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today at knowledge at wharton we're
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speaking with gary gensler and he's the
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chairman of the commodities futures
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trading commission
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thank you for joining us today gary no
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it's terrific to be back at my alma
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mater
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oh great um your career
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on wall street has not prevented you
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from being um
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a target of criticism by your former
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wall street colleagues
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and um most of that is happening because
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of the way you would like to interpret
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the dodd-frank and other financial
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reforms
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now your tenure comes to a close in just
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a couple months at the end of 2013
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and a lot of people would be sort of
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buffing up their plaques on the wall and
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starting to pack their boxes but instead
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you're
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actually involved in one of the most
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intense debates of your entire
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career at the commission so um
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you're also overseeing a market of
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derivatives that's
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somewhere between 400 and 600 or 700
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trillion dollars you can
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you can fill us in on what the right
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number is um
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could you talk about what
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this latest intense debate is about i
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think it has to do with
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with overseeing overseas derivatives and
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getting them or not getting them on to
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an exchange
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well let me let me start by saying
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these financial contracts called
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derivatives or swaps were at the center
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of the 2008 crisis
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and 8 million people lost their jobs in
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that crisis
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and large businesses
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like the insurance company aig
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we americans as taxpayers bailed out
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because it was so interconnected with
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the rest of the economy through
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the unregulated swaps marketplace that's
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what this is about
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ensuring uh that there's transparency in
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the markets
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and ensuring that large financial firms
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have the freedom to fail
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rather than each of us americans putting
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our hard-earned dollars
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in to bail out those businesses
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well aig you might remember had
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a large swaps business which actually
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was run
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overseas there are four flung operations
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actually nearly brought down our u s
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economy
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so this most recent debate about the
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cross-border application
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was to ensure that our laws are not
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strictly territorial
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but they actually will cover the
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far-flung operations the branches and
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guaranteed affiliates
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of u.s financial institutions and we've
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been successful
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congress gives gave us those authorities
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and our commission voted out guidance in
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july to do that
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that is um it's a parallel situation to
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the banks and bank regulations correct
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where
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we're too big to fail is uh is it's it's
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a problem
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in preventing that partly because uh so
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many operations can be overseas so you
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you face that same problem
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you have as i understand it overseas
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regulators or certainly financial folks
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overseas that aren't very happy about
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this
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and are coming to a kicking and
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screaming and probably
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fighting it in many legal ways too so
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what what what's your defense when uh
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you know the uk or someone says wait a
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minute this this transaction
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originated here in london you can't
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impose your regulations washington on
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what we're doing over here
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actually we we've been on a journey
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together uh
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from 2009 when president obama got
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the leaders of 20 nations together in
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pittsburgh it was called the g20 summit
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in pittsburgh in 2009 and there was
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broad agreement
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on bringing new oversight to these once
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dark markets
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and europe canada japan the u.s
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we've been on this journey together
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they've had very strong laws
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in place in europe and in japan and the
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u.s
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we might be a little ahead on timing
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and that creates some
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challenges because of different timing
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uh but we really
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are on this journey together so the
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broad structure you're in agreement i
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know the devil's in the details and
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that's where
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yes this is those areas and but there's
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a lot of details
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um and a lot of dust devils so so uh
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a fair review is that on uh
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three or four areas just we're smack on
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about the same place
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and a couple of areas we're not so
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reporting to regulators meaning
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all of these transactions have to be
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reported to regulators that's been going
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on in the u.s since december of last
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year
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400 trillion dollars of derivatives
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reported into the data repositories here
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in the u.s
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as we speak that there's something
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called
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central clearing that helps lower the
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risk of the marketplace it's
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it's been around for 120 years in other
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markets
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we've just brought this common sense
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reform to the swaps market
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in the u.s we have phased it from march
