Power Player Profile: Gary Gensler

Exclusive reporting for FinReg21 by Darrell Delamaide

It could be one of major ironies of the current reform effort if Gary Gensler turns out to be the chairman that makes the Commodity Futures Trading Commission a contender as a serious regulatory agency.

The former Goldman Sachs investment banker had his nomination held up for months in the Senate by independent Sen. Bernie Sanders of Vermont, who faulted Gensler for going along with the exclusion of swaps from regulation when he was in the Treasury Department during the Clinton administration.

Whatever his stance then, Gensler has embraced regulation of derivatives now with all the zeal of a convert. Only days after his May 26 swearing in, Gensler went before Congress to sketch a comprehensive program for overseeing over-the-counter derivatives by bringing them onto exchanges where they can be monitored or by supervising derivatives dealers.

He took the same message into the lion’s den in June when he spoke before the Managed Funds Association, the main lobby group for the hedge fund industry. For good measure, he emphasized that the CFTC would reinforce its regulation of hedge funds registered as Commodity Pool Operators even as the SEC is poised to gain authority to register them as investment advisers.

In earlier congressional testimony for his nomination, Gensler broke with the CFTC’s traditional line that there is no evidence of speculation affecting commodity prices by saying he believed it could at times be skewing prices in ways that defied the fundamentals.

Considering the claims made in Matt Taibbi’s muckraking attack on Goldman Sachs in the current issue of Rolling Stone, in which the journalist accuses the investment bank of manipulating every financial market under the sun, it could be that Gensler knows whereof he speaks after his years with Goldman.

The CFTC, rightly or wrongly, has gained the reputation of being something of a pushover as a regulator. It consciously adopted a “principles-based” regulatory approach at the polar opposite from the ponderous “rules-based” policy of the SEC. Under this “light touch” philosophy, the regulator sets a number of principles as markers to guide firms under its supervision in their behavior. This in contrast to the SEC, which prescribes in every detail exactly what firms must comply with.

The Commodity Futures Modernization Act of 2000, hailed by the industry at the time as an enlightened piece of legislation, has been fully discredited in the wake of the current financial crisis, not least for its deliberate exclusion of swaps from regulation.

It emasculated the CFTC and forced it to the sidelines of the most significant development of the decade in the futures markets. The commission became a backwater, often missing its full complement of members and going for long periods under acting chairmen.

Brooksley Born, the CFTC chairman who tried to rein in derivatives in the Clinton administration before she was overruled by Treasury Secretary Robert Rubin and Federal Reserve chairman Alan Greenspan, has become almost a folk hero now.

Now the planned reforms envisaged by the administration could put some teeth back into the CFTC. More to the point, Gensler could be a chairman who is willing to bite.

The 51-year-old Baltimore native may have gotten a bad rap as deregulation supporter. He was hardly the leading light in the Treasury supporting the CFMA. Larry Summers, now President Obama’s chief economic adviser, played a much more prominent role.

Gensler went on to work with Maryland Democrat Sen. Paul Sarbanes and played a key role in getting the landmark Sarbanes-Oxley legislation passed to reform corporate governance and accounting in the wake of the Enron fiasco.

Sarbanes, now retired, remains an enthusiastic supporter and administered the oath of office to Gensler in May.

Gensler also won the unanimous support of the Senate Agriculture Committee, which oversees the CFTC, for his nomination. The leading industry group, the Futures Industry Association, supported his nomination, but so did the aggressive consumer advocacy group founded by Ralph Nader, Public Citizen.

So Gensler, a slight, soft-spoken individual who lost his wife to breast cancer in 2006 and has been a single parent to three daughters, finally was able to take office.

And he is ready to go. “The future of the economy and the welfare of the American people depend on the regulatory reform we enact in the coming months,” Gensler said at his swearing-in ceremony. “Thank you, and let's get to work.”