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Can the president's two top financial regulators repent their past sins?
I think we're safe in calling it, for posterity, President Obama's "Day of Reckoning" speech (it's not FDR's "Rendezvous With Destiny," but it's not bad). In his address to a joint session of Congress this week, Obama said America was paying for the mistakes of the past, when difficult decisions about our economy were put off and "regulations were gutted for the sake of a quick profit." Now, he said, our day of reckoning has arrived.
What the president didn't say was that the people he has placed in charge of the reckoning are sometimes the ones who did the gutting. Or at the very least, they're the ones who obstructed the reckoning for years.
This is particularly true of the two people Obama has named to be the nation's top financial regulators: Mary Schapiro, chairman of the Securities and Exchange Commission, and Gary Gensler, whose hearing to be confirmed as head of the Commodity Futures Trading Commission was held on Wednesday. Schapiro failed to assert control over derivatives trading as the head of the CFTC in the mid-'90s, a time when it was already beset with fraud and manipulation. When a successor, Brooksley Born, came in, she called the unregulated derivatives market "the hippopotamus under the rug." As CFTC chair, Born tried to rein things in but was rebuffed by the Treasury Department, of which Gensler was a part.
Later, when Schapiro was running the Financial Industry Regulatory Authority (FINRA), she also missed Bernie Madoff's Ponzi scheme and now, we learn, R. Allen Stanford's alleged mini-Madoff scam. According to Reuters, associates of Stanford's, as was the case with Madoff's family, even served as advisors to FINRA, the industry's ostensible "self-regulator" (though it was widely seen as a joke in the industry). In both her jobs Schapiro followed a pattern: she tended to aggressively investigate relatively minor violations while failing to see the hippopotamus-size frauds in the room.
Gensler's past efforts to block derivatives regulation are no secret, and Sen. Tom Harkin, chair of the Senate Agriculture Committee, wasted no time in reminding Gensler of one such case on Wednesday. At a hearing on May 15, 1999, Harkin noted, Gensler said he "positively, unambiguously" agreed with then–Treasury Secretary Larry Summers in his testimony to the committee opposing additional regulation of the institutional over-the-counter derivatives market (in other words, the market that traded off exchanges). At the time, Harkin said, Gensler went on to argue that the "vibrancy and importance" of the global over-the-counter derivatives market "put the burden on those who are suggesting changes and further regulation … before we tamper on some of the successes of this marketplace for the economy." Well, said Harkin, "that's quite a resounding, unqualified and categorical statement, no second thoughts or ambiguity."
At the hearing, Gensler expressed some contrition and said he's seen the light.
Now, as to this ridiculous "solution" of pouring TRILLIONS into bailing out everyone and their mother, taking over the automotive industry, etc., that we can clearly place in the Obama's camp.