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until this october and it is now fully
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in place
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and the last data we had was nearly
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three quarters of the transactions in
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the middle of september were being
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cleared
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in the interest rate markets europe will
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put that in place
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uh sometime in the middle to second half
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of next year so
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there's some timing difference and then
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uh we have what's called the risk
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mitigation techniques that
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that the various dealers have to have
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clean up their back office the boring
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back office part of this but
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swaps have to be documented they have to
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be confirmed they have to be reconciled
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in all of those three areas we're really
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uh in sync i would say the one
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area that has has been um
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we americans have put in law and others
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have
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yet to join is that the public benefits
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from transparency
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and economists have shown whether
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they're at wharton or elsewhere
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economists have shown for decades
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that transparency price and volume of
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transactions
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helps the broader public it helps the 99
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plus percent
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of the public that might use these
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contracts but it does shift some of the
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information advantage from
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wall street to main street we've put
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that in place
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we have post-trade reporting in the u.s
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that means every transaction is reported
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now
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publicly we're just initiating
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uh that trading platforms as well have
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to be registered
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um but as you might know
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europe is only now passing a law to do
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that as well and i think they will pass
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a strong law but
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there are some differences because we're
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about two years
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gap on the law when that gap's closed
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will there be
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um incentives for some organizations to
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try to let's say originate you know
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outside of these 20 countries and and
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you know so there's always the argument
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with some regulation that well if you
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if you regulate too much then things
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just go underground and they become less
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transparent but i mean
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you're in september you're saying you
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captured three quarters of the
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of the swamps in the u.s so can i go to
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the cayman islands well maybe that's a
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bad example because i know there are
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just some new rules passed there but can
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i go to some other
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you know outside of these 20 countries
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and initiate my
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my swap and avoid some of this paperwork
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well risk knows no geographic
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border or boundary so what we've done
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here in the u.s
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has said if you're a u.s person or if
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you're
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an overseas branch of that u.s person
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or you're an overseas affiliate that's
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guaranteed by the u.s person you're
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covered by
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these reforms that only makes sense
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because we have to remember
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and recall the lessons of the crisis
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that so many of the u.s banks
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came asunder because of their offshore
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uh enterprises in the cayman islands and
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elsewhere
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if you want to set up in the cayman
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islands and you have nothing to do with
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the u.s
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you're by all rights go ahead but if
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you're guaranteed back here by
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the mothership in the u.s you're a
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branch back here in the u.s
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then you need to be covered sounds
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pretty
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um a pretty advanced state of global
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regulation really
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how would you compare that to what's
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happened
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in banking are you are the two
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industries more or less i know they're
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interrelated but are they following
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parallel tracks or do you think that
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this swap business is maybe a little bit
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ahead now
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we've been very successful with the
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commodity futures trading commission we
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were given about
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60 rules to write by congress
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that was three years ago and as we are
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here
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today we've completed 61 in fact rules
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guidances and orders and
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for the last year the markets have been
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coming into compliance
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i'm very proud of all of the people at
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the cftc we've largely completed the
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task the president and congress gave us
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that's partially true for bank
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regulation around the globe but it's not
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as far along in bank regulation
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you've been quoted as saying that the
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cftc is not going
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to allow the creation of another enron
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loophole could you tell us what you were
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referring to when you said that well
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there was there were various reforms
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that congress passed
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13 years ago in a in a different era
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and as part of those reforms
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there was an allowance an exemption
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for trading platforms from registration
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i mean think about it as that you could
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operate
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a a restaurant or maybe
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if you wish a casino without having a
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proper
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license without having to
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allow inspectors to come into your
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restaurant
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or your casino and
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that was all right that's where congress
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was in 2000.
