by Heidi Moore
Former Wall Street lawyer Timothy Massad is Obama's CFTC nominee. We'll find out whose side – Wall Street or the public – he's on soon
Today, President Obama is going to nominate a new head of a major financial regulatory agency. His job, unfortunately, will largely be to avoid making ripples and enforce new regulations that Wall Street lobbyists have written.
The president's nominee is Timothy Massad, a former Wall Street securities lawyer who joined the Treasury Department a few years back to help run the bank bailouts. He's an administration insider, and in his new position he's unlikely to be as controversial as the man he's replacing.
That man, Gary Gensler, has run what is America's smallest, and yet maybe its most important, agency to protect against future financial crises: the Commodity Futures Trading Commission, or CFTC.
The CFTC, under Gensler, has been a darling of the few remaining policymakers who listened to the complaints of Occupy Wall Street. The agency has been largely openly antagonistic towards Wall Street in the sense that it has insisted on more regulation of derivatives, the Jekyll-and-Hyde financial instruments that are as speculative as they are about reducing risk. The financial crisis showed us that derivatives, which are meant to help investors hedge against risk, are often abused as vehicles of profitable speculation. The question that is before Congress right now is: how do you allow derivatives while curbing the abuse?
Ken Griffin, the head of hedge fund Citadel, who has long worried about the dangers of derivatives, said at today's New York Times DealBook conference, "we've made progress".
The CFTC has made progress on 43 of the 60 rules it was assigned through the Dodd-Frank financial regulatory reform act – far more than any other regulatory agency. It has shot down ideas that had the potential to hurt smaller investors, like the short-lived proposal to allow people to bet on opening weekends of Hollywood movies.
Gensler, a former Wall Streeter himself, revealed in a recent speech how he did it. In essence, in a world where almost everyone Congress spoke to was a lobbyist against financial regulation, he decided to be a lobbyist for financial regulation. As he said recently:
Our tactics included giving speeches, providing Congress with legislative and technical assistance, placing opinion pieces in leading newspapers and actively working with coalitions of supporters outside of Congress.
He also made the CFTC more technologically savvy than its brethren at the Securities and Exchange Commission.
But the trend for the CFTC, as it stands right now, is not a promising one. The agency is funded with only $195m, a pittance in the context of the $700tn industry it regulates. Running on so little cash, the CFTC has had to put aside some investigations and run on a kind of life support.
There's also the fact that the success of Gensler and his former enforcement chief, David Meister, have earned Wall Street's ire and strengthened the financial industry's determination to fight them.
As a result, Gensler's team has lost some significant battles, including, notably, the one in which Citigroup lobbyists managed to write 70 out of 85 lines of a recent regulatory bill.
Big blowups of commodities firms like MF Global and Peregrine Financial, who wiped out farmers and investors as they went under, also made investors wonder if the CFTC was minding the store as well as it could. The CFTC responded by implementing new safeguards to protect customers' money – as yet untested.
But the CFTC's big upcoming challenge will be to hold its position on regulation. The big regulatory fights over the next year or two – as Wall Street continues to hammer away at Dodd-Frank – will concern the most complicated parts of the financial system. Derivatives are one part of that. Another part is the benighted, bloated Volcker Rule, which is designed to prevent banks from speculating with the money of depositors.
Wall Street, with its superior financing power and infinite patience, used to wearing Washington down by pouring coin, is going to keep these fights backstage, as befitting what Griffin called the industry's "cartel mentality". It's going to be ugly, and it's going to be quiet.
This is the situation Massad is inheriting. Gensler, an 18-year veteran of Goldman Sachs with a history of opposing derivatives regulation, came to his job with the zeal of the converted and was wise to many of Wall Street's tricks. Wall Street firms supported his nomination initially because they thought he was theirs, a made man. He became a surprising thorn in the side of the financial industry during his tenure at the CFTC.
As a result, Massad will likely be under pressure to "play nice" and create less friction than Gensler did. We'll find out during his Congressional testimony whether that is his intent. But it would be a shame if it is.