The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (11 page)

Chilton, who was the sort of appointee never to avoid a news camera, rushed back to his office and began calling reporters. The task-force findings were preliminary, he insisted, and it was too soon to render judgment. Just because speculators weren’t the only driving force behind oil prices didn’t mean they should be discounted entirely, he insisted.

He also confronted the CFTC’s chairman, Walter Lukken, as to why he had issued the release with such a thin basis. But he never got a satisfying answer, and it was too late to change the story line. Three days later, Reid’s bill was killed in the Senate.

The idea that Gary Gensler might be too tight with Wall Street was understandable. Before coming to Washington, he had spent two decades at Goldman, where he worked with media companies on mergers and acquisitions.
In 1990, he advised the National Football League on the sale of its broadcast rights to television networks over the coming four years. (One of Gensler’s tactics, which involved withholding the rights to broadcast the 1994 Super Bowl, helped net the league a record $3.6 billion package.)

He had also worked overseas, relocating in 1993 to Tokyo, where he ran the Asian branch of Goldman’s sprawling fixed-income, or bond, division. The job put him in close proximity to a
major financial scandal: a series of futures contract trades at the Singapore office of the UK-based
Barings Bank on the direction of the Japanese stock market and certain interest rates that ultimately brought Barings down. For Gensler, who knew little about such contract markets before living in Tokyo, it was an education in the perils of trading complex products across borders during times of market stress.

As a Goldman executive, he handled the crisis self-interestedly, telling the Goldman staff not to wire any money, property, or security of any value to Barings. “Let the lawyers figure it out later,” he said. He had to protect the firm’s soundness before anything else.

In 1997, Gensler, his wife Francesca, and their three daughters moved from New York to Chevy Chase, Maryland, for a new job he’d taken in the Treasury Department. A strong believer in the importance of government service, Francesca, whose father had been at Pearl Harbor, had encouraged Gensler to leave the private sector and had helped him compose a letter to Robert Rubin, the fellow Goldman alum who was then treasury secretary, inquiring about a post. Gensler had already made a lot of money at Goldman, and a job at Treasury seemed worth uprooting their lives for.

It was an era of light regulation in Washington, and it was the dot-com boom: Internet companies like Netscape, Yahoo, and Amazon were hitting the public markets with wild success, and small investors were shifting in mass numbers into stocks.

Under the guidance of the conservative Fed chairman Alan Greenspan and, later, Rubin’s successor at Treasury, Lawrence Summers, officials were beating back attempts to curb trading in off-exchange commodities and other risky contracts—including a notable push by Brooksley Born, the female lawyer who was chair of the CFTC. In 2000, President Clinton signed the Commodity Futures Modernization Act, a piece of legislation supported by Summers, Gensler, and other Treasury staffers that preserved almost complete autonomy for banks and speculators in the trading of private contracts known as “over-the-counter derivatives,” positions betting on the price movements of stocks, bonds, or commodities in some way. The idea was to let markets
run their course, presuming that broad growth would follow, and it did—right into the housing boom of the next decade.

“Knowing what we know now about how derivatives evolved, I think we should have done more at that time,” says Gensler. “But, back in that context on derivatives, they weren’t regulated in Europe, Asia, North America, or Latin America, and there had been a worldwide consensus on that.”

By the time Gensler was designated to run the CFTC in December 2008, the environment had changed dramatically. Upheaval in the banking system and a series of government bailouts had fueled calls for tighter market oversight, and Gensler would have to agree to tighten the policing of speculators to overcome his record in the Treasury. Even after the defeat of his July 2008 speculation bill, lawmakers like Harry Reid and Congressman Bart Stupak (D-Mich.) were still angling for curbs on the size of commodity futures wagers, otherwise known as “position limits.”

During rehearsals for Gensler’s confirmation hearings—also known as “
murder boards” in Washington since the intention was to help the nominee handle hostile questions that could scuttle his or her chances of being confirmed for a job—he spent a good deal of time justifying his historic stances on regulation. His coaches, including a staffer for a key Democrat on the Agriculture Committee and a hedge-fund official from New York, interrogated him on his years in the Clinton Treasury. Bart Chilton pitched in, as did Dan Berkovitz, the subcommittee lawyer on Carl Levin’s staff who attended Gensler’s first meeting with the Michigan senator.

During the actual hearing, Gensler was asked more than once about his surprising theory that speculation did indeed affect commodity prices. One senator on the Agriculture Committee
repeated Gensler’s own testimony as a younger Treasury official arguing that imposing regulation would be a “burden” to the market’s functioning. Senator Kent Conrad pointed out that Gensler bore “responsibility” to fix the harms that led to the financial crisis, because “you gave us bum advice” in the run-up to the housing collapse.

“What would you say to assure us that you would be part of the solution?” Conrad asked.

