Monday, December 12, 2011

Gary Gensler, the WSJ Editorial Page, and Political Competence

The Wall Street Journal editorial page has found a new regulatory villain:  Gary Gensler, chairman of the Commodity Futures Trading Commission (“CFTC”).  In passages that, except for writing style, could have appeared in Rolling Stone, recent editorials imply that Gensler’s supposed friendship with Jon Corzine, a fellow Goldman Sachs alum., led to the CFTC going easy on MF Global and the subsequent bankruptcy and missing customer funds.  (See “Mr. Corzine and His Regulator: MF Global and the new era of crony capitalism regulation” and “The Talented Mr. Gensler: Jon Corzine’s regulator wants you to know he’s been very busy.” )

Rolling Stone, of course, would have concluded that the cure to regulatory laxity is more regulation and purging the government of former Goldman Sachs employees.  The WSJ editorial page naturally draws the opposite conclusion with respect to regulation, while the editorsopinion about former Goldman Sachs employees taking government jobs is left unexpressed.  According to the WSJ editorial page, because regulators failed, they should not be entrusted with more power.  In today’s editorial about the “talented Mr. Gensler, the editors write:  “In classic Washington fashion, Mr. Gensler is nonetheless using his agency's regulatory failure in MF Global to impose still more rules and argue for still more power.  A better response would be to acknowledge that the political system has already entrusted too much power to regulators, who can never be all-knowing and all-seeing but are often vulnerable to political influence from executives or firms they know and like.  Investor beware:  Regulators cannot protect you.”
The New York Times Dealbook section effectively rebuts some of the factual basis for the WSJ editorials in an article dated November 8, i.e., some weeks before the Journal’s editorials.  The article states:

“A few days before MF Globals collapse, regulators stationed at the firm were assured its books were in order.
“Their boss, Gary Gensler, was not convinced.  A former Goldman Sachs partner who once passed the test for certified public accountants, he bore into the numbers himself and grew uneasy with the firms finances.

“‘Keep pressing them,’ he told his regulators, according to people with direct knowledge of the conversation.”
The article also notes that, while Gensler and Corzine have known each other for years, they “have seen each other just a handful of times since Mr. Gensler left Goldman Sachs in 1997.  Mr. Gensler did not attend Mr. Corzine’s 2010 wedding.  And Mr. Corzine did not attend the funeral of Mr. Gensler’s wife, a noted artist who died of breast cancer in 2006.”  Moreover, personal relationships have at least sometime not inhibited Gary Gensler; after he left the Treasury at the end of the Clinton Administration, he wrote a book, The Great Mutual Fund Trap, with another former Treasury political appointee, Greg Baer.  The book is critical of actively managed mutual funds.  Gary Gensler’s identical twin brother, Robert Gensler, is a mutual fund manager at T. Rowe Price.

As for the investment practices and apparently shoddy books and records and inadequate segregation of customer funds in commodity accounts at MF Global, it would seem that something is amiss at the Chicago Mercantile Exchange and the Financial Industry Regulatory Authority, which are the self-regulatory organizations (“SROs”) which had the front-line responsibility to examine MF Global for regulatory compliance.  While one might also look at the adequacy of the oversight of the CFTC and the SEC of the SROs, it is unreasonable to expect that the Chairman of the CFTC would be involved with regulatory compliance at a particular firm until there was a clear problem that staff deemed needed his attention.
This leads one to wonder what is behind the Journal’s vendetta against Mr. Gensler, with little mention of the SEC, which also had regulatory oversight of MF Global.  The reason is likely not that Mr. Gensler has been too lax a regulator but that his regulatory initiatives and aggressive negotiation style have made him some enemies.  It is hard to imagine that his former colleagues at Goldman Sachs like what he has been trying to do.

The liberals in Congress who had put holds or otherwise spoke against his nomination because of his Goldman Sachs ties and his activities on behalf of the Commodity Futures Modernization Act when he was an Under Secretary of the Treasury in the Clinton Administration have been pleased by the positions he has taken since he was confirmed as CFTC chairman.  But Mr. Gensler has run into problems which may undermine his effectiveness.
I argued in one of my more controversial posts that former CFTC Chair Brooksley Born’s lack of political ability hurt the CFTC in its quest to regulate OTC derivatives.  Gensler is not making the same mistakes as Born.  He was, after all, successful in obtaining for the CFTC a great deal of regulatory authority over the OTC derivatives market in the Dodd-Frank legislation.  However, he has not been able so far to obtain from Congress the funding the CFTC believes it needs to carry out these responsibilities.

Gensler also runs the danger of getting into substantive and turf battles with the bank regulators.   He is vulnerable, because he is prone at times to exaggerate his case.  For example, as I pointed out in another post, his argument in a WSJ op-ed (!) that the dangerous interconnectedness of financial firms because of OTC derivatives could be addressed by clearinghouses did not make sense.  Also, Gensler has used volatility in oil prices, by which he usually means sudden increases, not decreases, in prices, for arguing for more regulation, such as speculative position limits, without much factual support that the volatility stemmed from the futures markets.  In fact, the CFTC’s economic staff led an interagency study that said, if anything, speculative positions in the futures markets may have had a stabilizing influence on prices.
While the Journal’s editorial page attacks on Gensler make little sense, they indicate that he has a political problem.  He cannot even mollify Congress by recusing himself from MF Global matters.  He has been attacked for that by Republicans, even though it was a Republican Senator, Charles Grassley, who suggested that Gensler recuse himself.  If he had not recused himself, he would have been attacked for his conflict of interest because of his long association with Corzine.

As a small agency charged with legislative authority that can be interpreted quite broadly, the CFTC has since its creation been the subject of controversy when it comes to financial instruments.  Whether Gensler can manage the relationships he must maintain with various constituency groups in order to remain effective, now that the CFTC’s authority has been unambiguously broadened, is now in question. The Times’ Dealbook article frames his political challenge with the Wall Street community accurately when it states:
“Mr. Gensler has been Washingtons most aggressive ambassador to Wall Street, introducing sweeping new rules to crack down on excessive risk taking.

“Even industry groups acknowledge his influence, though they are not fond of his aggressive tactics.  He can be difficult, colleagues said.  And his unshakeable faith in regulation has left some fearful the agency will jeopardize Wall Streets anemic recovery and broader economic growth.
“‘It may be useful for Chairman Gensler in the short run to be viewed as an opponent of the financial industry, but to be successful in the long run, the C.F.T.C. will have to produce workable regulations that do not damage the economy too much,’ said Steven Lofchie, a partner at Cadwalader, Wickersham & Taft.  ‘The jury is still out on whether the C.F.T.C. can do that.’”

So far, while it is to be expected that Gensler’s substantive positions are opposed by Wall Street interests, his political style may undercut his effectiveness.  The Journal’s editorials are evidence that this may be the case.   

Disclosure:  I worked for Gary Gensler when he was a senior political appointee at the Treasury Department during the Clinton Administration.  With respect to Jon Corzine, I remember attending a couple of meetings, one in New York at Goldman Sachs and one in Washington, DC, at which he was a participant, but other than that I don't know him personally.