Brooksley Born, a former head of the Commodity Futures Trading Commission, and Democratic members of Congress hold a press conference outside the US Capitol to speak out against CFTC budget cuts advanced by Republicans. Photo by George Zornick
If you held a contest to determine the most important government agency nobody’s heard about, the Commodity Futures Trading Commission would be a strong gold medal contender. Charged with overseeing commodity futures and options markets—which, when the CFTC was created in 1974, mainly involved agricultural futures—the agency now oversees the absolutely massive financial derivatives market on Wall Street, as well as oil futures markets.
This means that the relatively tiny agency has tremendous influence over the financial sector’s biggest money machine—one that has already helped bring down the world economy once within the past few years. And oil speculation is a significant factor in driving the prices Americans pay at the pump.
But perhaps taking advantage of the CFTC’s obscurity, Congressional Republicans have made a brazen attempt to slash the agency’s budget and reduce staff. The House Appropriations Subcommittee on Agriculture sent out a budget that provides only $180.4 million to the CFTC, which is a $24.6 million cut from last year’s already anemic funding level. This is well below the $308 million in President Obama’s budget request, which supporters of Wall Street reform universally agree is still too low anyhow. The Republican request would likely lead to lay-offs at the agency, according to Congressional staffers familiar with the matter.
Late last week, Congressional Democrats—and one former head of the CFTC—gathered outside the Capitol building to communicate the gravity of the cuts, especially at a time when the Dodd-Frank reforms are expanding the agency’s mandate.
“The House Appropriations subcommittee’s failure to increase the CFTC’s budget to reflect these increased responsibilities—and indeed its irresponsible proposal to cut the CFTC’s budget by $25 million—are efforts to eviscerate vitally important financial regulatory reform and to cater to the interests of Wall Street rather than the needs of the American people,” said Brooksley Born, who ran the agency from 1996 to 1999.
“What the Republicans are doing is voting to take the cops off the beat. Wall Street is incapable of policing itself,” said Representative Ed Markey. “The invisible hand of Wall Street markets has waved off concerns, waved off regulations, and then reaches into our pockets and takes our money.”
The CFTC regulates index-based credit default swaps and interest rate swaps, which are bets on very complex arrays of factors—the value of entire indexes, or credit arrangements between entities. The Securities and Exchange Commission handles the relatively simpler single-name credit default swap, which is just a bet on the default of a single entity.
The Dodd-Frank bill required that the CFTC write new rules to make these trades open and transparent—right now, they are conducted on the phone, which is an easy way for people on Wall Street to mislead investors (and each other, and often and somewhat accidentally their own firm) about the true value of the already complex financial products.
Alexis Goldstein has an in-depth breakdown of this issue here, but essentially the CFTC is working on creating a framework for market participants to freely trade derivatives in a transparent fashion. It’s an enormous market of several hundred trillion dollars, and creating that framework is just one part of the CFTC’s responsibilities.
Enforcement is also a lot of work—the failure of MF Global has created a huge drain on the agency’s resources, because substantial chunks of the staff had to investigate missing futures custom funds from one of the company’s subsidiaries, according to Congressional staffers familiar with the matter. The JPMorgan imbroglio also appears to be getting a lot of attention from agency staff.
As noted, the CFTC also oversees the oil futures markets, in which speculators can easily monkey with the global price of gasoline. The St. Louis Federal Reserve found that speculation in oil markets was the second-largest factor in the past decade’s price increases, behind demand.
Yet the CFTC has a relatively tiny budget, compared to other regulatory agencies, and has grown only 10 percent since the 1990s. This is despite a massive explosion in the size of the products it regulates—Representative Sam Farr of California estimates that the CFTC budget represents six seconds of trading on the derivatives market.
And now, the budget cuts planned by Republicans. They are remarkable given that Wall Street regulation and high gas prices are volatile elections issues, but Democrats think Republicans believe nobody will notice.
“The [Dodd-Frank] legislation is too popular to repeal, but one can kill it by not funding it. It’s a death by a thousand nicks,” said Farr at least week’s news conference. “The president’s ask isn’t that much money, but without it, it can cripple the regulators. Make no mistake about this, the swap dealers don’t want it to be regulated.”
The proposed budget cut is also astonishing given the massive risk that unregulated derivatives pose to the financial system, demonstrated quite clearly less than four years ago.
“There’s one question every American should ask,” said Representative Gerry Connolly. “Given the meltdown that occurred in 2008, given the fragility of the world economy, given the fact that so many European banks hold too much European sovereign debt, given our recent economic performance numbers when you look at a [derivatives market] margin…valued in excess of $600 trillion—unregulated, with this action, what could go wrong with that?”