Meet the man with the power to crack down on oil speculators

June 15, 2011
Meet the man with the power to crack down on oil speculators
By Kevin G. Hall | McClatchy Newspapers

WASHINGTON — Most Americans don't know who Gary Gensler is or the agency he runs. They should.

It falls to him as the chairman of the Commodity Futures Trading Commission to rein in the flood of speculative money flowing into financial markets that many experts fear is driving up the price of oil, gasoline and basic foodstuffs.

The obscure CFTC regulates markets in which more than $5 trillion in trades take place daily. Gensler is trying to implement legislation passed last year that requires first-ever regulation of some of the darkest, riskiest corners of these financial markets.

Gensler's also a man in the proverbial hot seat, trying to bring change amid attempts by some in Congress, doing Wall Street's bidding, to gut his agency's funding.

His task is to regulate the market for complex instruments called derivatives, where a lack of regulation nearly brought down the world financial system in 2008. The value of all assets represented in trades in these derivatives markets is more than $600 trillion.

Separately, he's also charged with capping how much of the oil and grain markets any single investor can capture.

It's a big challenge for a guy few have heard of, facing a task few would want, and who almost didn't get the job.

As a former partner in Goldman Sachs, Gensler came under scrutiny from liberal Democrats, and his 2009 confirmation was held up for more than five months because of concerns about his Wall Street past.

Republicans were wary of his other past: He served as a Clinton administration Treasury undersecretary. And consumer groups didn't trust him because during that time, complex derivatives were exempted from regulatory oversight. The exemption proved to be a rope with which Wall Street nearly hanged itself, and everyone else, in 2008.

After two years at the CFTC, however, Gensler appears to have won over most of his detractors.

"I think he undercut that distrust, but I think it is beginning to creep back again over the question of whether the commission will take a strong stance," said Michael Greenberger, a University of Maryland law professor who headed the CFTC's trading division in the late 1990s and opposed the Clinton administration's exemption of derivatives from regulation.

"Overall, I think he's done an excellent job," Greenberger said. He attributed Gensler's caution to making sure the new rules can stand up to legal challenge. "Those of us who want to see the markets thrive — supported with adequate capital and transparency_ are indebted to the CFTC in general and Chairman Gensler specifically."

Barbara Roper, the director of investor protection for the Consumer Federation of America, pointed to last year's Dodd-Frank revamp of financial regulation, in which Gensler criticized the Obama administration's position on complex financial instruments as too soft and convinced Congress to get even tougher.

"I've been quite impressed with Gensler, which doesn't mean we agree with every sentence in every rule proposal. But I think he has done a good job of getting the strongest possible package of rules through the agency, under extraordinarily difficult circumstances," Roper said.

If there's a dink in the glowing reviews, it's on the issue of position limits, mandated by Congress to cap how much of any commodity any one trader or company can control. It's intended to curb speculation. In January, the CFTC proposed a 10 percent cap and began taking input, but the agency has told lawmakers it may not take effect until next year.

That doesn't sit well with critics, who note_ as McClatchy did in a May report_ that speculators now make up more than 70 percent of the market in contracts for future delivery of oil.

"It appears that speculators have an even larger position in the market than ever before, and it is really only excessive speculation that can be responsible for the extraordinary volatility that we're seeing in the market," said Sen. Susan Collins, R-Maine, in an interview. "It's just been an enormous volume that seems divorced from any underlying fundamental of supply and demand."

Collins pressed for tighter regulation of these markets in last year's revamp of financial regulation and said she's "disappointed" in Gensler for falling behind on congressional mandates.

"It's troubling to me that these markets were really established for end-users (of oil) and producers to bring them together ... now they have become markets that appear to have become dominated by hedge funds, pension funds and other non-commercial users, and this isn't what the markets were established for," she said.

Collins and other critics argue that the price discovery function of these markets_ bringing together a buyer and seller to find a market price — is distorted by the huge influx in speculative money.

In comments to McClatchy on Tuesday following a public commission hearing, Gensler was cautious about embracing the view of critics.

"It's a very good question. The markets have changed dramatically. There are electronic markets, there are significant high-frequency traders in the markets now. Price discovery is a critical and essential thing to these markets — that people can come into the market and discover a price and meet in a transparent marketplace," he said. "They can't do that yet in the swaps market ... until we finish these rules, until we get the job done."

Gensler denied foot-dragging on capping how much any one investor can hold, noting there have been more than 12,000 comments filed to the CFTC about its proposed limits.

"I think the recent volatility in commodity prices reminds us as to why we have to get this job done," he said. "We are not a price-setting agency, but our core — we help promote the integrity of these markets. What does that mean to the public? It means you can see where people are buying and selling, that no one party is sort of concentrated in the market, the market is free of fraud and manipulation, and you've got an effective cop on the beat. All of these features are important to the market and recent volatility reminds us."

As CFTC chairman, he's just one vote on a five-member commission that must approve by a simple majority every new rule it's implementing. Wall Street banks and powerful hedge funds are lobbying the agency and Congress furiously.

"He and his small agency have probably come under more pressure than any other regulatory agency in the history of the country. A day does not go by when there aren't an army of industry lobbyists laying siege to the CFTC to get the rules bent to their favor," said Dennis Kelleher, a former Senate lawyer who now heads Better Markets, a nonpartisan group pushing for more transparent financial markets.

The stakes are high for ordinary Americans, Kelleher said. His group has documented the massive amount of speculative money now flowing into futures markets. These markets were originally designed for end-users of oil or farm products to hedge against price shifts. Today these markets resemble casinos, with financial players who have no intention of ever taking possession of the commodities they're investing in, far outnumbering the actual end-users.

"It's true that the CFTC's jurisdiction relates to some of the most complex products known to man, but they were also the very products that were at the center of the financial meltdown," he said. Kelleher called the CFTC "the most important agency that nobody in America has heard of," and said that Wall Street has reason for concern. "It's the highest profit-margin products they've ever created, and Wall Street and its allies want to protect these profits no matter what."

The Republican-led House of Representatives Wednesday debated an agriculture spending bill that would slash the CFTC budget by $30 million at a time when the agency is laboring to meet new regulatory mandates that greatly expanded its workload.

It's an anything-but-subtle attempt to thwart the agency's new powers.

"If you didn't have a House that was anti-regulatory-balance, it's likely that the derivatives reform would have moved further along," said Michael Masters, a hedge fund manager who has advocated tougher rules to limit speculation. "Ultimately, I think there will still be new regulations in a renewed regulatory framework, but I don't think there's any question that the folks in the House have done as much as they can to slow things down."

Gensler came into office saying there has been excessive speculation in financial markets, especially those for oil contracts. Crude oil prices ran up to $113 a barrel in May, despite a weak economy.

A McClatchy report in May, based on secret State Department cables, showed that Saudi producers told the Bush administration in 2008 — as crude prices raced to all-time highs — that oil prices were being driven by financial speculators.

Given all the evidence that speculators should be regulated more closely, Collins and 16 other senators are unhappy with Gensler, whom they otherwise give high marks.

"He seemed so committed to reform. He's clearly very knowledgeable. I'm just at a loss as to why he has not been more aggressive in this area," Collins said. "My constituents are being hit not only by high energy prices, but a spike in food prices, so I am disappointed that the chairman has not made this more of a priority."

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