A Goldman Guy Turns on the Street

CFTC chief Gary Gensler's fight for tough rules on derivatives is making him exceedingly unloved

By Ian Katz and Robert Schmidt

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.

Business Exchange

Track and share business topics across the Web.