The limits of regulation are well known to Gary Gensler.
As a core member of President Bill Clinton’s Treasury Department, Gensler, with his colleagues, leapt to transform the financial markets through new legislation, in the wake of an Asian currency crisis that threatened the global financial system. Years later, they realized they had made some flawed assumptions.
“Looking back now, knowing what we know now about the markets as they developed, those of us that were involved in the late ’90s ought to have done more to protect the American public,” Gensler said in a recent interview.
Now Gensler, 54, has a hand on the wheel once again. As the head of the Commodity Futures Trading Commission, he is among a team of regulators racing to meet a July 21 deadline for the most controversial provision of the 2010 Wall Street reform law: the Volcker rule.
Defenders believe the rule could help ward off the next potential crisis by curbing risky trading. But the regulation has stirred tremendous backlash from the industry and even some former regulators.
Gensler dutifully defends the new regulation, which is meant to prevent government-backed banks from gambling with their own money — the kinds of trades that nearly brought down Wall Street in 2008, according to its supporters.
When asked whether regulators are on a path to producing a Volcker rule that’s clear and strong, Gensler responds with a laugh and few words.
“I hope so,” he said.
“At its core, it lowers risk to the American public,” he says. But Gensler adds: “The Volcker rule is one of the more challenging places where Congress asked regulators to come together.”
In theory, the idea behind the Volcker rule seems simple: Banks are permitted to hold stocks and bonds for the sake of their customers, but not for their own benefit. In practice, it’s very hard to tell when a bank is betting with its own money or its client’s.
Gensler notes that industry lobbyists submitted more than 30,000 comment letters, demanding clarifications and exemptions, slowing the work. Analysts and officials doubt regulators will make the July 21 deadline, set by the financial reform law known as Dodd-Frank.
It’s not just big banks that are upset: insurance companies, foreign governments and venture-capital firms have expressed their worries. Partly in response, regulators have already laid out major exceptions to the rule.
As a result, the latest version of the Volcker rule ballooned to more than 300 pages, prompting worries that the final regulation might drown in its own complexity.
“It’s partly the norm of such things, but it’s also the challenge of prohibiting one thing and permitting seven other things,” Gensler says.
Even some of the Volcker rule’s supporters have been skeptical that the final rule can succeed. Former Federal Deposit Insurance Corp. chairman Sheila Bair, for instance, has called for regulators to scrap the current draft and start from scratch.
Now there is increasing political pressure on regulators to come up with a workable final product: JPMorgan Chase’s recent loss of more than $3 billion√ due to risky bets drew fresh attention to the Volcker rule, even though it was unclear whether the provision would have stopped those trades.
A former Goldman Sachs partner, Gensler is now seen as one of the stronger defenders of the Volcker rule and other financial regulations. That is a turnaround of sorts from his days on the Clinton Treasury team, which is remembered for working to make sure regulations wouldn’t get in the way of financial markets.
Back then, he and his Treasury colleagues backed legislation that repealed the firewall between investment and commercial banking. Gensler also advocated for the Commodity Futures Modernization Act in 2000, which ensured that the trading of complex financial instruments, known as over-the-counter derivatives, wouldn’t be hampered by the government. The rule was opposed by the CFTC chair at the time, Brooksley Born.
Gensler says he was never was a champion of deregulation. But he admits that he and the Clinton team were proven wrong in some ways.
“One of them was that we’re kind of regulating these institutions anyway. I think that just proved wrong,” he says, pointing out that the federal oversight of American International Group did nothing to stop the insurance giant’s meltdown. Another “bad assumption,” he adds, was the argument that “if we regulate here, we’ll just push these [trades] offshore.”
Gensler says his views on financial regulation have “evolved” since then. He is now considered one of the more reform-minded financial regulators, compared with former White House economic adviser Larry Summers and Treasury Secretary Timothy F. Geithner, who both pushed back against the Volcker rule during the Dodd-Frank debate.
Yet Gensler cautions against crafting a Volcker rule that presumes regulators can understand and anticipate every trading circumstance in advance. “We also want to leave some flexibility as markets change, or as different institutions have different circumstances,” he says.
In their eagerness to provide clarity and shine light on every corner of the market, federal officials could end up painting themselves into a corner. A firm might ask for regulators to sign off on a trading practice that “years from now, you realize, is the new Enron loophole,” Gensler says. “It’s literally happened over and over again.”