For almost five years, the head of a once obscure U.S. agency fought Wall Street to impose curbs on derivatives that helped ignite the 2008 financial crisis. His successor, Timothy Massad, must now decide how to finish the job.
Massad, confirmed today by the U.S. Senate to replace Gary Gensler at the Commodity Futures Trading Commission, has given few clues to how he intends to run the agency he will inherit, which has new powers but also major challenges.
Wall Street is pressing for rollbacks of rules approved under Gensler, saying some are unworkable. Budget constraints threaten the CFTC’s ability to oversee markets and have led to a restive staff taking steps to join a labor union.
“Gensler had a vision for what he felt should be done, and he accomplished much of it whether you liked it or not,” Fred Hatfield, a former Democratic CFTC commissioner now at Patomak Global Partners, a Washington financial services consulting firm, said in a interview. The agency, under Massad, should look at those rules and “evaluate what needs to be tweaked to work better.”
The shape of the final rules will determine whether the new regime is too loose to prevent another financial meltdown, or so tight that it restricts the ability of banks to manage risks and make profits.
“I would hope that he would follow up with the same approach Gensler was taking,” Barney Frank, the former congressman and co-author of the 2010 Dodd-Frank Act that gave the task of regulating swaps to the CFTC, said in an interview.
Massad said little about his intentions during a Senate confirmation hearing. Amy Brundage, a White House spokeswoman, declined to comment and didn’t make him available for an interview.
Along with Massad, the U.S. Senate today confirmed commission nominee J. Christopher Giancarlo, an executive at New York-based interdealer broker GFI Group Inc. (GFIG), on a voice vote. Earlier in the day, Sharon Y. Bowen, a lawyer at Latham & Watkins LLP, was confirmed as a commissioner in a 48-46 vote amid opposition from Republicans and a handful of Democrats.
“Gary Gensler set a high bar as chair of the CFTC,” said Senator Sherrod Brown, a Democrat from Ohio and a supporter of Dodd-Frank. “I expect the new commissioners under the leadership of Timothy Massad to closely follow the path Gensler set and continue to implement policies that protect taxpayers and end-users from risky practices.”
Massad, Bowen and Giancarlo would join commissioners Mark P. Wetjen and Scott O’Malia on the five-member panel, which historically oversaw primarily agricultural and commodities futures contracts traded by farmers, manufacturers and the banks that served them.
Dodd-Frank gave the agency authority for the first time to regulate swaps -- complex derivatives once dubbed “financial weapons of mass destruction” by investor Warren Buffett -- that starting in the 1980s began trading privately on Wall Street between banks, hedge funds and other clients. Swaps, whose face value can reach trillions of dollars, were blamed for helping destabilize the financial system in 2008.
Despite the expansion of its responsibilities, the CFTC’s $215 million budget has increased little and House Republicans said last month they plan to give the agency $62 million less next year than President Barack Obama’s request. The budget troubles have led to discontent among the agency’s employees, who complain that their pay lags other regulators and are considering joining a union to press their grievances.
“The new chairman of the CFTC will be faced with a funding situation that is unsustainable because of the historical and meaty increase in responsibility hoisted upon the agency, a menu of profuse unresolved Dodd-Frank issues that must still be addressed, and the continuous exit of talented professional staff who have been worked to the bone,” Gregory Mocek, a former CFTC director of enforcement who is now a partner at Cadwalader, Wickersham & Taft LLP, said in an e-mail.
Massad, 57, has a narrow face and receding hairline that give him an uncanny resemblance to Gensler. He attended Harvard Law School and spent 25 years at the Cravath, Swaine & Moore LLP law firm, where he focused on corporate finance including securities, banking and derivatives.
Massad was tapped by the U.S. Treasury Department in 2010 to administer the Troubled Asset Relief Program that rescued Wall Street banks. Although TARP has been unpopular with the public and politicians in Congress, Massad has been praised for his oversight of the program, which as of last month had brought in $14.6 billion more than it paid out, according Treasury data.
Gensler earned Wall Street’s enmity and alienated even some allies as a result of his five-year drive to bring the $700 trillion swaps market under partial government control. The agency put in place more than 60 rules designed to reduce the risk swaps can pose to the rest of the economy by giving regulators new tools to track data on trade prices and volumes and by having most deals guaranteed at clearinghouses.
The regulations also seek to increase price competition by moving many trades to new execution facilities that must allow hedge funds, asset managers and others to participate alongside banks that previously dominated the market.
Representative Frank D. Lucas, chairman of the House Agriculture Committee that oversees the CFTC, said he told Massad that to improve regulations, he should lead by “consensus.”
“I am hopeful that he will reverse recent commission actions that seem to ignore the concerns of our farmers and ranchers, as well as pursue commonsense reforms that will bring certainty to the marketplace,” Lucas, an Oklahoma Republican, said in a statement.
Among the most contentious remaining issues is how far the CFTC regulations reach overseas. Gensler pushed for a broad application of Dodd-Frank’s rules, prompting resistance by U.S. banks and regulators in Europe and Asia. Last year, when banks began relying on a footnote in a CFTC document to keep some trades outside of the rules, the CFTC published a new policy seeking to cut off the strategy.
That quickly prompted a lawsuit against the agency by three industry groups that is still pending in federal court. At the same time, banks have restructured some of their overseas operations to continue to escape the regulations.
Other agency rules are either under reconsideration or were turned back by a federal judge. For instance, a long-contested rule that would limit traders’ positions in natural gas, oil, wheat and other commodities was overturned in federal court in 2012. A new version of the rule, proposed before Gensler left, is now pending at the commission.
A separate Dodd-Frank rule that required swap-data repositories to collect information for regulators is also under reconsideration, and the agency’s data collection policies are being challenged in federal court by the Depository Trust and Clearing Corp.
(Bloomberg LP, parent of Bloomberg News, has registered with the CFTC as a data-repository and as a swap-execution facility.)
There is still “great risk of going back even on the commitments that have been made final,” said Marcus Stanley, policy director at Americans for Financial Reform, a coalition including the AFL-CIO labor federation.
“In no way is he just a caretaker for a job that’s just been completed by somebody else,” Stanley, referring to Massad, said in an interview. “To make derivatives reform a reality means taking on some powerful interests and pushing forward against significant opposition and we hope he’s up to it.”
Massad already faces efforts on Capitol Hill to revise Dodd-Frank and curb the chairman’s powers. Bipartisan legislation passed in April by the House Agriculture Committee, which has jurisdiction over the CFTC, would limit the agency’s ability to impose rules overseas. The legislation would also make the agency’s division directors answerable to the entire commission, not just the chairman.
Representative K. Michael Conaway, a Texas Republican and co-sponsor of the legislation, said in an interview that the agency will benefit from “empowering the other members to have a better say on what goes on.”
Conaway said he doesn’t expect Massad to be bound by his predecessor’s record.
“My good first impression is that he’ll bring an independent mind to the issues at the commission,” Conaway said in an interview. “I don’t know that he’ll worry too much about either hurting or helping Gensler’s legacy.”
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