Odds are you’ve never heard of Gary Gensler, the man President Obama has nominated to run the Commodity Futures Trading Commission (CFTC). But it’s slightly more likely you’ve heard of Brooksley Born, the woman who held that position under Clinton in the late 1990s. Amid the cascading financial crisis and cries of “Nobody could have predicted!” from many of those who were instrumental in bringing it about, Born has emerged as one of the rare voices that warned of the perils ahead. In 1997 she began to sound the alarm about the growth in the derivatives market, which, unlike traditional futures, were not traded on a regulated exchange. Born argued that derivatives should be brought under regulatory supervision, or they “could pose potentially serious dangers to our economy.”
She proved prescient. These instruments, specifically credit default swaps, increased risk throughout the global financial system, eventually bringing down AIG, the world’s largest insurance conglomerate. George Soros, economist Alan Blinder and many others now name the failure to regulate credit default swaps as one of the prime causes of the collapse.
But in 1998 powerful voices close to the Clinton administration–Robert Rubin, Larry Summers and Alan Greenspan–argued that the derivatives market was just fine. They had allies among the Wall Street banks who were making money hand over fist in the unregulated, over-the-counter market.
Then there was Phil Gramm, the mastermind behind the 2000 Commodity Futures Modernization Act, which definitively kept derivatives unregulated. Attached to a massive omnibus bill during the lame-duck Congress in December 2000, while the nation’s attention was captivated by Bush v. Gore, the CFMA passed overwhelmingly in both houses and was signed into law by President Clinton. But Gramm wasn’t sneaking anything past the White House, which had hammered out the details in lengthy negotiations with the senator. And one of the men charged with shepherding the bill through Congress was none other than the Treasury’s under secretary for domestic finance, Gary Gensler.
Gensler was well qualified to dive into the arcana, having spent eighteen years at Goldman Sachs before taking a job at Treasury. When it came to derivatives, he shared the prevailing deregulatory ethos. (He declined to speak to me on the record for this column.) The New York Times editorial board found Obama’s nomination of Gensler “troubling.” Iowa Senator Tom Harkin, who chairs the Agriculture Committee, which has jurisdiction over Gensler’s nomination, released a statement saying that he is “concerned about the deregulatory orientation in this nominee’s past.” And fellow committee member Bernie Sanders issued this terse statement: “It is imperative that we not continue the same mistaken policies that got us into this mess in the first place. I have real concerns.”
In Gensler’s defense, he did do regulatory penance. He worked for Senator Paul Sarbanes helping to craft Sarbanes-Oxley, and he wrote a book criticizing the mutual fund industry for the ways it rips off investors. But the fact remains: on the biggest issue of commodity futures regulation in the past decade, he was a star player on the team that got it exactly wrong.