Feb. 25 (Bloomberg) -- Gary Gensler, the nominee to head the Commodity Futures Trading Commission, is dogged by a decade- old debate with former Chairman Brooksley Born over whether to regulate private derivative contracts blamed in part for $1 trillion in global bank losses.

The Baltimore native, then working for Treasury Secretary Robert Rubin, was on the side that opposed oversight by the CFTC, the watchdog for $5 trillion in commodity and financial futures. Since President Barack Obama nominated him Dec. 18, Gensler has been working to convince members of Congress that he is now ready to expand the agency’s regulatory authority to include $28 trillion in credit-default swaps and other derivatives.

“The stakes are very high,” said Andrew Lowenthal, a lobbyist with Porterfield & Lowenthal LLC in Washington and former CFTC chief of staff. Lawmakers “want to understand where Gary is going to come from. There are a lot of tricky issues.”

At his confirmation hearing today, Gensler, 51, told the Senate Agriculture Committee that “we must urgently develop a broad regulatory regime for over-the-counter derivatives markets.” Credit-default swaps “will also require further regulation,” Gensler said.

Before today’s session, Committee Chairman Tom Harkin, a Democrat from Iowa, wanted to ask the nominee about why he hadn’t supported oversight in the past and why the Treasury didn’t heed Born’s cautions that unregulated derivatives posed a danger to the economy, Harkin spokeswoman Kate Cyrul said. Harkin said in an interview with Bloomberg Television today that he has “lingering questions.”

Higher Stature

If approved, Gensler would run the agency most likely to regulate the swaps and other derivatives he helped exempt in 2000 commodity futures legislation, according to Peter Wallison, a former Treasury Department general counsel who is now a senior fellow at the Washington-based American Enterprise Institute. That new assignment would raise the stature of a commission little-known outside Washington, he said.

A bill that taps the CFTC to regulate these complex contracts was approved by the House Agriculture Committee this month.

Gensler declined to comment for this article because of his confirmation hearing.

As chairman, Gensler also would serve on the President’s Working Group on Financial Markets, along with Federal Reserve Chairman Ben S. Bernanke, Treasury Secretary Timothy Geithner and Securities and Exchange Commission Chairman Mary Schapiro. The committee makes recommendations on how to keep markets functioning and will be the administration’s forum to debate new regulatory architecture, according to James Cox, a law professor at Duke University in Durham, North Carolina.

Regulation Forum

Because of the government’s expanding role in the economy, the group “is going to be even more important than it has been,” Cox said. “Financial planning is at its zenith. The knitting of the sweater that emerges will be done at the President’s Working Group.”

First, Gensler must convince Congress that his attitude toward regulation is closer to his work on the 2002 Sarbanes- Oxley Act toughening corporate governance rules than the 2000 Commodity Futures Modernization Act, which he also helped shape.

“That bill is, rightly or wrongly, perceived as being a contributor to the current financial crisis,” said Craig Pirrong, a finance professor at the University of Houston, referring to the CFMA. “In this environment, that’s not the most favorable association.”

In recent weeks, Gensler has been trying to convince members of Congress and critics he’s ready to tackle regulation of futures markets convulsed for the past year by increased speculation, volatility and record high prices.

Meetings With Born

Gensler met with Born a couple of times and spoke with her on the phone to discuss the job and get advice, people familiar with the matter said. The meetings don’t mean Born supports Gensler’s nomination, they said, although one noted that it appeared he had “evolved” his views on regulation.

Born declined to comment on the nominee’s chances for confirmation or whether she supports him.

In the weeks since his nomination, Gensler has answered pages of questions from Democratic senators on the CFMA legislation, the role of speculators pushing up commodity prices and whether he supports a merger of the CFTC and SEC.

Among those who questioned Gensler is Senator Maria Cantwell, Democrat from Washington. She blocked Walter Lukken, President George W. Bush’s choice to head the CFTC, from ever being named anything more than “acting” chairman. Unlike Lukken, Gensler agrees with Cantwell that speculators contributed to the run-up in commodity prices.

‘Excessive Speculation’

“I believe that excessive speculation in commodity futures can cause sudden or unreasonable fluctuation or unwarranted changes in commodity prices,” Gensler said in responses to questions from Senator Carl Levin, a Democrat from Michigan.

The stance helped Gensler with the Petroleum Marketers Association of America, a federation representing 8,000 companies that sell home heating oil, gasoline and other petroleum products. The group has complained to Congress about “excessive speculation” that it claims drove up energy prices.

