Senators press tough line on commodity rules

April 1, 2009


Prominent senators have put Gary Gensler’s nomination to head the Commodity Futures Trading Commission (CFTC) on “hold” in a bid to force the administration to take a tougher line on commodity regulation.

Gensler’s nomination was approved by the Senate Agriculture Committee on March 16, but almost immediately put on ice before it could reach a vote on the Senate floor by Senator Bernie Sanders (Independent, Vermont) and one other unidentified senator.

Holding a nomination is a relatively common procedure allowing any senator to request a delay before it moves to a vote on the Senate floor, ostensibly to seek more information or testimony from the nominee.

However, the practice is controversial because it allows even a single senator to delay the confirmation process, in some cases indefinitely, and because holds can be placed anonymously. Senators simply notify their party’s floor leader, who will prevent the nomination from coming up on the Senate calendar for a vote.

While the practice is arcane, it plays a crucial role in the nomination process. Holds can block nominees with whom the senator has a strong personal or political disagreement; punish past transgressions by the nominee; or create bargaining leverage with the administration on related issues, or even unrelated ones.

But in this case the hold appears to reflect substantive disagreement. Announcing it, Sanders criticized Gensler for backing financial deregulation when he was a senior official in the Clinton Treasury Department and said the CFTC needed “an independent leader”.

Gensler has already denied playing a significant role in drafting the Commodity Futures Modernisation Act 2000, including the now-controversial exemptions from CFTC oversight for over-the-counter (OTC) energy derivatives (the so-called “Enron loophole”), which led to the Commission having no visibility over large unregulated positions on OTC markets.

In a pre-confirmation letter to Senator Carl Levin, Gensler admitted “excessive speculation” could cause sudden price changes and this had actually happened in recent years owing to the massive influx of investment money into commodity indices.

He promised to review the myriad “hedging exemptions” the CFTC and commodity exchanges have granted allowing swap dealers and investment banks to exceed normal position and accountability limits.

Gensler’s statements have gone much further than the CFTC has been prepared to go in the past. The Commission continues to argue fundamentals rather than speculation were the main cause of recent price volatility. And his comments create a rationale for tighter regulation.

But they do not appear to have satisfied Sanders (who sits in the Senate as an independent but was a self-described “socialist” when he sat in the House of Representatives) or other senators anxious for the CFTC to take a tougher approach.

In reality, the dispute is about more than the nominee himself. Gensler is a lightning rod for broader concerns about the administration’s attitude to regulation in general and commodity regulation in particular.

Opposition centers not just on Gensler’s own past role, or commitments he has given as part of his confirmation hearings, but the suspicion he is a continuity candidate would support a continuation of the “light touch” approach to regulation pioneered by the Clinton administration and popular until recently.

Unable to exact a price from Treasury Secretary Timothy Geithner and National Economic Council chief Lawrence Summers for bailout packages and a regulatory approach many in Congress think is not tough enough on Wall Street, senators are flexing their muscles where they can by blocking Gensler.

It is hard to see how much further Gensler can go to assuage concerns which in essence center on his regulatory “instincts” and “philosophy” — unless he gives cast-iron commitments about future regulatory actions, which would curb his scope for later action.

President Obama’s nominee to head the Securities and Exchange Commission (SEC) has already been confirmed. In contrast, the continued failure to appoint a head for the CFTC leaves a policy vacuum at the top of the world’s most important commodity regulator at a time when both Congress and the administration have started to think about how to overhaul the entire financial regulatory framework.

By convention, holds are honoured by party leaders on the Senate floor. The administration could try to save the nomination by pressing Sanders and the anonymous senator to withdraw their objections and let the matter proceed to a vote. But it may be difficult to exert pressure on a senator popular in his home state, known for taking a non-conformist stand and sitting as an independent.

So the administration may have to offer some creative concessions or find a new nominee.

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Obama promised change. The vast majority of his appointments are Clinton retreads who enriched themselves handsomely while out of power. Geitner, Summers, Emmanuel ….. all of them and more made tidy fortunes in finance. Could it be that all of their great concern for the finance industry is a blatant conflict of interest?

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