Bloomberg News

Budget Woes Leave U.S. Swaps Agency Outgunned by Wall Street

January 17, 2014

When President Barack Obama gave federal workers a 1 percent pay raise at the start of the year, employees at the U.S. Commodity Futures Trading Commission assumed they’d get the boost. They didn’t.

In a brief e-mail last week, the CFTC said the cost-of-living increase wouldn’t kick in until August paychecks. While the agency provided no explanation, employees chalked it up to budget woes that forced the derivatives regulator last week to quietly obtain an emergency infusion of funds just to keep its doors open, according to four people familiar with the situation.

The escalating budget crisis has spurred unrest within the 700-person agency and hampered its work, the people said. More than a dozen senior employees, many complaining of low pay, have quit for jobs on Wall Street or at law firms. Others at the CFTC’s Washington headquarters have discussed joining a labor union, said the people, who asked not to be identified because the friction isn’t public.

Once little-known, the CFTC gained new powers under the 2010 Dodd-Frank Act to oversee swaps, the financial products that helped fuel the 2008 credit crisis. Continued staff defections and plummeting morale will leave the agency, with a budget of roughly $200 million, outgunned as it polices the $693 trillion worth of derivatives traded by firms like Goldman Sachs Group Inc. (GS:US) and JPMorgan Chase & Co (JPM:US), current and former regulators said.

Agency ’Underfunded’

“The agency is underfunded and needs significantly more resources,” said Fred Hatfield, a former Democratic CFTC commissioner who is now at Patomak Global Partners, a Washington financial services consulting firm.

CFTC spokesman Steven Adamske declined to comment.

Recently departed CFTC chief Gary Gensler spent his five-year tenure battling Wall Street over the new swaps oversight enshrined in Dodd-Frank. His expected replacement, Treasury Department official Timothy Massad, has yet to be confirmed by the Senate.

Gensler, who stepped down as chairman at the beginning of this year, struggled to convince lawmakers concerned about the federal deficit or opposed to stiffer regulation that more money was needed. Unlike most of the other financial regulators, which are funded with industry fees, the CFTC relies on Congress to provide its budget.

In an interview shortly before his exit, Gensler said the lack of money had crimped the agency’s work and led CFTC enforcement lawyers to shelve cases.

“We don’t have the staff to oversee the markets,” Gensler told Bloomberg TV on Dec. 30. “Do you want an underfunded regulator where something inevitably might blow up?”

$100 Million Less

After automatic budget cuts kicked in last year, the agency was left with $195 million -- more than $100 million less than the Obama administration requested.

Last week, in an unpublicized incident, cash was so short that the CFTC had to arrange a special deal for additional funds from the Treasury just to stay open, according to three of the people.

House and Senate lawmakers released a government-wide spending plan this week that included a small CFTC budget boost to $215 million. By contrast, the Securities and Exchange Commission, which has more than 4,000 employees, was given a $1.35 billion budget.

The CFTC appropriation “won’t cut it,” Commissioner Bart Chilton, a Democrat who has pressed for a higher budget, said in an interview. “Our employees need more than a government ID and the belief they are doing worthy work.”

Morale Low

The CFTC’s budget pressures come as agency morale is already low after a three-year slog to complete more than 60 Dodd-Frank regulations. Gensler, an ex-Goldman Sachs partner, drove the CFTC staff hard to get the bulk of the rules done before his exit.

According to one report, the agency’s workers are the most disgruntled they’ve been since 2005. The Partnership for Public Service, an organization that compiles survey data from federal employees, ranked the CFTC the sixth worst place to work of 29 small agencies. CFTC employees gave the agency low marks for work-life balance, pay, training and quality of leadership.

Some of that frustration was on display at a “town hall” meeting Gensler held several months ago, according to two people who attended. One senior lawyer grilled the chairman about why staff were subject to a pay freeze, pointing out that other financial regulators, such as the SEC and the Federal Deposit Insurance Corp., gave regular raises.

Pay Parity

Under federal law the CFTC is part of a group of financial agencies allowed to pay more than the standard government scale to attract people with special skills. The CFTC is also required to have “pay parity” with the other regulators.

CFTC workers at the meeting complained that the agency had fallen behind its peers in both pay and benefits. One of the few benefits they received in recent years -- reimbursement of about $400 for health-related activities, like gym membership or yoga classes -- was canceled.

The complaints were confirmed by an internal agency memo issued in March 2013 detailing the previous year’s pay and benefits. The CFTC’s average salary of $143,659 was 7 percent less than the SEC average of $154,295. The CFTC’s benefits, as a percentage of the agency’s payroll, also lagged behind all other financial regulators, the memo said.

Brain Drain

The CFTC’s leadership, aware of the potential for employee turmoil, commissioned an outside study in 2012 that warned of a coming “brain drain.”

The report, obtained through a public records request, concluded that the CFTC’s compensation was too low to attract the talent necessary to implement Dodd-Frank. In interviews with the consulting firms that conducted the study, senior officials said the CFTC promoted too many people from within who lacked experience as executives and managers.

The report recommended the CFTC find ways to hire staff from Wall Street or Chicago derivatives firms in order to bridge gaps in the agency’s knowledge of the markets.

For the most part, movement has been in the opposite direction, as banks and law firms have poached senior staff members, offering salaries several times greater than what they earn at the CFTC.

Among more than a dozen departures in the last year were the agency’s general counsel and two of his deputies; the head of enforcement; the director of a division overseeing trading and data platforms and a handful of lawyers advising agency commissioners.

Union Talks

The union talks that started last year are still preliminary, the people said. Interest picked up after CFTC employees were told in October that they would be required to take as many as 14 days off with no pay. One option would be for CFTC staff to join the National Treasury Employees Union, which already represents workers at the SEC, the Office of the Comptroller of the Currency and the FDIC.

One former regulator, Lynn Turner, said the situation at the CFTC reminds him of when he was chief accountant of the SEC in the late 1990s. Republican lawmakers were “starving” the agency’s budget, he said, spurring unhappy employees to unionize while others fled to the private sector.

“That led to an inability to enforce the laws,” said Turner. “And of course, that led us to the Enrons of the world, the large corporate scandals” that began a few years later.

With derivatives at the center of the collapse of companies like American International Group Inc. (AIG:US), Turner said Congress ignores that history at its own peril.

“It would only seem wise to come up with a couple hundred million more dollars to fund the CFTC rather than have to go fund another multibillion dollar bailout of corporations like AIG,” he said. “How stupid can you be?”

To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Silla Brush in Washington at sbrush@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net


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