[Senate Hearing 111-240]
[From the U.S. Government Publishing Office]
S. Hrg. 111-240
NOMINATION HEARING TO CONSIDER
GARY GENSLER TO BE CHAIRMAN OF THE CFTC
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HEARING
before the
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 25, 2009
__________
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
Available via the World Wide Web: http://www.agriculture.senate.gov
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COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
TOM HARKIN, Iowa, Chairman
PATRICK J. LEAHY, Vermont SAXBY CHAMBLISS, Georgia
KENT CONRAD, North Dakota RICHARD G. LUGAR, Indiana
MAX BAUCUS, Montana THAD COCHRAN, Mississippi
BLANCHE L. LINCOLN, Arkansas MITCH McCONNELL, Kentucky
DEBBIE A. STABENOW, Michigan PAT ROBERTS, Kansas
E. BENJAMIN NELSON, Nebraska MIKE JOHANNS, Nebraska
SHERROD BROWN, Ohio CHARLES E. GRASSLEY, Iowa
ROBERT P. CASEY, Jr., Pennsylvania JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado
Mark Halverson, Majority Staff Director
Jessica L. Williams, Chief Clerk
Martha Scott Poindexter, Minority Staff Director
Vernie Hubert, Minority Chief Counsel
(ii)
C O N T E N T S
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Page
Hearing(s):
Nomination Hearing to Consider Gary Gensler to be Chairman of the
CFTC........................................................... 1
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Wednesday, February 25, 2009
STATEMENTS PRESENTED BY SENATORS
Harkin, Hon. Tom, U.S. Senator from the State of Iowa............ 1
Cardin, Hon. Benjamin L., U.S. Senator from the State of Maryland 6
Chambliss, Hon. Saxby, U.S. Senator from the State of Georgia.... 2
Lugar, Hon. Richard G., U.S. Senator from the State of Indiana... 3
Mikulski, Hon. Barbara A., U.S. Senator from the State of
Maryland....................................................... 4
Sarbanes, Hon. Paul, former U.S. Senator from the State of
Maryland....................................................... 7
Panel I
Gensler, Gary, Nominee to be Chairman and Commissioner of the
Commodity Futures Trading Commission........................... 9
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APPENDIX
Prepared Statements:
Cochran, Hon. Thad........................................... 40
Gensler, Gary................................................ 43
Document(s) Submitted for the Record:
Committee questionnaire and Office of Government Ethics
Executive Branch Personnel Public Financial Disclosure
Report filed by Gary Gensler............................... 46
Various organizations, letters of endorsement for Gary
Gensler.................................................... 70
Question and Answer:
Harkin, Hon. Tom:
Written questions for Gary Gensler........................... 74
Brown, Hon. Sherrod:
Written questions for Gary Gensler........................... 77
Casey, Hon. Bob:
Written questions for Gary Gensler........................... 78
Grassley, Hon. Charles E.:
Written questions for Gary Gensler........................... 79
Nelson, Hon. Ben:
Written questions for Gary Gensler........................... 81
Roberts, Hon. Pat:
Written questions for Gary Gensler........................... 82
Stabenow, Hon. Debbie:
Written questions for Gary Gensler........................... 84
Gensler, Gary:
Written response to questions from Hon. Maria Cantwell....... 85
Written response to questions from Hon. Dianne Feinstein..... 98
Written response to questions from Hon. Carl Levin........... 108
NOMINATION HEARING TO CONSIDER
GARY GENSLER TO BE CHAIRMAN OF THE CFTC
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Wednesday, February 25, 2009
U.S. Senate,
Committee on Agriculture, Nutrition, and Forestry,
Washington, DC
The Committee met, pursuant to notice, at 2:40 p.m., in
room SD-106, Dirksen Senate Office Building, Hon. Tom Harkin,
Chairman of the Committee, presiding.
Present: Senators Harkin, Conrad, Stabenow, Nelson,
Klobuchar, Chambliss, Lugar, Roberts, Grassley, and Thune.
STATEMENT OF HON. TOM HARKIN, U.S. SENATOR FROM THE STATE OF
IOWA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND
FORESTRY
Chairman Harkin. The Senate Committee on Agriculture,
Nutrition, and Forestry will come to order. I know we just had
a vote. We are waiting on some Senators to arrive. Senator
Chambliss said he would be a few minutes late and to go ahead
and proceed.
Good afternoon, and we thank you all for joining us today.
We meet this afternoon to consider the nomination of Mr. Gary
Gensler to serve as the Chairman of the Commodity Futures
Trading Commission. As many of you know, Mr. Gensler is not new
to public service. He served as Assistant Secretary for
Financial Markets, and later as Under Secretary for Domestic
Finance at the Department of Treasury. He was at Treasury about
3 years, so he brings this experience to this CFTC position.
This nomination comes at a very challenging time. Since the
CFTC was created 35 years ago, it has never faced more daunting
market challenges than those that the next Chairman and
Commissioners will face. Our financial markets are still
unstable, and the physical commodities of energy, agriculture
and metals have experienced dramatic price movements and
volatility.
Again and again, actions in our futures markets have caused
some havoc across our country and economy. I thought about
this, and in principle are supposed to provide some stability
and certainty and not to create havoc.
One year ago this weekend, we had an experience in the
cotton market. Speculative funds ran up the prices of the
cotton futures market at a time when there were record
surpluses of cotton and not very much demand. So there was a
ton of money, speculative money, going into the futures markets
that had absolutely nothing to do with supply and demand. It
served no constructive economic purpose except maybe to make
some people wealthy.
The markets for other agricultural commodities experienced
similar disruptions for wheat, corn, and soybeans. They rose to
record levels last year. Country elevators that had offered
producers forward contracts and then hedged their positions on
the Chicago Board of Trade struggled to find the cash resources
to meet margin calls. Users of commodities from bakers to pork
producers to ethanol facilities, suddenly realized that the
price they would have to pay for the most critical inputs was
double the price they had paid just a couple months before.
Prices in the energy sector also shot up to unprecedented
levels last summer. Energy users from airlines to commuters to
farmers struggled with higher fuel costs. So in places like my
State of Iowa, people are wondering; is Washington really
asleep at the switch? Do we understand the disruption and
damage caused by ineffective and inadequate oversight and
regulation?
Last night, President Obama urged Congress to move quickly
on legislation that will finally reform our outdated regulatory
system. He called for tough new common-sense rules of the road
so that our financial market rewards drive innovation and
punishes short-cuts and abuse. So it is our responsibility to
rise to the President's challenge.
This Committee and the Commodity Futures Trading Commission
have a profound responsibility to craft and implement tough-
minded regulatory reforms. Last month, I reintroduced the
Derivatives Trading Integrity Act. ``Integrity'' is a synonym
for honesty. The bill would require that all futures contracts
trade on a regulated exchange, including all derivatives
contracts. I came to that position after our hearing in October
on derivatives. Exchange-traded contracts are subject to a
level of transparency and oversight that is just not possible
in over-the-counter markets.
The best-intentioned and most brilliantly crafted
legislation will be only as effective as the regulators who
implement it. We must have an unflinching determination on the
part of the Commodity Futures Trading Commission to restore
integrity to these important markets.
That is why the position of Chairman of the CFTC is so
critical. And that is why this Committee must gain assurance
that the nominee before us is prepared to provide strong
leadership at the CFTC, to work with this Committee to develop
solutions to ensure that markets are open, transparent, free of
excessive speculation, and that all trades clear. We need to
know if Mr. Gensler will be committed to repairing the damage
from abuses and mistakes of the past and ensuring that they are
never repeated.
With that, I will hold the record open at this point for a
statement by Senator Chambliss. I would ask if Senator Lugar or
others would have opening statements that they would care to
make at this time.
Senator Chambliss, for an opening statement.
