Naming Names in the Dodd Frank Mess

As we trudge through the swamp of disappointment that defines Dodd-Frank implementation, the liberal commentariat has lately seized upon a new meme; Wall Street lobbyists are responsible for gutting Dodd-Frank behind closed doors. Big-pocketed firms deploy phalanxes of clever lawyers and influence peddlers that easily outpace reformers, ensuring that the regulations ultimately written are sufficiently defanged to allow the financial industry to conduct its business with few, if any, restrictions. The lobbyists, and mostly the lobbyists alone, bear responsibility.

Witness the most recent rollback of Dodd-Frank, a compromise on derivatives regulations by the Commodity Futures Trading Commission (CFTC). The New York Times’ Ben Protess makes the culprit clear in his Page 1 report: “Under pressure from Wall Street lobbyists, federal regulators have agreed to soften a rule intended to rein in the banking industry’s domination of a risky market.” (Emphasis mine.)

But this gets things backward. Concessions aren’t made without a regulator willing to sit across the table from Mr. Wall Street Lobbyist and agree to his suggestions. Indeed, in the case of the derivatives regulations, one Democratic commissioner on the CFTC, Mark Wetjen, basically forced through the weaker rules by himself. The importance of actually naming the source of the problem is even more magnified here, because Wetjen is in line to replace Chair Gary Gensler and run the CFTC. With 63 percent of Dodd-Frank rules still unwritten by regulators, a bank-friendly chairman overseeing derivatives would surely erode at an already-diluted law. Reformers may have arguments for treading lightly rather than singling out specific bad actors, but I don’t see why the press facilitates it. The public really needs to know exactly who is responsible for these cracks in the regulatory foundation.

The regulations in question concern how to manage derivatives—the bets on bets that accelerated the financial crisis when the housing bubble collapsed. While the derivatives market previously resembled the Wild West, Dodd-Frank’s Section 716 sought to increase transparency by running derivatives through a central clearinghouse called a “swap execution facility” (SEF), with trade information available to all market participants after the fact. Gensler also envisioned making all bids for derivatives contracts public before the trade. But those dreaded “Wall Street lobbyists”—actually, the two Republicans on the five-member commission and Democrat Mark Wetjen—forced a compromise system called “Request for Quotes,” or RFQ.

Under RFQ, a company wanting to sell a derivatives contract informs the swap execution facility. The SEF must then request price quotes from a predetermined number of banks before making the trade. What matters here is the specific number of banks the SEF must call. A higher number invites more participants into the marketplace and increases competition, with better pricing and less concentrated risk. A lower number limits who has the ability to submit a bid on any deal, and invariably that benefits the five biggest banks, which already control 95 percent of the derivatives market. Smaller competitors would be unlikely to get the call from the SEF, and without a heavy flow of trades, they won’t even stay in the market. “If you want RFQ, it should be a big number so that there’s as much pre-trade transparency as possible, and to increase competition,” says Dennis Kelleher of Better Markets, a key financial-reform advocate in Washington.

Gensler’s initial rule was RFQ to five banks. The rules adopted weakened this to RFQ to two for the first 16 months of the rule, rising to three thereafter. RFQ to one is basically the status quo, a totally secret market with only the participants in the trade knowing the details. So RFQ to two is the smallest possible increase. “It’s like shopping for a car but not knowing all the information until after the fact,” Kelleher says.

If you get through half of Protess’s New York Times article, you understand what happened. Gensler and Bart Chilton, the other Democrat on the CFTC, supported RFQ to five, but Wetjen objected to the number as arbitrary. Protess says straight out that Wetjen “has sided with Wall Street on other rules.” With Republicans favoring no transparency at all, Gensler and Chilton were outvoted and had to bow to Wetjen’s demands to get the full swap execution facility rule (which includes some positive measures) passed.

