Tuesday, February 15, 2011

Gary Gensler on Derivatives and Disclosure

The New York Times' Dealbook ran an interview with Gary Gensler in which he discussed Washington, regulation, Wall Street and lobbying.

Regular readers of this blog know that the gold standard for disclosure is all the useful, relevant information is made available in an appropriate, timely manner to all market participants.  Under the FDR Framework, it is the government's responsibility to achieve and maintain this gold standard for disclosure in the financial markets.

Mr. Gensler specifically asked for the opportunity to develop the disclosure regulations to achieve this gold standard for derivatives. [emphasis added]
As chairman of the Commodity Futures Trading Commission, he is leading the charge to overhaul the murky $600 trillion derivatives market, which was at the center of the financial crisis. The Dodd-Frank Act, the financial overhaul law enacted last year, requires Mr. Gensler’s agency to draft dozens of new derivatives rules by July. 
Since taking the helm of the commission in early 2009, Mr. Gensler, 53, has developed a reputation as a consumer-friendly regulator — despite his 18 years on Wall Street, including nine as a Goldman Sachs partner. He has been pushing aggressively to impose the Dodd-Frank rules, although he has had to dial back on a few occasions in order to strike a compromise. 
... His gung-ho approach has drawn the ire of the new Republican Congress, which is threatening to withhold additional money from Mr. Gensler’s agency. Wall Street lobbyists have bombarded him with complaints and requests for exemptions, too. 
... In a recent interview from his Washington office, Mr. Gensler spoke with DealBook about the challenges of Dodd-Frank, his days on Wall Street...
Q.  The C.F.T.C. has taken up much of the implementation of Dodd-Frank. How challenging has it been? 
A.  .... It is also a challenge to integrate all of these public comments, all of the different views and actually end up with a result that benefits the American public. 
Q.  What’s the most absurd complaint you’ve received about the new regulations? 
A.  I’m not bothered by any of this because it’s often motivated by profits. But there are an awful lot of folks in industry who want an exception. And some of those exceptions are appropriate, but some of them you have to be amused and laugh at. As it relates to Wall Street directly, they tend to want less transparency because that helps their profits and their revenues. 
Because Wall Street wants less transparency, it is the government's responsibility to make sure that disclosure always adheres to the gold standard.
Q.  How would you describe the response you’ve received from industry lobbyists? 
A.  It’s professional. It’s active. We’ve had about 475 meetings in five months. And since the lobbyists haven’t found us on the weekends (usually), you can do the arithmetic. It’s quite a bit. 
I will say this: In America, large institutions have a great deal more resources than the investor advocates. If you looked at those 475 meetings — and we’re posting every one of them on our Web site — 90-plus percent are probably larger institutions or corporations. 
Given that the government is responsible for insuring that derivatives meets the gold standard for disclosure, why would investors or their advocates lobby?

Developing disclosure regulations is not a balancing act based on how many meetings take place with advocates of more or less transparency.

It is the fundamental obligation of the government to insure that all useful, relevant information is made available in an appropriate, timely manner to all market participants.  The obligation and standard are not negotiable.
Q.  Can your staff handle the load? 
A.  This agency, just this past year, got back to the size it was in 1999. We think we need about 400 more people — even though we’re taking on markets that are seven times the size of what we currently regulate and far more complicated. So we’re going to continue to make the case. Even though our great nation has a very large deficit, this is the best investment for taxpayer money.
Your humble blogger would like to offer up again the relevant yearly cost/benefit analysis.

The direct cost of providing current data for each derivative might be as high as five basis points (five one hundredths of one percent) times the notional value of the derivative.  For the $600 trillion derivative market, this works out to an annual cost of $300 billion.

The benefit of providing current data for each derivative is that it contributes to the prevention of a repeat of the recent financial crisis.  Preventing a repeat of the recent financial crisis would save a lot of money.

As discussed by the Bank of England's Andrew Haldane, the cost of the recent financial crisis, which occurred because there was not the gold standard for disclosure in all areas of the global financial markets, is measured in the trillions.  This cost includes losses on opaque, toxic securities as well as broader costs like unemployment, business failures and reduced government services. [for example, the discussion over the budget in the US at the national and state levels]
Q.  Republicans have said that the C.F.T.C. is moving too fast in developing regulations. Are they right? 
A.  I think we have to remember there was a great financial crisis in 2008. Every American was affected — millions of Americans are out of work, millions of Americans have homes that are worth less than their mortgages. Derivatives played a role in that.

Q.  Does it ever get overwhelming? 
A.... But we have the task that the American public expects us to do: to lower risk and promote transparency....
Q.  Why leave a profitable career to come to Washington? 
A.  I think what government does makes a difference. 
Your humble blogger is hoping that Mr. Gensler and his staff really do believe that Washington does make a difference.  Particularly when it actually recognizes its responsibility for and promulgates regulations insuring that all useful, relevant information is made available in an appropriate, timely manner to all market participants.

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