STATEMENT OF HON. SAXBY CHAMBLISS, U.S. SENATOR FROM THE STATE
OF GEORGIA
Senator Chambliss. Mr. Chairman, thank you.
I will submit my opening statement for the record, and let
me just echo, Mr. Gensler, we welcome you to the Committee, and
we welcome your girls to the Committee.
We have had the opportunity to visit and obviously I know
your background. We look forward to continuing a dialog on the
issues that we know face this industry and look forward to
working with you down the road with respect to making sure that
we continue to provide financial investors in this country the
type of regulation that is fair, reasonable, and will ensure
safety and security in the market.
So thank you, Mr. Chairman.
Chairman Harkin. Thank you, Senator Chambliss.
Senator Lugar.
STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM THE STATE
OF INDIANA
Senator Lugar. Mr. Chairman, let me just add that I
appreciated especially the hearing you conducted in which we
participated last October. I felt that was an educational
experience for us and for the American people, and I appreciate
the progress that has occurred at CFTC subsequent to that
hearing. People were able to do some things administratively.
But I would just simply chime in to say that as a very
junior Senator, Senator Leahy and I sat at the end of the table
and were assigned by Chairman Herman Talmadge the
responsibility of oversight of the CFTC, because apparently no
one else on the Committee understood what he was doing and no
one really wanted to find out. So we have had some parental
responsibilities in subsequent years, and I appreciate very
much the evolution. But this is a pivotal moment today as we
take a look at a new chairmanship, a new era, the regulatory
suggestions you have made and other members likewise. And so I
look forward to the hearing.
Chairman Harkin. Thank you very much, Senator Lugar.
Senator Nelson?
Senator Nelson. Thank you, Mr. Chairman. Unfortunately, I
have to leave, so I am going to make a couple of statements and
leave open a question which I hope Mr. Gensler can respond back
to us in writing.
You have outlined very clearly and succinctly the problems
that we face today with the volatility that we have experienced
in the markets. I hope we have the opportunity to see where the
weaknesses are and what fixes are necessary. Credit
derivatives, obviously regular commodities, physical
commodities, need to be bound by certain rules. But it is
important that whatever regulations are put in place does not
constitute strangulation of the commodities in the whole.
I think the CFTC must preserve the price discovery aspect
of the markets and risk management hedging benefits that it
provides. It needs to regulate with a focus on what has become
more and more important, the system risk, and not just look for
bad actors in the situation.
I think the thing that interests me most is the need that
the CFTC should be proactive and try to anticipate matters that
pose a threat to systemic risk than always be reacting. I know
it is a very challenging thing to be able to predict and to
anticipate without some market experience to guide you as to
what needs to be done. But waiting until the systemic risk is
so big or the fire is beyond the capability of being put out is
not a course of action that we would like to see happen again.
The question that I really have of Mr. Gensler, should he
be confirmed, is--we proposed that the CFTC issued--they issued
a report, and we came back and we asked that the report's
recommendation of the review of, quote, whether to eliminate
the bonafide hedge exemption for swap dealers and replace it
with a new risk management exemption subject to certain
conditions that we suggested that be done. And my question is
do you know whether that has been done or, if it has not,
whether it will be done. And if you can just get back to me on
that, that certainly will satisfy me.
But thank you very much for your willingness to serve, and
I look forward to my two colleagues giving a great introduction
of you. Thank you.
Chairman Harkin. Thank you, Senator Nelson.
Senator Grassley.
Senator Grassley. Yes, thank you very much, Mr. Chairman.
Obviously, we need to congratulate Mr. Gensler. I think we
ought to also thank Walt and Michael for their acting
chairmanship and the hard work that they put into the work of
the Commission. I think our last year has shown that more
aggressive activity on the part of the CFTC is really needed.
This is a year when we are going to have to decide to a
greater extent the appropriate role of regulation of
speculators to a greater extent than we have in the past. We
are going to have to decide if we are serious about giving the
CFTC the resources it needs to do its job effectively. And that
is what new leadership is all about, I hope, and, of course,
the work of this Committee as well.
So I am not going to be able to stay around here to ask
questions, but I told Mr. Gensler that I would be submitting
about eight questions for answer in writing. So I thank you,
Mr. Chairman, for the privilege of making a statement, and I
will put my entire statement in the record.
Chairman Harkin. Thank you very much, Senator Grassley.
We have a distinguished colleague and a distinguished
former colleague, and I will recognize them in order for
purposes of introduction. Senator Mikulski from the great State
of Maryland, welcome to the Agriculture Committee.
STATEMENT OF HON. BARBARA A. MIKULSKI, U.S. SENATOR FROM THE
STATE OF MARYLAND
Senator Mikulski. Thank you very much, Mr. Chairman, and
also Senator Cardin, who is currently presiding, will also be
joining us, and it shows the enthusiastic support that Mr.
Gensler enjoys from the Maryland delegation.
First of all, in terms of the Commodity Futures Trading
Commission, we know how important this Commission is. But as
Senator Lugar so aptly said, it is often little understood or
little noted, unless there is a crisis in the markets. And last
summer, also the whole issue of commodities and the futures
trading just exploded in our community and our media and in our
marketplace.
I had bakers lined up throughout in my office and out in
the community wondering how they were going to buy rye and
wheat and so on to keep their small and medium-sized businesses
going. We were talking about the high price of gasoline. We
were talking about something called the ``London loophole'' and
how we needed to close that.
So the whole issue of commodities we are seeing not only as
something that was primarily an Agriculture Committee issue,
but an American issue and how it affects our community.
There is grave concern whether there was adequate
oversight, adequate regulation, and what we needed to do. Well,
I think now we are on the path in the right direction. But
whatever the rules of the road, whatever Congress chooses to
do, we need to have the right person in charge of the CFTC.
That is why I enthusiastically endorse and introduce Gary
Gensler to the Committee to be the Chairman of the Commodity
Futures Trading Commission. We know his work when he was in the
Senate. We know his work in the Clinton administration, and
also he is and continues to be a community leader in Maryland.
I know him to be a man of principle and great intelligence.
He has a deep understanding of finance, both domestic and
international, and how to turn that knowledge into workable
policies that will protect the interests of our country and the
interests of our consumer.
During this time of great financial turmoil and
uncertainty, we need someone with these skills, this background
and experience, and these values to lead the Commission. So I
enthusiastically support him for this important position.
When you look at his resume, we know that he worked hard at
Treasury and received the Alexander Hamilton Award, the highest
award that the Department can give. He worked with our
colleague Senator Sarbanes in terms of fashioning a response to
not only the Enron scandal, but how we could make corporate
America more responsible, the Sarbanes-Oxley bill.
He has worked as a top economic adviser both in our own
government and on Wall Street. He is also a strong community
leader. Whether he has been on the board of Johns Hopkins
University or whether he has helped the Community Enterprise
Foundation be able to provide affordable housing, Gary has
always been someone who has given of his own time and, I might
add, of his own dime.
And just speaking as a woman, I watched him and my heart
went out to him when his own beloved wife, Francesca, struggled
with breast cancer. He had to be a father; he had to be a
mother; he had to be a devoted husband. He was always at his
wife's side, and at the same time tending to his children.
Someone who knows what sorrow is and has to go through
that, and also what it means to his family, and then while he
was doing that, to stay civically engaged while at the same
time watching the marketplace. I think we have someone who
brings talent, who brings dedication, and who brings values. I
think the Committee would be well served in approving his
nomination.
Chairman Harkin. Thank you very much, Senator Mikulski, for
that very strong supportive statement.
Now our distinguished former colleague, Senator Sarbanes.
Welcome back.
Senator Sarbanes. Mr. Chairman, thank you very much, and I
appreciate your courtesy in allowing me to appear. It is a
risky proposition on your part because former Senators do not
get much of a chance to speak, and there is always a danger
they will abuse the microphone when the opportunity presents
itself. But I know you want to move along.