“We certainly had questions, unanswered questions, about where Gensler would fall regarding the desperate need to reform the commodities market,” said Sherri Cabrera, PMAA vice president. “Gensler suggested that he does support far more regulation now than he used to, that anyone who has lived the last five years has to see the need for that.”

Gensler also discussed the issue with Michael Masters, a hedge fund manager who has criticized the role of speculation in last year’s commodity price rises.

Reaching Out

“The CFTC in the past has said speculation did not cause price movements, which is quite frankly laughable,” said the president of Masters Capital Management in Atlanta. Masters met with Gensler earlier this month at the Hotel George in Washington after the nominee “reached out” to him.

“That he acknowledged what speculation did publicly is quite important,” said Masters, who isn’t ready to back him yet. “It’s a good start.”

Gensler managed to convert House Agriculture Committee Chairman Collin Peterson. The Minnesota Democrat threatened to “take his head off” until White House Chief of Staff Rahm Emanuel made a personal plea for restraint, Peterson said.

After several meetings with Gensler, Peterson is ready to endorse the nominee.

“I am very comfortable with him at this point, and think he should be confirmed,” he said. Peterson didn’t say what in particular Gensler said that swayed him, and didn’t respond to requests for comment this week.

SEC-CFTC Merger

Senators also submitted questions to Gensler on whether he supports the notion of merging the CFTC and SEC -- an idea championed by Treasury Secretary Henry Paulson under President George W. Bush’s administration. Gensler has responded that he wouldn’t support a merger if it would impair the CFTC’s ability to regulate.

Gensler has been working in and around Democratic politics since 1997, when he quit Goldman Sachs Group Inc. to join the Treasury under Rubin, the investment bank’s former co-chief executive officer. Gensler stayed on as undersecretary to Rubin’s successor, Lawrence Summers, who was in place when the CFMA was passed and is now Obama’s National Economic Council director.

After Enron Corp.’s massive accounting fraud surfaced in 2001, Gensler volunteered to serve as a senior adviser to Senator Paul Sarbanes. He eventually worked on the Sarbanes- Oxley Act, one of the most sweeping corporate oversight laws passed since the SEC was formed in 1934.

Wall Street Savvy

Gensler is a “tremendous problem solver” and has “very good political antennae,” Sarbanes, 76, said in an interview. “His experience in New York has given him an expertise, an understanding of complex financial matters, which is extremely helpful when it comes to asking, ‘How do you regulate these activities?’”

Sarbanes-Oxley defines Gensler more than the 2000 commodity futures act, said Bart Chilton, a Democrat currently serving as one of five commissioners at the CFTC.

“If you just take one bill in isolation, it’s really a disservice to his portfolio of accomplishments,” he said in an interview.

A father of three daughters, Gensler lost his wife to breast cancer in 2006. The Wharton School MBA has run marathons and a 50-mile ultra-marathon race, according to race results posted online. At 30, he became one of the youngest partners at Goldman Sachs.

Clinton Adviser

Gensler, one of Hillary Clinton’s senior advisers during the presidential primaries, was snapped up by the Obama campaign after she conceded. Two weeks after the election, he was working on the 10th floor of the SEC building as the president’s point man to evaluate the agency.

In 2002 he co-wrote “The Great Mutual Fund Trap: An Investment Recovery Plan,” examining the “failings” of the mutual fund system. The book, written out of frustration at low government-pension returns, recommends index-fund investing to avoid the “perfectly understandable mistake of trusting experts” who try to outperform the market.

Gensler had at least $15.5 million last year in investments and assets, mainly in bonds and stock and index funds, according to financial disclosure forms filed with the U.S. Office of Government Ethics. His total includes $100,001 to $250,000 in restricted stock he is to receive from Strayer Education Inc. for his work as a board member.

Strayer Board

Strayer is a holding company for a university with the same name that offers working adults undergraduate and graduate degrees via the Internet or in facilities in the eastern U.S. The Arlington, Virginia-based company also paid Gensler $89,660 for serving on the board and as chairman of the audit committee. He resigned from Strayer on Feb. 2.

“He’s a good Democrat and wants to engage in these issues,” said Phil Singer, who was a spokesman for the Clinton campaign. “He could be doing a lot of things instead of taking on what will be presumably a stressful and difficult job given the gravity of the issues the country is facing.”

To contact the reporters on this story: Ian Katz in Washington at Ikatz2@bloomberg.netTina Seeley in Washington at tseeley@bloomberg.net

Last Updated: February 25, 2009 16:04 EST