So who is Mark Wetjen, and how did this apparent Wall Street mole get a Democratic seat on the commission? Well, President Barack Obama appointed him in 2011. His past as a garbage man notwithstanding, Wetjen’s selling point for a nomination was his seven years working as a key legislative aide to Senate Majority Leader Harry Reid, who delivered an embarrassingly syrupy paean to him at his confirmation hearing, lauding him as such a paragon of the human race that, according to Dennis Kelleher, “Jesus Christ wouldn’t qualify for his statement.” A popular Senate staffer signals the prospect of an easy confirmation, which Wetjen received, with few of his views on core financial issues revealed.

Since that time, Wetjen has systematically sought to weaken CFTC rules on multiple occasions. He asked for several bank-friendly changes to planned derivatives rules, delayed rules by refusing to commit to voting for them, advocated giving Wall Street additional time to comply, publicly announced concerns with Gensler’s proposed regulations in a speech to the main trade lobby for the industry (the International Swaps and Derivatives Association), and generally took Wall Street’s side, both in public and behind the scenes. In February, word leaked that Wetjen wanted to weaken the RFQ proposal. He has become the key swing vote on the panel, threatening to side with Republicans and vote down rules unless his changes are implemented.

Yet the major reform organizations continue to cite Wall Street lobbyists when they wring their hands over the weakening of financial reform, even when talking about these CFTC rules. There’s no question that Wall Street has a strategy to chip away at new rules, create additional loopholes, and preserve as much of their business model as possible. But that only works when individual regulators embrace their suggestions. Top industry lobbyists have met with Mark Wetjen repeatedly, but if he ignored their concerns, we wouldn’t be talking about how Wall Street killed financial reform.

Gensler’s term as chair actually ended April 13, but federal rules permit him to stay until the end of 2013. Gensler agreed to stay on until a successor is installed, and that successor is widely rumored to be Mark Wetjen. With Wetjen controlling the commission, it’s quite possible that he would delay the shift in RFQ from 2 to 3, and roll back several other rules, in line with changes sought by the industry. “Mark Wetjen replacing Gensler as CFTC chairman would be a disaster,” says former congressional staffer and reform advocate Jeff Connaughton.

Among the many Dodd-Frank rules left for the CFTC to write, the most critical are the so-called cross-border regulations, governing whether the CFTC can monitor derivatives trades performed overseas by firms with substantial business in the United States. The notorious “London Whale” trade from JPMorgan Chase would fall into this category, as would American International Group’s credit default swaps that nearly melted down that firm. Wetjen has already advocated delaying cross-border rules and wants the plan completed as “interpretative guidance,” with less force of law. He has also pushed for “substituted compliance," allowing overseas affiliates to follow foreign rules instead of the U.S. laws. The reaction would be obvious; big banks would offshore their trading desks, moving the risky trades overseas and away from CFTC oversight, siting trades wherever the rules are the weakest. Gensler has remarked that this would make 70 percent to 80 percent of all derivatives rules irrelevant.

With this context, Gensler’s desire to finalize rules now and accept compromises makes sense. He also wants to finish cross-border rules before leaving, but there are indications that Wetjen and the Republicans are waiting Gensler out to delay the process. Gensler may have agreed to the RFQ concession as a means to try to get cross-border done with Wetjen’s support. Reform advocates are similarly stuck between the possibility of influencing Wetjen and the imperative of calling out his bad actions.

What information has leaked out about Wetjen’s Wall Street biases may be the reason that the Obama administration is reportedly vetting someone else for the chair, former Goldman Sachs employee Amanda Renteria (Gensler also worked for Goldman, and yet he turned out to be a bold reformer). It’s also possible that Renteria is a distraction, someone the White House can point to as a fresh face while quietly elevating Wetjen. His growing profile in the press as a pro-bank commissioner may hurt Wetjen’s ascension, which is all the more reason to talk straight about who is weakening these rules.

Blame-shifting to amorphous systems and faceless “lobbyists” weakens our understanding of what is really going on in financial reform. Democratic accountability only works when the public has knowledge about what’s taking place. If Mark Wetjen is carrying Wall Street’s water, that’s important information to know, especially going into a confirmation hearing for his potential promotion, where he would take on additional powers. It’s time to stop being polite and start getting real about holding people like Mark Wetjen to account for their decisions.

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