Actually, I will withhold and defer to Ben and keep it in--
I am out of office, and they are in office, and I respect the
difference very much. Do you want to go ahead?
Senator Cardin. I usually yield to my constituents, and
Senator Sarbanes is my constituent. But let me----
[Laughter.]
Chairman Harkin. Senator Cardin.
STATEMENT OF HON. BENJAMIN L. CARDIN, U.S. SENATOR FROM THE
STATE OF MARYLAND
Senator Cardin. Mr. Chairman, let me thank you for the
courtesy of just a few remarks with regard to Gary Gensler. He
is a friend. He is a person I have known for many years. I
deeply respect his intellect, his integrity, his financial
knowledge, and his commitment to public service. And I join
Senator Mikulski and Senator Sarbanes in recommending him for
confirmation.
Gary has a tremendous depth and breadth of knowledge on
financial issues. He was in the Department of Treasury from
1997 to 2001, Assistant Secretary for Financial Markets and
Under Secretary for Domestic Finance. He was a senior adviser
to both Secretary Rubin and Secretary Summers.
He received the Treasury Department's highest award, the
Alexander Hamilton Award. He was an adviser to a very
distinguished member of the U.S. Senate, Chairman Sarbanes,
when Paul chaired the Banking Committee and helped Senator
Sarbanes when we passed the Sarbanes-Oxley legislation, which
regulated corporate America--very important legislation on
corporate responsibility--we could use more of that today--and
accounting and security laws.
So Gary is well prepared through his experience to take on
this very important responsibility as Chair of the Commodity
Futures Trading Commission. But I want to tell you just one
more thing about him. His background in the community, the type
of volunteer activities that he has committed himself to, in
helping educational institutions and helping health care
institutions and helping those who are disadvantaged. It tells
you a lot more about him. He is a person committed to our
community.
I will tell you one more thing about him. He has
participated in nine marathons, and if he is confirmed, helping
repair our economy will be his tenth marathon, and I am sure he
will be just as determined to bring us to a successful goal,
and I encourage his confirmation.
Thank you, Mr. Chairman.
Chairman Harkin. Thank you very much, Senator Cardin.
Now Senator Sarbanes.
STATEMENT OF HON. PAUL SARBANES, FORMER U.S. SENATOR FROM THE
STATE OF MARYLAND
Senator Sarbanes. Well, thank you very much, Mr. Chairman.
First of all, I want to just underscore something that both
Senator Mikulski and Senator Cardin said, and that is the very
substantial, positive contribution that Gary Gensler has made
in the Baltimore community through his civic involvement. If we
talk about being a good citizen and sort of participating and
meeting your responsibilities, this is a prime example of
someone who has done that. And it has been of enormous benefit
to our community, and we are all deeply indebted to him for it.
He has been in a sense a star from the beginning. He was a
summa cum laude graduate from the Wharton School of Business at
the University of Pennsylvania, first a BA and then an MBA. He
then went to work in the financial industry where he had
extensive experience, and then he was in the Treasury for, I
think, close to 4 years. He then wrote a book about mutual
funds, and then I was fortunate enough--I was then Chairman of
the Banking Committee, and we were confronted with the Enron
situation.
Enron was the seventh largest company in the country. It
was reporting record profits in the first part of 2001, first
quarter, second quarter, 20-percent increase in profits each
quarter. By October, they were restating their earnings.
November, they restated them again. December, they declared
bankruptcy. The largest bankruptcy in U.S. history up to that
point. It was subsequently eclipsed by WorldCom in June of
2002.
The Committee, which I then chaired, was charged with the
responsibility of addressing the situation, and one of the
things we did which made an enormous difference, as it turned
out, was to get Gary Gensler to come and work with us as a
senior adviser to the Chairman. And his contribution was
enormous.
He was integrally involved in shaping the legislation,
which, of course, dealt with oversight of the accounting
industry, the reform of corporate governance, and investor
protection measures. And let me just quickly outline for the
Committee the qualities he brought to that work, which I think
will stand all of us in good stead should he be confirmed as
Chairman of the CFTC.
First of all, he thinks comprehensively in terms of what is
necessary to make the financial system work. So he has a
breadth and depth of vision which is somewhat rare, but which
is extremely important, particularly when you are trying to
deal with a situation where the system is breaking--seems to be
breaking down and it needs to be, as it were, restructured and
put back together again.
He is extremely smart. I indicated his past
accomplishments. Nowadays, people are around developing more
and more complex instruments all the time, and you have got to
have someone there who can not only stay with them every step
of the way, but can be ahead of them, can anticipate what is
coming and seek to address it.
He knows the markets well, and he is very committed to
ensuring that the markets work honestly and fairly. And the
markets are an important part of the workings of our economic
system. But if they do not work honestly and fairly, they will
drive the economic system down, and all of us will pay a very
high price for that.
He is very hard-working. He is not ideological. He is
pragmatic. He is a good listener. He seeks practical solutions,
seeks to develop constructive and positive approaches. He is
firm and fair. And he brings excellent judgment and very strong
leadership skills. I think he will be very effective in heading
the agency and imparting a sense of mission to the employees in
terms of what needs to be done.
I want to say to the members of the Committee, I have
absolute confidence in his integrity and in his judgment, and I
think it is an opportunity for the country to put his superior
understanding of financial markets and his extensive experience
to work on behalf of the American people. I can assure you he
will be a fierce enemy of fraud and manipulation, that he will
find it, root it out, and also try to make the systemic changes
that will contribute to it not recurring again, which is, of
course, very important. We can go after the bad actors, but we
want to have a system in place that precludes the bad actors
from coming along in the first place.
Gary Gensler has a very, very deep commitment to the public
interest. I have had occasion to talk to him at length about
his feeling for the country, his own opportunities in life, and
the need to make the system work fairly for all.
And, finally, Mr. Chairman, let me just say he appreciates,
I think, the role of the Congress and the workings of our
political system. Sometimes you get these people in the
executive branch, and they have difficulty understanding there
is a legislative branch that plays a very important role. Gary
Gensler I think clearly understands the role of the Congress. I
think he is sensitive to it. He appreciates it is an important
partner. And I want to say to the Committee I think he will be
an absolutely first-rate partner for the Congress as you move
to address the economic challenges which you, Mr. Chairman, and
the other members of the Committee outlined at the beginning of
this hearing.
Thank you again for the chance to come and be with you.
Chairman Harkin. Well, thank you very much, Senator
Sarbanes. Good to see you back, and I am sure we do not have
any questions for all of you, but I just would say for the
record that Mr. Gensler is indeed very fortunate to have three
such well-respected and well-liked advocates for his position
as the two sitting Senators and the previous Senator from the
State of Maryland. Thank you all very much for being here.
Now I would like to call Mr. Gensler to the witness table.
Mr. Gensler, before you take your seat, if you would rise,
we have an oath that we have to administer.
Mr. Gensler, do you swear to tell the truth, the whole
truth, and nothing but the truth?
Mr. Gensler. I do, Mr. Chairman.
Chairman Harkin. And, Mr. Gensler, do you agree that, if
confirmed, you will appear before any duly constituted
committee of the Congress if asked?
Mr. Gensler. I do, Mr. Chairman.
Chairman Harkin. Thank you very much, Mr. Gensler. Please
have a seat.
Mr. Gensler, welcome to the Committee. My congratulations
on your nomination by the President, and we have your written
statement. It will be made a part of the record in its
entirety, and the floor is yours. You may proceed as you so
desire.
TESTIMONY OF GARY GENSLER, NOMINEE TO BE CHAIRMAN AND
COMMISSIONER OF THE COMMODITY FUTURES TRADING COMMISSION
Mr. Gensler. Chairman Harkin, Ranking Member Chambliss,
members of the Committee, thank you for the opportunity to
appear here before you today. I am honored to be President
Obama's nominee to be Chairman of the Commodity Futures Trading
Commitment at this critical time in the commodities markets,
and for our Nation.