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that came to be known as the enron
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loophole
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a number of senators and congressmen and
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even
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senator obama in june of 2008
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put out a release saying that he felt
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that we should close this enron loophole
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that we should no longer have unlicensed
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restaurants or casinos in the swaps
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trading
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area that's what congress did they
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repealed that exemption
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and with rules that we completed that
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went into effect on october
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2nd of this year now
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if you want to trade on a trading
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platform
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it has to not only have a license but it
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has to have certain business conduct it
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has to
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be open to the whole broad public not
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just to a select view
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and these reforms will really help
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promote transparency in our
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economy you talked about a market of
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400 trillion put that next to
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the entire u.s economy which is about 16
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trillion
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so it's a big number um confront it with
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that and you
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one has to ask how can you possibly
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regulate something
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so big and sprawling what what are some
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of the fundamental principles
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that you start out with when you do that
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and how did you accomplish that
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so here's a market that actually is 25
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times the size of our economy the
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notional
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amount the risk is is not quite that big
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so the fundamental principles going back
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to basics
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transparency matters you can shift
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information from the few dealers
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to the broad public and that makes an
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economy work better that's true whether
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it's in automobiles
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where we now can go on the internet we
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can see the price of automobiles before
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we go into the dealership
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and it's as true and important in these
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swaps so the
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market is your partner enforcer in a way
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well
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beyond that that we promote
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economic activity and efficiency in
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markets which is a fancy economic word
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saying that it cost you less
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if the market's transparent i have three
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daughters
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and uh they're young i wouldn't give
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them the keys to the car
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if i didn't think there were rules of
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the road that
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years ago the state legislature passed
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laws to have traffic lights and stop
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signs and
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cops on the beat to insure against drunk
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drivers
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i mean i just wouldn't give my daughters
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the keys to the car that's what we were
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doing
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in this swaps market it was unregulated
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and because of the crisis congress said
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no we have to have common sense rules of
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the road
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for the big highways of finance the same
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way we might have for the back roads for
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my daughters
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that's the basic principle after
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they ran the tractor trailer off the
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road well they did if i might just pause
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there
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so that's what we saw aig
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and others had fantastic
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accidents and they took out
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the the bystanders
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so so you could have been a pedestrian
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so to speak on the road
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and you could have been one of eight
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million that lost your job and having
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never heard of what a credit default
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swap
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my my mom she's 86 she still asked me
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gary what's a swap
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you know so so our job in washington and
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it's very different than
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when i once was
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fortunate enough to work on wall street
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for many years
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but our job is to look out for that
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broad public interest
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transparency and lowering risk and
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ensuring
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against manipulation and fraud for the
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general public
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you know it's interesting that uh with
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the uh aig bailout which i think was
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something like 180 billion
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that's right six hundred dollars for
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each and every american
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and i know that um i know that they've
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claimed
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not that long ago that they they paid it
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back with interest and i know there's a
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lot of folks who say but that
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you know that's miscounting or
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misaccounting there's a lot of other
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costs that that weren't added up in