Gensler was humble. “We should have fought harder” to harmonize the oversight of all commodities and not just a few, he replied. He and his colleagues in the Treasury and Fed hadn’t realized the looming threat from “swap,” or hand-tailored products settled by private contract, he added, which in the late 1990s were just “dots on the landscape,” not the enormous market that derivatives later became. He mentioned
The Great Mutual Fund Trap
, a book he had coauthored, about shoddy performance and excessive fees in the mutual fund industry in 2002—probably the first public manifestation of his own apparent change of heart on financial regulation. The book itself was ironic, given that
Gensler’s twin brother, a libertarian thinker named Robert, was a celebrated mutual-fund manager at the investment firm T. Rowe Price in their
hometown of Baltimore.

Late in May 2009, Gensler was sworn in as chairman of the CFTC. In his acceptance speech, he promised to work “vigorously” to protect citizens from “fraud, manipulation, and excessive speculation.”

He would have limited resources with which to do so. Reduced funding had taken the CFTC to a five-hundred-person staff, the
same size it had been back in William Bagley’s day in the late 1970s. The agency desperately needed additional lawyers to enforce its existing laws, as well as to develop new ones. A request to add nearly two hundred people to the staff was pending.

For Gensler, it was also a time of personal transition. After a long fight with cancer, his wife Francesca had died in 2006, leaving him to raise their three children on his own. During her final weeks at The Johns Hopkins Hospital in Baltimore, bedridden and wearing an oxygen mask, she had exhorted her family not to think of her passing as unfair.

“This is just part of life,” she had said as Gensler tried to comfort the girls, “but life’s been fair to us.”

Gensler repeated the mantra often in his years at the CFTC. He was “blessed” with two decades of marriage to his late wife, and also blessed to serve the government, he’d say. It gave his professional persona, which could turn caustic over seemingly small issues, a sense of mission.

Gensler didn’t work for two years after his wife’s death, wanting to focus on his daughters instead. But once on the job at the CFTC, he wasted no time with opening pleasantries. During his
first financial-services industry speech, to the Managed Funds Association in June 2009, he recommended that the “entire” derivatives industry—at least those parts of it that traded privately rather than on a public exchange, be subjected to robust regulation. That meant that every type of swap, or two-party trading contract, from interest-rate to commodity, would be under his purview. He added that he would be scrutinizing the hedge-fund industry, and deferred to a wheat-market study that had been conducted by Senator Levin’s investigative subcommittee, a particular enemy of Wall Street interests, as a source for further discussion.

Traders were shocked. Nearly every government official paid lip service to protecting the public good, but no one had launched their new regulatory regime like Gensler. Short, slim, and brainy, the CFTC chairman was not physically intimidating; during the course of a long meeting, he might even kick off his shoes and prop his feet up on a coffee table to create a more casual atmosphere. He spoke of using the D.C. Metro service and the Baltimore commuter rail, mentioned often that his girls had no nanny, and held lunch meetings at a nondescript Chinese restaurant near his Twenty-First Street office (which was huge and had a view). But when the former Goldman banker took the podium at a large securities conference and told Wall Street that he was essentially coming for it, that was something.

The debate over speculation continued to roil. Late that summer, a pair of Rice University academics,
Kenneth Medlock and Amy Myers Jaffe, published a paper arguing that speculators might be influencing prices. They used CFTC market data to illustrate their point. Noting that the proportion of speculators in the market had spiked to nearly 60 percent in July 2008, as oil reached its peak price, they argued that the former condition may have caused the latter.

Some market analysts
immediately panned the study. “Ken Medlock and Amy Jaffee [
sic
] play the drunk looking for a wallet under the lamppost” in their study, argued University of Houston professor Craig Pirrong, an expert in commodity trading who was skeptical of the idea that speculators were responsible for raising oil prices and thought the data proved little. Hobbled by faulty logic and grand, baseless assertions, Pirrong added, the Rice study “is about as weak as it gets.”

That summer, the CFTC held three rounds of hearings on position limits, the takeaway of which was that no one could agree on almost anything.
Energy users like the American Trucking Association demanded that the agency place curbs on positions that, they felt, led to spikes in the price of futures that they used to hedge the cost of diesel. Wall Street traders such as JPMorgan argued that large-trader reporting was fair, whereas position limits on client flow trades were not. The head of the Chicago Mercantile Exchange claimed that it should be the one to monitor speculative activity by curbing large positions; whereas its archrival, the IntercontinentalExchange in Atlanta, argued that such supervision should be done by the CFTC.

Gensler’s own mind was already made up. “I came away with the feeling that it was not so much a question of whether we were going to do a proposal on position limits, it was just a question of the details,” he says.

On January 26, 2010, less than a year after the new chairman had taken office, the CFTC published its
proposed energy position limits in the
Federal Register
, the government’s daily publication of official notices and new rules to the public. Noting the wild prices of 2007 and 2008, the rule filing stated that “large concentrated positions in the energy futures and options markets can potentially facilitate abrupt price movements and price distortions.” To limit that risk, the CFTC planned to contain the size of the position that any one party could hold in major energy commodities like crude and natural gas. Exceptions would be made primarily for traditional hedgers, such as airlines, or for swap dealers using large positions as risk-management tools.