As a champion of the public's interest--for farmers,
consumers, small businesses--the CFTC plays an essential role
in our financial regulatory system and affects the lives of all
Americans. And I firmly believe that strong, intelligent
regulation with aggressive enforcement is what our economy
needs and benefits the public.
The current economic crisis clearly has shown, though, that
our financial and regulatory systems have failed the American
public terribly. Those of us who have spent our time, our
professional lives, around markets have to approach the current
crisis with humility following such broad failures. We have
learned the limits of our ability to foresee how markets may
evolve. We have learned the importance of being candid with the
American public about the risks we face and that we must be
unceasingly vigilant to address these risks. We have also
learned that there is no substitute for strong, independent
regulation, that we must bring transparency and accountability
throughout the system, and we must always err on the side of
protecting the American public.
These are the lessons I draw from what has transpired this
past decade. And, if confirmed, I pledge to this Committee and
to the Congress that I will not forget these lessons.
We must repair our regulatory system by enacting much
needed reforms that promote transparency, fairness, and safety.
If confirmed, I will fight hard on four essential
priorities for reforming the commodities markets and our
financial system.
First, the CFTC must vigorously fulfill its mandates:
enforcing existing laws, promoting market integrity, preventing
against fraud and manipulation, and guarding against excessive
speculation. I will work tirelessly to ensure that the
Commission leaves no stone unturned, ferreting out and putting
to a stop activities and practices that hurt the American
public.
I also look forward to working with Congress to provide the
adequate resources for this agency which I believe currently
lacks the sufficient funds to do even its current mission, let
alone the missions I think it needs to take on.
Second, I believe that increased speculation in energy and
agricultural products hurts American farmers and consumers and
businesses. I do not have any doubt about that. A transparent
and consistent playing field for all physical commodity futures
should be the foundation of our regulations. Position limits
must be applied consistently across all markets, across all
trading platforms, and exemption to them must be limited and
well defined.
Third, we must now urgently develop a broad regulatory
regime for over-the-counter derivatives. Standardized products
need to be brought into mandated clearing and mandated
exchanges. Beyond this, I believe the institutions themselves--
the derivative dealers that make the markets in derivatives--
need to have direct regulation under Federal statute, capital
rules, business conduct reporting, and regulations need to be
developed for customized swaps and for credit default swaps
given their unique nature.
And, fourth, I believe the CFTC must work with Congress and
other regulators around the globe to ensure that failures of
the regulatory and financial systems, failures that the
American people public has taken such a toll, never happen
again. Now, this will not be easy. These are complex financial
markets, and markets are irreversibly linked. But we will have
to work with our global partners to make sure that around the
world we have the same rules that we have here. This is the
only way that Americans can really be protected.
Mr. Chairman, Ranking Member Chambliss, I am a proud
believer in financial reform, tough regulation enforcement. I
have been privileged to have had broad exposure to financial
markets, here and in Asia, in public service and on Wall
Street, as an investor advocate, and as a Government official.
And my experience has taught me the importance of having a
strong working relationship with Congress. I appreciate Senator
Sarbanes' comments on that. In these transformational times, I
do believe we have a unique opportunity working together to
bring bold and necessary reform forward. We must, though, take
this opportunity to ensure we deliver on the expectations that
all Americans have for us.
I would like to close by saying how much the support of my
family--my three daughters--means to me, and the great
sacrifices they will make if I am so honored to serve. My
eldest, Anna, is a freshman at college and could not be here.
My two other daughters, Lee and Isabel, if it would be
appropriate, I would just like to introduce to the Committee.
Chairman Harkin. Please introduce them.
Mr. Gensler. This is Isabel, my youngest, who is 12, and
then my daughter Lee, who is 17, who are here with us today.
Chairman Harkin. Welcome to the Committee.
Mr. Gensler. Mr. Chairman, Ranking Member Chambliss,
members of the Committee, I look forward to taking your
questions.
[The prepared statement of Mr. Gensler can be found on page
43 in the appendix.]
Chairman Harkin. Thank you very much, Mr. Gensler.
Mr. Gensler, in confirming nominees and moving their
nominations forward, I like to know about their background and
history and where they are now, their present views and
outlook. Obviously, you have had experience, you have served in
a previous administration. I would like to cover some of that
with you as a way of examining where we were in the late 1990's
and where we are today regarding issues under CFTCS
jurisdiction.
On May the 18th, 1999, you testified before the House
Agriculture Committee's Subcommittee covering risk management.
In response to questioning by our distinguished ranking member,
when he was a member of the House Agriculture Committee, you
said you ``positively, unambiguously'' agreed with Mr. Larry
Summers in his testimony to the Senate Agriculture Committee
opposing additional regulation of the institutional over-the-
counter derivatives market.
You went on to refer to the ``vibrancy and importance'' of
the global over-the-counter derivatives market.
Here is a direct quotation. You said quote, ``That large
and vibrant market is part of, I believe, the American success.
And we should recognize that and put the burden on those who
are suggesting changes and further regulation, put the burden
on them before we tamper on some of the successes of this
marketplace for the economy.''
Well, that is quite a resounding, unqualified, and
categorical statement, no second thoughts or ambiguity.
Ms. Brooksley Born, who was about to leave as the
Chairperson of the CFTC, had advocated strenuously over the
previous few years, including before this Committee, that the
risk of these over-the-counter derivatives needed to be
evaluated and appropriately regulated.
However, you were part of the team arguing--and you can
correct me if I am wrong on that--for a statutory enactment to
take away all CFTC regulatory power over these over-the-counter
derivatives. According to the Washington Post of October 15th,
2008, this team was really quite dismissive of Ms. Born, to the
point of it kind of becoming personal at that time. But I do
not need to go into that.
But this team was quite direct in advocating that these be
exempted from CFTC regulation.
Mr. Gensler, what was your own personal role in dealing
with Ms. Born during the time she was chair of the CFTC? Did
you attend any meetings during that period of time in 1998 or
1999 or did you have any telephone calls or communications over
that period of time with her? What was the nature of those
interactions, and did you have any advice for her at that time?
Mr. Gensler. Mr. Chairman, thank you for your question.
First, may I say, looking back now it is clear to me that
all of us that were involved at the time--and certainly
myself--should have done more to protect the American public
through aggressive regulation, comprehensive regulation. We
should have fought harder for some of the things that we raised
with Congress at the time, whether that be regulating
derivative dealers or keeping the oil and metals markets
consistently regulated with the corn and wheat and soybean
markets. These were things we recommended and we should have
fought harder for.
I clearly look back on some things outside the jurisdiction
of this Committee that I should have fought harder for,
guarding against predatory lending practices.
I believe there are many things that at the time that we
could not foresee, or did not see. They were just dots on the
landscape, as you, I believe, and other Senators here
commented. And we have to do a far better job seeing that which
is out on the horizon.
You asked specifically about meetings with Chairman Born
and I recall working with her, working with her as a staff
member at Treasury. I was an Assistant Secretary working on a
report on long-term capital management and the after effects of
the collapse of long-term capital management where there was a
joint report put together in the spring of 1999.
During those earlier periods of 1998, when there was
different views of the Treasury, the Federal Reserve, and the
SEC from the CFTC, Ms. Born raised very good questions but I,
in fact, at the time was recused because it did relate to a
particular matter of my former employer. I had been at the
full, big set piece President's Working Group meetings, as
would be customary for the Assistant Secretary to attend, along
with other staff of Treasury.
Chairman Harkin. Well, Mr. Gensler, that is a very
straightforward answer and I appreciate that. So would you say
that your views and your thoughts on this have evolved and
changed over the intervening years, looking back at what has
happened in the last several years?