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there
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and that there was probably actually a
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direct loss to the taxpayer but putting
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that controversy aside
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what you mentioned um is interesting
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that eight million jobs were lost they
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were a big contributor to that that's
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never
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on the ledgers that's never counted
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that's that's separate and apart from
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you know the you know the 180 billion
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and we
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and they paid that back um
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so just i mean it sounds like you're
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you're concerned about that and i find
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it interesting because you don't hear a
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lot of concern about that
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um it tends to be you know about the
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debits and credits and
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it turns into a technical discussion a
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lot of times and the human side is lost
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no no there's a very real human side i
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mean
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beyond the eight million people that
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lost their jobs i mean
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millions uh found themselves
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with homes that were valued less than
00:15:35
their mortgages and
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and and millions found their pension and
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savings lower hundreds of thousands of
00:15:43
businesses didn't make their budget
00:15:45
in 2008 and 2009. there's
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real live consequences
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to the public from these
00:15:55
what might be considered otherwise sort
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of narrow
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part of the economy do you know that
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non-finance in our economy
00:16:02
the non-finance side employs
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94 percent of private sector jobs and of
00:16:08
the other six percent most of that is
00:16:10
insurance or community banks only a very
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small slice
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is what we might call wall street but
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they produce more than 40 percent of the
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profits i think
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well but ultimately ultimately
00:16:22
finance has got to serve the real
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economy
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finance is about what wharton it's
00:16:28
studied
00:16:29
it's about allocating
00:16:32
the money in society to the best uses
00:16:36
so that my family's savings or
00:16:39
your family's savings is allocated to
00:16:42
another family that wants to take out a
00:16:44
mortgage
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or somebody that has a good idea and
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wants to innovate and start a business
00:16:49
finance is about serving the rest of the
00:16:51
economy
00:16:52
and these complex market swaps uh
00:16:57
if well regulated or a component of
00:17:00
serving the rest of the economy but not
00:17:01
taking down the rest of the economy
00:17:03
right and i cite the 40 percent
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uh not so much to underline the
00:17:07
importance of the industry of course
00:17:08
it's very important but
00:17:09
but to also note there's many economists
00:17:13
uh and financial observers from across
00:17:15
the spectrum
00:17:16
who say that that's an imbalanced
00:17:18
economy when you have that much of your
00:17:20
economy based uh in finance
00:17:23
well and and in fact economists will say
00:17:26
if you bring efficiency to a market you
00:17:30
usually
00:17:30
narrow the profit spread
00:17:33
and can produce the same product for
00:17:36
less
00:17:37
cost we all like it that our computers
00:17:39
cost less today than they did
00:17:41
three years ago or ten years ago
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transparency
00:17:45
in the swaps market will provide
00:17:49
the risk reduction of swaps for but for
00:17:52
a lower cost one last question
00:17:55
um i hope it's not a hard one
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i'm wondering you you're talking about
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regulating
00:18:03
400 trillion dollars worth of swaps i
00:18:06
think you have about four employees
00:18:07
working right now in your agency we're
00:18:09
right now under the government shutdown
00:18:11
still um
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you're the only financial regulator
00:18:15
that's actually shut down
00:18:17
except for a few key people um
00:18:20
how does that work or not work well
00:18:24
the staff of the cftc have proven
00:18:26
themselves to be remarkably resilient
00:18:30
the 650 that
00:18:34
were furloughed and have not come in
00:18:37
i thank them for their resilience of
00:18:40
putting
00:18:41
their uh professional lives on hold and
00:18:44
living with this uncertainty for the 30
00:18:47
who have come in each day
00:18:49
and um each day we have an all hands
00:18:52
meeting and we get together to say are
00:18:54
you still here i fit them in one room
00:18:56
one room one room and we go around
00:19:00
everybody talks i thank them as well
00:19:03
it we're not doing anything other than a
00:19:07
cursory review of markets at this point
00:19:09
in time this is not
00:19:11
um adequately overseeing the markets
00:19:14
and we're a gravely underfunded agency
00:19:17
to start with we're only about
00:19:20
five percent bigger than we were 20
00:19:22
years ago and that was before congress
00:19:24
gave us this new
00:19:25
responsibility to oversee a 400 trillion
00:19:28
dollar market
00:19:29
so i i wonder how many times bigger the
00:19:32
market is
00:19:33
can you do that math well we we had
00:19:36
overseen a market called the futures
00:19:39
market
00:19:40
which historically was in corn and wheat
00:19:43
and oil but it also was in financial
00:19:45
products
00:19:46
like the euro dollar contract and the s
00:19:49
p 500.
00:19:50
that total market was about 30 trillion
00:19:53
dollars
00:19:54
and congress asked us to take on this
00:19:56
other market
00:19:57
this 400 trillion dollar market so you
00:19:59
can see
00:20:00
and with that new responsibility
00:20:03
we don't have more people there's
00:20:06
one other odd thing about that i think
00:20:09
that i've come across which is that i
00:20:12
believe your agency was responsible for
00:20:14
bringing in something like
00:20:16
almost a billion dollars worth of fines
00:20:17
is that correct
00:20:19
over the last year or so well in the
00:20:21
heart of the 2008 crisis
00:20:24
what our agency the cftc found
00:20:27
is that large financial institutions
00:20:30
banks were readily
00:20:33
and pervasively rigging the interest
00:20:35
rate market
00:20:37
there's something called the london
00:20:38
interbank offer rate which is
00:20:40
in many of your viewers
00:20:43
mortgages and student loans and and
00:20:46
business loans and
00:20:50
that marketplace was being
00:20:53
rigged by major banks we've brought four
00:20:55
actions and you're right
00:20:57
collectively those four actions against
00:20:59
three big banks and one
00:21:02
broker have brought in i think over two
00:21:06
over two billion dollars to the u.s
00:21:09
treasury somebody went back and they
00:21:12
figured out that that
00:21:13
added up to the last 17 years of our
00:21:16
agency's funding
00:21:18
well maybe in the future you'll be able
00:21:19
to get a small cut of that
00:21:21
no we don't i we're a good investment to
00:21:24
the american public because you
00:21:26
need cops on the road you need somebody
00:21:28
looking we're also a good investment
00:21:31
i would contend to wall street though
00:21:34
they don't always
00:21:35
agree with what we do their brand is
00:21:38
wrapped up
00:21:39
in the confidence in the markets could
00:21:42
you imagine would anybody come to the
00:21:43
football games
00:21:45
on sundays if there were no referees i
00:21:47
mean for a week or two it might be
00:21:49
interesting but after that it would not
00:21:52
we need referees to
00:21:55
ensure that people have confidence in
00:21:56
the markets thanks very much for joining
00:21:59
us
00:21:59
appreciate it thank you
00:22:23
you
