The upside of outrage

By Felix Salmon
November 24, 2009
Noam Scheiber has the fascinating behind-the-scenes story of how the derivatives-regulation sausage is being made -- and how Wall Street, amazingly, seems to be losing the lobbying war, at least for the time being. In a nutshell, the banks sought to get around proposed new derivatives regulations by creating an “end-user exemption” loophole which they could then drive their trucks full o'money straight through. But the CFTC's Gary Gensler saw through the ruse and persuaded Barney Frank to tighten up the language and minimize the size of the loophole. And since the banking lobby was pretending to care only about its end-user clients, it had few if any grounds on which to object to the new bill.

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Noam Scheiber has the fascinating behind-the-scenes story of how the derivatives-regulation sausage is being made — and how Wall Street, amazingly, seems to be losing the lobbying war, at least for the time being. In a nutshell, the banks sought to get around proposed new derivatives regulations by creating an “end-user exemption” loophole which they could then drive their trucks full o’money straight through. But the CFTC’s Gary Gensler saw through the ruse and persuaded Barney Frank to tighten up the language and minimize the size of the loophole. And since the banking lobby was pretending to care only about its end-user clients, it had few if any grounds on which to object to the new bill.

Writes Scheiber:

Gensler’s own role can’t be overstated. A former Goldman Sachs partner who served as Treasury under secretary in the late 1990s, Gensler’s nomination to the CFTC aroused suspicion among congressional liberals when the Obama transition team announced it last December. But Gensler spent several months persuading regulatory hawks that he was one of them, and his actions as chairman underscore it. “The reason I think the left and these consumer groups are in good position is that they have Gensler at the CFTC,” says the bank lobbyist. “He’s turned a rinky dink commission into the most powerful agency in the federal government when it comes to derivatives.”

This is not the first time that the head of the CFTC has tried to rein in the power of the banks. But it is the first time that Congress has listened — and that’s worrying the likes of Andrew Ross Sorkin, whose column today is headlined “Beware the Result of Outrage”.

I’ll have more to say on Sorkin’s column in general, and the Miller-Moore amendment in particular, later today. But suffice to say that Scheiber I think shows quite compellingly that there’s significant upside to outrage too.

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Comments
5 comments so far

i got part way through your piece to discover the relevant congressperson was barney frank.

since barney is one of the very few congresspeople of above-average intelligence, i have to say that my reaction wasn’t “this is the upside of outrage” but rather “this is the upside of having a few brave, intelligent congresspeople who have served long enough to head the relevant committees.”

Posted by howard | Report as abusive

My response to Mr. Sorkin:

If secured lenders are not subject to a haircut, the funding is secure as a Treasury bond and that financing should provided by the treasury. Now do you or any of your cronies in the banking business think THIS is a good idea?
The genesis of this problem was that banks received government (implicit, now all-but-explicit) funding for what turned our to be speculative proprietary trading. If it is made clear that being a secured creditor to a bank is no guarantee against capital loss, then the creditors will actually perform their stated fiduciary duty–making sure that they receive appropriate risk-adjusted returns. This will mean creditors will start exacting the discipline on banks that no one seems to have enforced up to this point.
Your article could be one of the most ill-informed, misguided pap that has come out of the financial press in some time. Keep up the good work, shill.
— Danbo

Posted by Danbo | Report as abusive

Come on now. This is classic lobbysist PR bu**s**t. It is a head-fake to say that Gensler, because he was a thief himself, knows how to push back against the bank lobby. The system won’t allow for that. Everyone is out for themselves – there is no public spirit animating anyone here like it was when FDR put Joe Kennedy in charge of the new SEC back in the 30s.

Gensler is just putting on a nice facade so that Congress and the President can pretend to have some paper victories over the FIRE criminals. Anything with real teeth will be watered down or unwound in a year or two. Don’t worry.

Posted by Gensler's a Mole... | Report as abusive

I also found Mr. Sorkin’s perils of outrage lacking. I’m not informed enough to know if the risks he describes are real, but I’m not sure he is either.

I’m left with the impression that we must let the financial system run wild lest something be more expensive or we have less credit. OK – so what?

Sorkin writes: “Up to now, they’ve been kept whole, even as others have been asked to share the pain. Otherwise, some feared, creditors might get spooked, and lending might seize up.”

That’s silly. Won’t they just hedge their exposure with credit default swaps from the next AIG and backed by taxpayers anyway?

Posted by Neil D | Report as abusive
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