Mr. Gensler. Mr. Chairman, I very much would say that my
views have evolved. There is so much that has happened in the
marketplace as electronic trading facilities, even that our
exchanges now are public and for-profit enterprises and back
then were not for-profit and public. And the financial crisis
itself, to me, goes to the heart of some of the assumptions
that I think collectively all of the Federal agencies and even
Congress at the time grappled with.
I believe now it is just so important that we bring the
whole over-the-counter derivatives marketplace on the market,
into exchanges, as you do. I share that goal. And to also bring
that over-the-counter derivatives marketplace onto centralized
clearing.
I, frankly, though do not think that is enough. I also
think we need regulation of the institutions, that Congress
would actually have a statutory regime for derivative dealers,
somewhat like we have for banks, where you have capital rules
which address the excess leverage, have business conduct rules
to make sure there is not fraud and manipulation in the sales
practices. And then, of course, last and very importantly,
reporting rules. These dealers--there is about 15 or 20 around
the globe that make up 99 percent of the market for over-the-
counter derivatives.
So I have come to believe strongly we need both, the market
side, clearing and exchanges for the standardized products, the
derivative dealers clearly regulated, all the information
coming in.
Chairman Harkin. I am going to follow that up in my second
round because I want to ask about this whole idea of having
some derivatives that are not on a regulated exchange. I will
get to that.
In my reading, my memory but also my reading of that period
of time from 1998 through about 2000, was that the President's
Working Group was very forceful in their position that these
OTC derivatives should be exempted from the CFTC. As I said, to
the point one time where it also got personal with Ms. Born. I
remember that.
And in my reading of it, about that, from various sources,
it appears, of course, that you have some very strong
personalities there. You have Mr. Greenspan, who was driving
this, quite frankly. And he is a very forceful personality. He
was driving this.
Then you have Mr. Summers. He is no shrinking violet, as we
all know. He was driving this, also.
Then you have Mr. Rubin there, also. So you have a very
forceful group.
CFTC was sort of shunted aside. Well, Mr. Gensler, should
you get this position as the Chairman of the CFTC, you will be
on the President's Working Group. And I needn't remind you that
you will not be working for Mr. Geithner. You may be a friend
of his; that is fine. You will not be working for him. You do
not work for Mr. Summers. You do not work for Mr. Bernanke. You
are the chairman of an independent regulatory agency. You do
not even work for the President. You are chairman of an
independent regulatory agency.
And as such, your views and your positions that you have
should be that of a chairman of an independent agency. And one
should not be reticent in advocating a position even to the
extent that some of the other forceful personalities may not
agree, if you get my point.
I just want some assurances from you that you will be that
independent voice. Like I said, I am not asking you to sever
friendships or the like. I am saying the mindset, the mindset
of the Chairman of the CFTC cannot be working for Mr. Summers
or Mr. Bernanke or Mr. Geithner or anybody else. And that you
will bring that independent mindset to the President's Working
Group.
Mr. Gensler. Mr. Chairman, I thank you for that question. I
think being Chairman of the CFTC is an independent regulatory
agency. The commitment I give this Committee and to the
American public that I will bring that independence. If I have
a concern or thought about the regulatory protections that the
American public needs, I will absolutely share it as one of the
President's advisors, as part of the President's Working Group,
with the President and senior members of his economic team.
But if we cannot reach any consensus and I believe
something, I am going to bring it to this Committee, I am going
to bring it to the American public. There is a real difference,
in my mind, of being an Assistant Secretary of Treasury and
being the chairman of an independent regulator.
I appreciate that when the President asked me--then
President-Elect Obama--to be his nominee in December and we had
a chance to chat, that was what he understood and that is what
I understood, that I will certainly be advising the President.
It would be a great honor to advise him on regulatory reform
and all that we need.
But that which is at the core of my beliefs, that we have
to bring the entire over-the-counter derivatives marketplace
into a regulatory regime, these two pieces that I have talked
about, these two big pieces I have talked about and the goals
that we share, they have heard me saying this straight through
since December 18th and they are going to keep hearing me say
it. And I make that commitment to you, sir.
Chairman Harkin. Thank you very much, Mr. Gensler. I will
return to the issue of derivatives and trading on exchanges
during the second round.
With that, I would of course yield to our distinguished
ranking member, Senator Chambliss.
Senator Chambliss. Thank you, Mr. Chairman.
Mr. Gensler, in your statement you state, and I quote,
``The current economic crisis clearly has shown that our
financial and regulatory systems have failed the American
people terribly.''
I know you are very familiar with the workings of the CFTC.
Surely you have followed the markets over the last several
years since your direct involvement at Treasury. Is there
anywhere that you think, or any particular instance you think
where CFTC falls into that category of having failed the
American people terribly?
Mr. Gensler. Senator Chambliss, I think that the great
failures are largely beyond the CFTC. But even in this area,
the CFTC is, by Congress, that Act in 2000 that the Chairman
referred to, asserted that they are an agency that has to look
after systemic risk as well. And we clearly have had a systemic
failure.
Second, though the CFTC, I do not think, has the tools to
look after that much, I do believe that we have had speculation
that contributed and hurt farmers and consumers and all
Americans.
And if confirmed, I would fight hard to make sure that we
have the resources and that we can bring what is needed to be
borne to these markets within the current authorities at the
CFTC.
Senator Chambliss. With the current authority that is out
there and the current resources that you are familiar with, do
you think there is anything that the CFTC did not do that they
should have done relative to this systemic risk issue that you
are talking about?
Mr. Gensler. Well, again, when the failure is so broad and
complete, Senator, I just think all regulators have to look
into themselves and say what could we have done differently? I
do that personally, in terms of my own record.
I think that the CFTC has aggressively fought and tried to
enforce fraud and manipulation in other areas. But if
confirmed, I would certainly want to take a look at all of the
individual hedge exemptions that are currently in place, some
for 20 years or so. I think it is time to look back and see
whether those exemptions are still appropriate, given the
current times.
There are processes that the CFTC uses to allow for markets
or individuals to take action sometimes that are not brought up
to the full Commission level, and I think we need to do that,
as well.
So these might sound like they are around the edges of a
big financial calamity, but I think every agency needs to take
a look to see what can we do better and what can we do more.
Senator Chambliss. You and I talked about the potential for
an SEC/CFTC merger that a lot of folks are advocating and have
been advocating. And I noticed you are quoted, and I hope this
is an accurate quote, ``CFTC performs vital functions and it is
critical that all of its mandates are preserved, even as the
demands on our regulatory agencies expand. A merger makes sense
only if it enhances our ability to carry out the important task
with which the CFTC is entrusted. Thus, I would not consider a
merger simply for merger's sake.''
I want to say that on the vital function of the CFTC,
certainly you and I are very much in accord there. There has
been much discussion about merging these two agencies, as well
as the creation of a new systemic risk regulator to oversee all
Federal financial regulators.
Personally, I have great reservation about bringing these
two regulatory bodies together, as I expressed to you. For one,
the SEC's performance in regulating their current portfolio has
been less than stellar. And second, the CFTC uses principle-
based regulation that has proven an effective approach to
regulating commodity futures. It is difficult for me to see how
welding these two regulators together will serve Americans
well.
First, are you a proponent of the CFTC's principle-based
regulatory approach? And if so will you, as Chairman of the
CFTC, work to preserve this regulatory approach, as regulatory
reforms and reshuffling of bureaucratic boxes are contemplated
and proposed? And second, what problems could you see arising
from an SEC/CFTC merger?
Mr. Gensler. Senator Chambliss, I appreciated the time we
spent in your office. I think we may have talked about this as
well at that moment, too.
