A Goldman Guy Turns on the Street

Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC) and an ex-Goldman Sachs (GS) partner, has shattered any illusions that he will protect Wall Street from tough new derivative regulations. Over a private lunch at the Waldorf Astoria on Jan. 6, Gensler, 52, told executives from Credit Suisse (CS), Deutsche Bank (DB), Bank of New York Mellon (BK), and Goldman that while he once shared their goals—to boost revenues and their own bonuses—his responsibility now was to taxpayers, according to people familiar with the meeting. When one banker asked Gensler what he saw as the biggest obstacle to reform, he gestured toward his hosts and replied: "You."

Of all the regulators in the Administration, Gensler may be the most troubling to the Street. He wants to drag derivative trading out of the shadows and expose to scrutiny the lush margins traders make on these complex securities. Companies use them to protect against oil price swings and other risks; sophisticated traders like to exploit them for profit. Gensler also wants to make it much easier for new competitors to enter the market, which would deprive the five U.S. banks that dominate derivative trading—Goldman, JPMorgan Chase (JPM), Bank of America (BAC), Morgan Stanley (MS), and Citigroup (C)—of billions in profit.

A House bill passed in December spells out new regulations for trading derivatives. Gensler thinks the bill should have been a lot tougher and is lobbying the Senate hard to come up with a more rigorous bill of its own. He even wants to go further than President Barack Obama in clamping down on current practices, because, says Gensler, the banks' "interests are not necessarily aligned with the American public's interests."

Gensler's years at Treasury and Goldman Sachs—at age 30 he became one of the firm's youngest partners—make him a formidable Wall Street foe, says CFTC Commissioner Bart Chilton. During agency discussions about rules on how firms trade and account for their transactions, "We've had times when someone says, 'The banks tell us they can't do that,' " Chilton recounts. "And Gary says, 'That's crazy. I used to do it all the time.' "

Gensler's biggest beef these days is with the loopholes embedded in derivative legislation. Unregulated derivative trading contributed mightily to the financial crisis when it turned out many investors could not pay off the derivative contracts they had written. Appalled by the damage done by reckless trading, the House voted to require that derivative dealers settle their transactions through clearinghouses. Traders working through clearinghouses would pledge capital to insure against the risk of any member defaulting on a trade. The clearinghouses would also make it easier for the CFTC to monitor trading.

But the House bill allows many exemptions to the clearinghouse rule, especially for nonfinancial companies seeking to hedge against currency swings, fuel costs, and other ordinary risks. Gensler argues that even these innocent-seeming exemptions will give openings to hedge funds and other financial firms that take big risks on derivatives to juice profits.As a result, he has now raised hackles at many corporations beyond Wall Street—they see the clearinghouses as burdensome and costly. On Feb. 3, the Senate got a letter from 180 companies, including Caterpillar and Boeing (BA), warning of dire consequences if Gensler gets his way.

Gensler is not giving up. He petitions the Senate constantly on the need for strong regulation. To extend his influence, he offers himself as a tutor to legislators on how the markets function. He also helps lawmakers spot small details that make a big difference. While the House legislation on derivatives was being drafted last year, bank industry lobbyists pushed to keep the current system of reporting trades through electronic systems set up by the banks. Gensler told lawmakers that such "confirmation facilities" were less transparent than an open exchange would be. He got the language that preserved the status quo removed from the bill.


Gensler's new role as a regulatory crusader contrasts sharply with his days as a Wall Street hotshot. A Baltimore native, he worked at Goldman from 1979 to 1997, mostly in mergers and acquisitions and then as chief of debt and currency trading in Japan. He shifted to government in 1997 and eventually worked under then-Treasury Secretary Lawrence Summers. He was on Summers' staff when President Bill Clinton signed the 2000 Commodity Futures Modernization Act. That legislation—which Gensler supported—exempted many derivatives from CFTC oversight. The law has been blamed for the rapid growth in credit-default swaps and other instruments that developed largely outside the purview of regulators—until many of the deals blew up.

The dangerous role derivatives played in the financial crisis helped change Gensler's views on regulation, although he says those views were evolving before the crisis. Still, when Obama tapped Gensler to run the CFTC, consumer groups worried he would not be an ally. Democratic lawmakers, suspicious of his background in the Clinton Administration and at Goldman, delayed his nomination for five months.

Activists aren't worrying now. "He's been the strongest advocate of reform" in the Administration, says Barbara Roper, director of investor protection for the Washington-based Consumer Federation of America. Former CFTC Chairman Brooksley Born, who had squared off against Gensler in the fight over deregulation, is pleasantly surprised. "He's committed to robust regulation," she says.

That doesn't mean he'll always get what he thinks is best. In the fight over the Senate bill, he may have to settle for partial wins, given the strength of his Wall Street opponents. With at least $15.5 million in stocks, bonds, and index funds (according to a 2008 financial disclosure form registered with the Office of Government Ethics), Gensler can take on the banks without fear of annoying potential employers. "I don't see myself going back to Wall Street," he says. "That's very liberating."

With Tina Davis in Washington and Matthew Leising in New York

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