The Onion recently joked that Wall Street is just about ready to ruin the world again. But what is truly terrifying about this headline is how accurate it is. Wall Street has been busy trying to con US regulators into gutting the very reforms meant to prevent a future crisis. What is at stake in this fight is nothing less than future bailouts. And one regulator—Mark Wetjen—will ultimately decide whether or not to endanger Main Street for the benefit of Wall Street.
Following the financial crisis, Congress took pains to ensure that any derivatives trades that could impact the country should adhere to US financial reform rules. This is crucial to prevent history from repeating itself: many of the firms bailed out by taxpayers in 2008 were US firms operating overseas. The most infamous of these was AIG, a company of 116,000 brought to its knees by the trades made by its 377-person office in London. The toxic derivatives done out of the London-based AIG Financial Products unit led to a $182 taxpayer bailout.
To prevent a bailout like AIG from happening again, Congress created new rules to bring more transparency to the derivatives markets. But Wall Street hates transparency, as it encourages competition, pushing profits down. Rather than compete in the new, safer environment, Wall Street wants to do what it has always done—move their riskiest trading to the parts of the world with the most lax rules.
The Commodity Futures Trading Commission (CFTC) is the regulator tasked with deciding precisely which trades must obey the new US rules. The specifics are hashed out in what is called “cross-border guidance”. And there is debate within the agency over just how much leeway Wall Street will get in obeying US rules.
The CFTC’s chairman, Gary Gensler, has fought for strong cross-border guidance, arguing that without it, “all of these common-sense reforms Congress mandated…could be undone.” Commissioner Chilton appears to be on Gensler’s side. Two Republican Commissioners, on the other hand, want to punt: they recommend delaying finalizing the guidance, which also happens to be exactly what Wall Street is advocating. They are likely hoping to run out the clock until a new commissioner with less zeal than Gensler is appointed.
Commissioner Mark Wetjen is the tie-breaking vote.
In a recent speech, Commissioner Wetjen insisted the CFTC’s final rules “must protect U.S. taxpayers and the U.S. financial system.” But he also expressed concern that the CFTC “avoid creating needless and arbitrary advantages for certain markets.”
In his latter remarks, Wetjen is implying that forcing firms whose trades affect the United States to obey our rules would create advantages for firms that do not do business with the United States in any way. There are two problems with this argument. The first is that any financial firm of substance has a presence in the United States. The second is that it is difficult to see how firms operating in countries with insufficient safeguards are at an advantage. When the United States lacked strong regulations in the lead-up to the crisis, we paid for it dearly: Better Markets estimates the cost of the crisis at over $12.8 trillion. A loss of that size would devastate any market.