As I said, and that was an accurate quote, I think this
financial crisis brings to bear so many other problems other
than, as you say, the boxes. The CFTC was formed in 1974, but
really it was formed back in 1922 to protect the interest of--
at that time--grain merchants and farmers so that they could
appropriately and reliably hedge their risk in the future about
their corn and wheat and then later soybean. And of course, we
have added many other products to it.
I think that is fundamentally very different than what the
SEC does. They are both market regulators. They both need to be
strong on enforcement and anti-fraud and anti-manipulation, and
look out for the public.
But at the core, the CFTC's mission about protecting
farmers and merchants and later oil and metals, and though it
has been expanded to financial products and it is critical to
get the over-the-counter derivatives marketplace correct as
well, is sort of around a different set of mission and goal
than that which is the SEC.
I think both very vitally important. And as you rightfully
point out, one of them principles-based which, as Chairman of
the CFTC, I would support and make sure it works. And if it did
not work, I would be back here readily to work with Congress to
see if we needed to fix something. And the Securities and
Exchange Commission has another approach.
Senator Chambliss. The 2000 Modernization Act was a very
complicated piece of legislation that you were involved with
back then, as were a number of us. We thought we were doing the
right thing and I think we did absolutely the right thing by
allowing the market to expand and putting more flexibility out
there. As a result we saw these markets grow in a tremendous
way. I think all of that has been healthy for the economy.
Obviously, as you alluded to, over the last 10 years--or
well, 9 years we have seen major changes in the industry. We
have seen very volatile prices from time to time which can be
attributed to any number of issues.
But my question to you is looking back at the 2000 Act, and
knowing what you knew then, is there any recommendation that
you think was made that we did not follow that should have been
followed that we ought to think about now? Or do you think that
act worked the way that all of us intended for it to at that
time?
Mr. Gensler. Well, I believe, looking back now, knowing
what we know now, there are two areas that we did raise then
but we should have fought harder for, I personally felt--thank
you, Senator--should have fought harder for.
One was the concept of regulating the dealers themselves,
the brokers, the voice brokers or derivative dealers that are
making markets. We all know their names. I will not name them
here, but the large financial institutions.
We recommended that. In some cases, they were the
affiliates of the broker-dealers. But one of the big lessons
out of AIG, the insurance company that failed, they had an
unregulated dealer in the derivatives business. And now, in
that case, it was $450 billion in size. In that case, it was
largely credit default swaps. But it was also unregulated.
There was no, not the New York State Insurance Commissioner,
nor any Federal regulation about its capital, its business
conduct, its reporting. I think we need to put that in place.
Second, at the time the President's Working Group did
suggest and recommend that oil and metals and cotton and wheat
all have a consistent regulatory regime. We were unable to
achieve that, working with the various committees in Congress
in working that through.
But I think that is a good foundation. I still think that
is the right foundation, that if something has finite supply
and is more easily manipulated, that we should think of
consistent regulation and make sure that we get that in.
Senator Chambliss. Thank you, Mr. Chairman.
Chairman Harkin. Thank you, Senator Chambliss.
Senator Lugar.
Senator Lugar. Thank you, Mr. Chairman.
You have just mentioned, Mr. Gensler, the ideal of having
the agricultural commodities but likewise, a broader group
together. Certainly in testimony that we heard in October and
before many advisors, even to pension funds and to college
endowment funds, suggested a grouping of commodities which
included corn and soybeans but also metals and oil and these
combinations of commodities that serve those interests well for
a period of time.
But it did lead to an interesting question with regard to
regulation of them, and it is a discussion that we had at the
time of the reauthorization of CFTC a while back which, without
going into who was for and against, the problem of the
regulation of oil, for example, or of various other energy
products, was fiercely resisted by some Senators, by some
witnesses, by some members of the Administration at the time,
as I recall.
I mention that now because I really want your judgment as
to what should be the scope of the CFTC? We think about the
agricultural scene, that seems fairly clear. It has never been
quite that clear with regards to other commodities, as they are
thought of generally.
What sort of scope do you envision as ideal, in terms of a
regulatory regime?
Mr. Gensler. Senator, I thank you for the question and I
thank you for having--we had a good meeting together on these
subjects.
I think that the Commodity Futures Trading Commission
currently has exclusive jurisdiction from Congress to regulate
the futures markets. And it has proven well, as Senator
Chambliss said, though in the midst of a crisis everybody has
to look within. It has proven well in regulating over these 35
years the futures markets.
I believe that if we are able to bring over-the-counter
derivatives into centralized clearing, into exchanges for these
products, that the CFTC is best situated with expertise on the
derivatives marketplace, if appropriately funded I must add.
But I think they are best situated amongst the Federal
regulators for these authorities.
Senator Lugar. Now the appropriately funded point which you
touched upon in your opening remarks, and which has often been
touched upon by the leadership of the Commission, just has not
been occurring. There is not an understanding I think, perhaps,
of the scope of what this means if you are to take in all of
the different types of derivative contracts and various other
situations.
From the beginning will you be able to give the Committee
and work with us in terms of how many people you actually need
or what sort of facilities are required to achieve something
which the American people clearly want at this point?
Mr. Gensler. Senator Lugar, I look forward, if confirmed,
working with you and the Committee on that. I know under its
current authorities the CFTC has just under 500 people. This is
the same size it was in 1974.
Senator Lugar. Yes.
Mr. Gensler. So in 35 years, when the markets have grown
more than 50-fold--again, markets have grown 50-fold, the
agency is the same size. That is either efficiency or well, or
it is underfunded. And maybe it is some of both, but I think it
is underfunded.
It was 600 people just a few years ago. The enforcement arm
had 150 lawyers, it is now only 110 lawyers, just to enforce
the laws currently in place.
I believe the Agency has put a request in, and I am a
private citizen but I was able to read this letter in the last
few days, to get back up to 690 people. That gives you a sense
of what they believe right now they need.
Senator Lugar. I think it is probably incumbent upon us,
but you if confirmed, to gain greater recognition for what the
CFTC does. I think it has always remained in the shadows. But
no longer. We have a financial crisis that still goes on.
Let me add one further thought, as you are thinking about
the budgets. I have no idea what the result will be of our
debates on energy resources, climate change. But let us say
that a cap and trade system was established in this country in
which there was really a very conspicuous and very expensive
market for carbon.
I ask sort of in advance what your judgment would be as to
whether the CFTC should be the agency that regulates huge sums
that are likely to be involved if a very serious cap and trade
situation involving all of our industries, utility, so forth,
was to come about?
Mr. Gensler. Senator Lugar, I believe under the current
statutory authorities that the CFTC does have that oversight,
and there is a very small cap and trade market now I am told,
regional market, that they have some oversight.
Senator Lugar. Yes.
Mr. Gensler. If that were to grow into a national market,
be listed on an exchange or in other ways, the CFTC, I have
been told in my early investigation, does have that authority.
But I would certainly look forward to working with Congress if
we need to put more of that into statute and address that
specifically.
Senator Lugar. Let me just ask as a personal inquiry, I
have become a member of the Chicago Climate Exchange, largely
as a demonstration that farmers who have hardwood trees and
have proper measurement and so forth are sequestering carbon in
their trees. And each year we have an update of how much more
is there.
So on the website of the Chicago Climate Exchange, every
day there is a quote for their price of a ton of carbon. It is
$1.95 today. It was up to $7 at one point during the year.
Similar situations in Europe, however, have had quotes of
anywhere from $20 to $50 per ton, depending on the Kyoto
Protocol and how seriously some countries looked at this.
I mention this because there is, as you say, a modest
attempt being made by people in Chicago, who also are working
with the Europeans in this. And it may come to pass that the
Congress debates this issue but puts it aside, as was the case
last year.
But if we do not put it aside, this is going to be a very,
very large set of problems and sums of money and implications
for something well beyond agriculture or speculators in
commodities. And that is why I wanted to try to establish who
is responsible. And your judgment, and I agree with it, is that
it is the CFTC.
