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A Regulator Heeds Lessons From the Past
Once an Opponent of Monitoring Derivatives, CFTC Chief Now Urges Tighter Rules

By Zachary A. Goldfarb
Washington Post Staff Writer
Friday, July 24, 2009

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.

"I feel like reinforcements have been sent in," Chilton said.

Gensler grew up in Pikesville, the son of a World War II veteran who sold candy and cigarettes around Baltimore. One of five children, including a twin brother, he was an overachiever who graduated at 21 with both a bachelor's and a master's degree in business from the University of Pennsylvania.

At Goldman Sachs, he rose through the ranks and worked in mergers and acquisitions and trading groups.

Although Gensler spent much of his career outside Washington, he has deep ties politically, professionally and personally in the area. During Senate confirmation hearings on his nomination in 1997 as an assistant Treasury secretary, Gensler sat at the same table as a then little-known official named Timothy F. Geithner, now Treasury secretary.

In the wake of the Long-Term Capital debacle, he was at the center of a debate over whether new rules should be adopted for hedge funds and derivatives. The CFTC chairman, Brooksley Born, was pushing for regulation of derivatives. But Treasury Secretary Robert Rubin, Gensler's boss and former colleague at Goldman, opposed the measures. Gensler saw his role at the time as supporting Rubin.

"Clearly, in hindsight we all should have pushed harder," Gensler said.

At the end of the Clinton administration, Gensler decided to stay in the Washington area. Long involved in Democratic politics, he knew former senator Paul Sarbanes (D-Md.) and called him after the corporate accounting scandals of the early 2000s, volunteering to help write the landmark Sarbanes-Oxley legislation, which sought to reform American business practices.

"He was enormously helpful to us, and he had terrific insights, and he understands very complex issues," Sarbanes said.

In 2006, Gensler's wife died of breast cancer, turning Gensler for a time into a full-time, stay-at-home dad for his three daughters.

After Hillary Clinton launched her run for president, Gensler spoke with her several times about joining the campaign. When Maryland Gov. Martin O'Malley held an event in Annapolis to endorse Clinton in May 2007, Gensler again told her he wanted to sign on. "But what about the girls?" she said, as she had on several occasions when he talked about joining the campaign. He eventually joined as a policy adviser.

When Clinton's campaign ended, Gensler made his way to the Obama team. Obama adviser Pete Rouse, who had gotten to know Gensler when they both worked in the Senate, had approached him earlier. After Obama was elected, Gensler worked with Geithner, Lawrence Summers and other members of the economic team to review the performance of regulatory agencies.

At the CFTC, Gensler is planning to kick off a series of hearings next week to explore whether major financial firms have inflated the prices of energy and other commodities by amassing large holdings. And he remains adamant that the firms dealing in derivatives be tightly regulated.

"We have to get all the dealers," Gensler said. "It's the one way you can be sure you are getting the whole market."

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