A Regulator Heeds Lessons From the Past

Once an Opponent of Monitoring Derivatives, CFTC Chief Now Urges Tighter Rules

When a meltdown on Wall Street threatened the financial system in 1998, Gary G. Gensler was still a newcomer at the Treasury Department. He was part of the government team that orchestrated the rescue of Long-Term Capital Management, a big hedge fund that had made bad bets on exotic financial contracts known as derivatives. But once the smoke cleared, Gensler closed ranks with others in the Clinton administration who decided against subjecting derivatives to tighter regulation.

"Looking back now, it's clear we should have done more then," Gensler said in a recent interview.

Since President Obama brought him back to government to lead the Commodity Futures Trading Commission (CFTC), Gensler has aggressively pushed for strict new rules to govern derivatives as the administration campaigns to revamp financial regulation. He has appeared frequently before Congress to press his case. This has meant confronting former colleagues at Goldman Sachs, where he began his career, and at other big banks that have profited from the agency's traditionally light touch.

"Both the financial system and the regulatory system failed the American public," he said. "I want all options on the table."

When Gensler discusses regulation, he speaks with a combination of candor reflecting his gritty Baltimore upbringing, confidence from his years as a senior executive on Wall Street and political caution born of more than a decade in Washington. At 51, he is balding but exceptionally fit, the result of his passion for running 50-mile ultramarathons.

Gensler has faced skepticism about whether he is suited for the job after being part of the team that exempted derivatives from regulation a decade ago. Several senators held up his nomination for months out of concern that he was not committed to reining in Wall Street's use of derivatives.

In just a few years, the derivatives trade has mushroomed into the world's largest market, estimated to be in the tens of trillions of dollars. Unregulated traders around the world have influenced and bet on just about anything -- including how much companies pay to borrow money, the value of currencies, and the prices of critical goods such as oil and cotton.

The CFTC has long been a backwater, an agency important to certain financial and agricultural interests but lacking the stature of other financial regulators. With Gensler at the helm, it is emerging as a key player on two fronts.

Using existing powers, Gensler is pushing for tighter regulation of the trade in oil, wheat and other commodities as evidence grows that speculators have been inflating prices.

He also has been out in front in publicly advocating strict regulation of derivatives. Early on, he pushed for a requirement that derivatives be traded on exchanges, almost like stocks and bonds. Later, the Obama administration offered that proposal, which if adopted would make it easier for regulators to monitor trading in derivatives and foster a more orderly market.

To do the job, Gensler said, his agency needs more money. "This agency is sorely underfunded. We are smaller than we've been in a long time," he said. "It's 20 percent smaller than [in] 1999, and yet the volume in the marketplace has gone up fivefold."

Yet to commissioner Bart Chilton, who had long been a lonely proponent at the CFTC of strict regulation, Gensler's appointment is already a relief.