But having the personnel, the regulations, the rest of it
for this is sort of a quantum leap and is the type of thing
which hopefully we will not look back in a hearing 10 years
later and say why did we have no vision, no preparation, and no
people.
Mr. Gensler. Right. And Senator, I think you raise a very
good point. The Commodity Futures Trading Commission has the
best experience and background and current authorities
regulating the futures markets.
But just as it does also work with the Department of
Agriculture that has the best authorities and expertise on
agriculture and the cash markets and so forth. So there is some
shared protection of the American public between the Department
of Agriculture and the CFTC in corn and wheat and other
products, where the CFTC is focused on the futures.
There may well be multiple agencies in a cap and trade
situation where the CFTC brings its expertise to protect the
American public in the futures markets and other agencies bring
their expertise to protect the public in other regards.
Senator Lugar. Thank you.
Chairman Harkin. Thank you, Senator Lugar.
Senator Stabenow.
Senator Stabenow. Thank you very much, Mr. Chairman.
First of all, welcome and I look forward to supporting your
nomination.
Mr. Gensler. Thank you, Senator.
Senator Stabenow. Is this microphone on? It is not working.
Well, I am going to move over here, just a second. We will see
if this one works.
OK, that is working, and I am not Senator Conrad.
Welcome again, and I will say for the record, with the
microphone on, I look forward to supporting your nomination on
the floor and to working with you.
I wanted to follow up with Senator Lugar, I think, what
Senator Lugar was speaking about, the engines of cap and trade,
which I think is such an important new area for us to focus on.
President Obama spoke about it last night. We know that there
is a lot of work being done, important work, being done to
craft the right kind of balance for moving forward to tackle
this issue, which I hope we will do.
And some believe this will create the largest derivative
market in the world. So there are a number of questions that I
have in terms of how we approach this. It is a real
opportunity, I think, to design a transparent, efficient,
carbon market that builds on the practices for market
regulation that we have.
So I am wondering what you believe the lessons are that we
have learned from other financial markets that would guide us,
guide Congress and Federal regulators as we design a new carbon
market?
Mr. Gensler. Senator, first let me thank you for the
support and confidence you have in me in this nomination, and
that means a great deal to me.
As I indicated, the carbon markets and the cap and trade
markets may grow. The CFTC does have expertise in terms of the
futures markets. And though I have not studied these issues in
any depth, let me just mention a couple of things.
I think that it is important, just as in other futures
markets, to make sure that we have a transparent marketplace.
So if there is a design of a contract, as there is design of
contracts in corn and wheat and oil and so forth, design of
contracts that there is some transparency and there is a
marketplace where it trades, there the public can see and
corporations can see that marketplace and have the benefit of
that transparency. And that there really are protections, just
as there are in other futures, from fraud and manipulation.
But there may be things that are specific to this market
that I, if confirmed, would look forward to working with you
and your staff and this committee to better understand and
better advise you as you go forward.
Senator Stabenow. Thank you.
This may be something, as well, that you have not focused
on specifically regarding carbon. But there is another issue
related to that which relates to bonafide hedgers and what is a
bonafide hedger in this contact. And I would be interested in
knowing if you have any thoughts on a definition or what the
CFTC and the Congress should do relative to this issue when we
think about the nascent carbon market.
Mr. Gensler. Senator, I think that all of the markets that
the CFTC has oversight for, futures markets and hopefully these
other over-the-counter derivatives, where there is something of
finite supply, it is susceptible, that underlying product is
susceptible to both manipulation, corners--what is called
corners and squeezes. I am old enough to remember when the Hunt
brothers cornered the silver market. I know the lack of hair,
but I remember that.
And I am not familiar enough with the carbon markets, but I
think that is probably a market that would fall into this
category which is susceptible to some finite supply.
And also, the position limits are critical to protect
against excess speculation. Hedgers need the benefit of
speculators on the other side. We have had, for 130-plus years,
contracts in the futures market and hedgers want somebody on
the other side to take a risk. But there is a burden if it gets
so excessive, and we saw that volatility in the last several
years.
So I think as it relates to this new market, the lessons of
guarding against manipulation, guarding against excessive
speculation would inform me, as Chairman if confirmed, and
quite possibly inform Congress as to thinking about a regime in
the carbon market, as well.
Senator Stabenow. Thank you. I look forward to working with
you on this issue. We have a number of different discussions we
need to have that relate to regulating carbon, how this is
going to be done in a transparent way, how there is
accountability, how we--again, as you indicated, make sure that
we are doing everything we can to deal with speculation in the
marketplace driving up costs and so on.
So I think there is a very important opportunity and role
going forward for the CFTC in this whole discussion, and what I
hope will end up being a strategy for us to be able to address
the issue of carbon and cap and trade.
Mr. Gensler. Senator, if confirmed, I look forward to
working with you on that.
Senator Stabenow. Thank you.
Chairman Harkin. Thank you very much, Senator Stabenow.
Mr. Gensler, I had this chart prepared here. No, I am not
Senator Conrad.
[Laughter.]
Chairman Harkin. He sits right there. That is an inside
joke referring to Senator Conrad's use of charts.
But this is the oil market from 1997, here is 2007, and
here is the price spike of last year coming back down here to
about $40, maybe a little bit less than $40 a barrel right now,
somewhere in that neighborhood. So the consumers see this and
they suspect something is wrong with this big spike. There
really wasn't less oil. In fact, if anything, we were beginning
to see the situation improve in Iraq, and Iraq has significant
oil reserves. So it really wasn't a lack of a supply.
So if these wild price swings are not a function of normal
market factors, how is that explained to the public? As
Chairman of the CFTC, how would you explain something like this
to the public that happened last year in oil? How would you
explain that?
Mr. Gensler. Mr. Chairman, I think that we had an asset
bubble in the oil markets, an asset bubble even in other
commodity markets. To the American public, I would say, as we
saw----
Chairman Harkin. Explain that asset bubble as it regards
this.
Mr. Gensler. Well, similar to in the housing market, but
driven by different factors, but just as the housing market,
housing prices went up beyond what one might have said was the
underlying cost to build the homes and so forth. In this
marketplace, I believe that we had a great many people come to
the conclusion that it is another asset class. The stock market
is someplace you can invest. Maybe the bond market is someplace
you can invest. Now the commodity markets is a third place one
might invest to diversify risk, and there are great theories of
diversification and theories I generally believe in.
But that risk diversification led some investors to try to
invest in commodities and I think over this period, just before
the run-up, but over the period from 2004 to 2007, that some
statistics that I saw, that increase of outside investors, and
I have said publicly and I will say again here I believe that
investors that were investing as an asset class, whether they
were index investors or hedge funds or other financial
investors around the globe, not just here, had the perception
that this price was just going to keep going up so that the--
they were wrong. They were terribly wrong. But as a factor in
that, the American public was hurt. I mean, it was terribly
hurt by this speculative bubble.
Chairman Harkin. So I could substitute speculators for the
word ``investors.'' You use the word ``investors,'' but they
were speculators. They were speculating on this market
continuing to go up all the time.
Mr. Gensler. That is true, like some people speculated on
home values or some people speculated on real estate or other
things.
Chairman Harkin. This is something that I have wrestled
with since I first came here in 1975 to the House Agriculture
Committee and that is the role of speculators. The term
speculator has a bad connotation. So what is the proper role
for a speculator in a market? I don't care whether it is oil,
it can be grains, it can be metals. What is the proper role? Is
it beneficial? And how do you explain to the consuming public,
most of whom, if you ask them should speculators be driven from
the market, would say yes--nine out of ten, I bet, would say
that--so how do you explain, what is the beneficial role of
speculators?
