in order to protect the integrity of our financial markets,” he said. “Strong enforcement is vital to maintaining the public’s confidence.”
Concerns that Massad had very little experience in the regulated derivatives industry or that he might favor the largest Wall Street banks were not issues in the hearing. In his book Bailout, Neil Barofsky, who oversaw the Troubled Asset Relief Program (TARP) and worked alongside Massad, had written that Massad “misled the public about the progress of the AIG bailout,” a statement that is concerning to some.
“The importance of the CFTC Commissioners to the American people cannot be overstated, and yet very little is known about the current CFTC nominees,” Dennis Kelleher of Better Markets said in a statement. “Appropriate leadership of such a crucial agency requires individuals with broad experience with and commitment to derivatives regulation, and who will prioritize fair, transparent and equitable markets that serve the public, not Wall Street.”
Writing an opinion piece published on the CMEGroup web site, Mayra Rodriquez Valladares, a well-known derivatives regulatory consultant, said that Massad would be a good choice. “No candidate is ever perfect. I like Massad’s knowledge about legal issues related to derivatives & his international experience.”
Massad’s tough talk will be tested in CFTC’s Corzine trial
The attitude might be wait and see, using the upcoming CFTC trial of Jon Corzine as a key benchmark as to Massad’s tough statements on enforcing CFTC rules. Senator Debbie Stabenow (D-MI) echoed many thoughts inside the regulated derivatives industry when she said the nominees had a duty to “make sure that we never see another MF Global or Peregrine Financial shatter faith in either the markets or the ability of regulators to oversee those markets.” Massad replaces former Chairman Gary Gensler, who left the agency at the end of the year.
The committee also heard form Sharon Brown, a securities lawyer with the Wall Street firm of Latham & Watkins with little regulated derivatives experience, as well as J. Christopher Giancarlo, a well-known senior executive of the derivatives brokerage firm GFI Group. Brown replaces Bart Chilton, perhaps the most liberal and outspoken commissioner in CFTC history. Giancarlo replaces Republican Jill Sommers, a former lobbyist for the CMEGroup who was thrown into the MF Global when Gensler stepped down from day to day management of the issue in November of 2011.
It is expected that all three CFTC nominees will be confirmed at the end of the month.
Normally reserved Wetjen warns of issues without proper CFTC funding
On the other side of the mall, the House of Representatives heard acting CFTC Commissioner Mark Wetjen sound a warning regarding the agency’s ability to properly regulate the previously unregulated OTC derivatives that underlie the world’s economy.
“I do not intend the testimony that follows to sound alarmist… but I do want to be sure that Congress… has a clear picture of the potential risks posed by the continued state of funding for the agency,” Wetjen said. “When not overseen properly, irregularities in these markets … can severely and negatively impact the economy as a whole and cause dramatic losses for individual participants. The stakes, therefore, are high,” warned Wetjen, a man not known for hyperbole.