The Wrongologist

What’s
Wrong Today:

Few of you saw it,
but our Washington ignorati have launched part of their plan to hamstring Dodd-Frank
and the Commodities and Futures Trading Commission (CFTC). See this from Reuters:

“Republicans and
Democrats in the U.S. Congress on Monday agreed to a measure that would set the
U.S. Commodity Futures Trading Commission’s budget for fiscal 2012 at $205
million, $103 million less than what was requested by the Obama
administration.”

But, this year the
CFTC had a budget of around $170 million. So, funding in 2012 will be up by
about 20%. Sounds ok, right? 

So,
What’s Wrong?

The
CFTC has a bigger job to do next year and you want and need them to do it well. Have you heard about MF Global (MFG),
John Corzine’s company? No? They just went bankrupt after making huge bets on
European sovereign debt. MFG placed
$6.3 billion in bad bets using derivatives on European sovereign debt, thereby
becoming the first Wall Street firm to fail since the 2010 Dodd-Frank
regulatory overhaul.

Guess who might be
the US regulator responsible for the $600 trillion over-the-counter derivatives
market? Wait for it…the CFTC!

So, great timing
Congress.  It’s not very comforting to hear that the CFTC is already “several
months behind in implementing [OTC derivatives] rules…required under last
year’s Dodd-Frank law.”

The FT reminds us what a shock MFG’s downfall
is:

“It
is a mantra of the futures industry: no customer lost a dime because regulators
failed.”

Well, the CFTC may
be getting set up for failure.

We have
learned that MF
Global’s customers haven’t just lost
dimes,
but $600 million due to MFG’s
failure to observe the
broker’s cardinal rule: keep the house’s money separate from the customers’.
Investors now want assurances about all the other brokers. They want the CFTC
to, among other things, help audit
120 U.S. futures firms
to make sure that they are not acting like MFG. The CFTC is short one man because their
chairman, Gary Gensler, had to recuse himself from the
MFG deliberations due to his close ties to Corzine. Gensler worked at Goldman
Sachs Group Inc. when Corzine was co-chairman, and was a Senate aide when Corzine
served as a U.S. senator from New Jersey.

Meanwhile, consider
this:

• U.S. banks exposure to European
  sovereign debt is very high–the best guess is an absurdly
  wide range of $46.4 billion to $767.5 billion, and

• Chances are that a huge part of
  their exposure is in the form of derivatives

Scared
Yet?

The costs of carrying
out the CFTC’s mission have changed dramatically since the Dodd-Frank legislation
was passed last year and we surely want to avoid more MF Global-style failures. 

Politico quoted Dennis Kelleher, CEO of Better
Markets: “Not funding the CFTC is like taking the police off the streets
in a high-crime area, which is what Wall Street is.” “The only way to
prevent…[the Wall Street houses] from…[losing huge amounts of $$] again is to
make sure that the CFTC has the funds to do its job.”

And
a little history: Way
back in 2010, during the debate on finance reform, Republicans successfully defeated
a measure that would have caused the banks to contribute to a fund that would
cover the cost of additional oversight (like that required in the derivatives
market) by regulators. Now they (and some Democrats) are whining because it
will cost too much to enforce. Gee, why can’t we have it both ways?

I
don’t know if an additional $35 million above last year’s CFTC budget is
sufficient to keep these Wall Street firms playing by the rules. They seem to
always walk the fine edge of the letter of the law in a world where they can
only win and where we can win or lose. Given that, I don’t see what is wrong
with fully funding the regulators for the next few years. We have seen what
happens when we do not.

Once
again, the legislative process lurches forward, fueled by a toxic brew of
ideology and financial influence peddling by the very entities that obviously need
to be on a short regulatory leash.

And once
again, it is terribly WRONG.