Mr. Gensler. I think at the history and the core of the
futures markets, going back to the 1870's, in fact, when a
farmer wanted to have a reliable price for corn or wheat that
they might want to sell at the end of the harvest and know how
much money they would have to plant their fields, on the other
side of that transaction, there needed to be somebody who was
willing to bear risk, almost like writing insurance.
So for 130 years, since futures started trading, we have
had a concept, and I believe it to be the right one, sir, where
commercial interests, farmers, ranchers, and then later oil
producers and natural gas companies and grain elevators and so
forth, all wanted to have a reliable price for their product so
that they can make business decisions.21Well, on the other
side, then there is somebody in essence writing--taking on that
risk. It is not an insurance company. In fact, it is somebody
we call a speculator, somebody who is taking a position on the
other side.
What is at the heart of the CFTC authorities dating back to
its founding is that that is to be allowed, but we also want to
protect against excessive speculation and the burdens of
excessive speculation, and there is a whole regime of position
limits to limit that, and there is also clearly an important
public interest to protect the American public against
manipulation in markets. And sometimes when you see spikes like
this, you say it broke down. What was happening may have broken
down.
Chairman Harkin. Could the CFTC have started to do
something in here to stop that speculative bubble in oil
prices?
Mr. Gensler. I believe that all of these products need a
consistent regime of position limits and those position limits
should apply around the globe. The CFTC, in working with
Congress, has addressed a number of these features. In the farm
bill last year, I believe, to the credit of this committee,
working with other members of the Senate and the House, you put
in place a way to close part of that. There is also things that
the CFTC has done subsequently, working with the regulators in
London to try to address some limits so there is more
transparency and that limits, where they are in place, apply to
all markets consistently around the globe.
Chairman Harkin. Well, at least with the oil market, you
could see it happening. But I would like to turn, if I could,
to over-the-counter derivatives, which really is an opaque
market and which you can't see happening. First of all, would
you agree or slightly agree or disagree with the statement that
derivatives are more like futures contracts than just about
anything else. Is a derivative a futures contract?
Mr. Gensler. Senator, a future is actually technically a
derivative. A derivative is just a broader term, and I believe
that all of these products have great similarity. So I think
that hopefully answers the question. And what they have
similarities is that they derive their value from some other
product. A future derives its value from the corn or wheat or--
--
Chairman Harkin. That is a future. That is right.
Mr. Gensler. That is a future, and an over-the-counter
derivative derives its value possibly also from corn or wheat
or oil or it might be from underlying interest rates. So they
are very similar products. They are all forms of financial
instruments that derive their value from some underlying
feature.
Chairman Harkin. OK. And a derivative's value basically
depends on something happening in the future. A derivative is
tied to something either happening or not happening in the
future. So I always think of derivatives trading as a futures
market. So, therefore, why should they be exempted? Why should
they be exempted from the CFTC?
Mr. Gensler. Mr. Chairman, I believe that the entire over-
the-counter derivatives marketplace, we need to bring those
standardized products onto centralized clearing, and we get a
great benefit from centralized clearing and we will lower the
risk in the system and add to transparency. We actually
attempted to do some of this 8 years ago and there was a
voluntary clearing mechanism that was in that bill. I believe
now it should be mandated for interest rate product, currency
product, commodity product, credit default swaps, and the
equity products, the whole regime.
I also think the standardized products, we get great
benefit from the transparency that can come from being on
exchanges. There are some exchanges for these derivative
products, but we can get a great deal more benefit from
transparency from bringing those standardized products onto
exchanges.
Chairman Harkin. Help me think through this. I have a
concern that you keep using the word ``standardized,'' and I
saw that in your response to questions asked of you by both
Senator Cantwell and Senator Levin. And you referred to it a
number of times here, about the standardized credit default
swaps for example, standardize.
But it seems to me that if someone wanted to trade in an
over-the-counter derivative market and not on a regulated
exchange, they could simply do little things to make the
contract customized, and you can't, in all your wisdom, define
every little thing that could make it a customized rather than
just a standardized swap or derivative. So how can you have
both a regulated exchange for standardized, and then an over-
the-counter for customized? How do you define what is custom?
Mr. Gensler. Mr. Chairman, I couldn't agree with you more.
I believe that is why we also need, working with Congress, to
come up with a regime for the customized product. There is
still commercial interest, whether they be a grain elevator or
it can be an airline that wants a certain grade of jet fuel
delivered on a certain day to a certain airport, and those
dates and that grade of jet fuel and that airport may be
different than a particular contract. That is customized.
But at the same time, if we bring reporting to that and
required reporting, required capital or margin requirements,
and we level the playing field between that and what might be
the standardized products, I believe that working together
still allows the legitimate commercial interest to try to hedge
in that little example a particular jet fuel at a particular
date at a particular airport.
Chairman Harkin. Maybe there is something here I don't
understand, because I have thought about this a lot and I have
read a lot about it. But it just seems to me that if you are
going to close the loophole, you have got to put them all on a
regulated change. If someone says they have got a custom deal,
well, put it on the exchange anyway. Then we know what you are
doing.
Many thousands of contracts would avoid daylight by one
little custom change. I have said before, if you and I want to
swap something, you want to swap your tie for my tie, no one
else cares. But if you own a whole portfolio of stocks and
bonds and you want to swap that for my little piece of land
someplace that may have tenants on it and things like that,
well, then you see a lot of other people are involved in that
custom swap.
And I am thinking, why not just put those on a regulated
exchange? And if you can't do that, well, then you are just--
you just outlaw those customized kind of swaps unless they are
willing to put them on a regulated exchange.
Mr. Gensler. Mr. Chairman, that is why actually I believe
that we, in addition to what we are talking about, also bring a
full regulatory regime to the dealers themselves, these large
financial actors that deal in these markets. My fear, Mr.
Chairman, of saying they are outlawed entirely is not only that
which might hurt, whether it is a grain elevator in Iowa or
whether it is an airline that wants a certain jet fuel on a
certain date in a certain city, that they will find some other
way. That is true economics. An airline wants to hedge that
risk some other way that is then outside of the regime.
So I think working with Congress, if confirmed, I would
look forward to making sure that 100 percent is reported, that
it is not opaque, that it is all brought in and aggregated into
central data warehouses, which I know a number of Members of
Congress have looked at and worked on, that there is no hole in
the bottom of the boat that it all flows out of, but that the
hundreds of products and the great majority of the products
that are standardized are on exchanges, and if an exchange
accepts it on the exchange, it has got to be on the exchange.
And if the clearinghouse accepts it in the clearinghouse, it
has to be in the clearinghouse.
But we still--like you said, if we swap ties--and I do like
your tie--but if we swap ties, Mr. Chairman, that it might well
be that that has to be reported and we have to have capital
charges for it but not have that on an exchange.
Chairman Harkin. I see Senator Klobuchar is here and I am
going to yield to her. I have more to go into on the topic in a
little more depth, but it just seems that once you have an
over-the-counter market, derivative market for customized
contracts, you can just about exempt anything. If I have a
futures market that says the expiration date is July 20, but
then I say, no, I need July 21, does that make it a custom
contract? Does that exempt it from exchange trading? That is
what I mean. It just seems to me I can make any little change
and all of a sudden I am exempt and can trade the contract
over-the-counter.
Now, you say, well, you report the trading anyway and so
forth, but I am still not certain that gets to the nub of the
benefit of putting the trade on that regulated change where
every day it is transparent. One can know exactly what is
happening and you don't have these customized things drifting
around out in the OTC market. I think you just open the door
for proliferation of inadequately regulated OTC trading.
Mr. Gensler. Mr. Chairman, you and I share exactly the same
goal, that we bring this whole marketplace into what I believe
is two regimes. One regime is the centralized clearing in the
marketplaces. The other regime is that the dealers themselves
have serious regulation on capital, business conduct, and
reporting, and that we rely on both to bring a marketplace that
is very important and large into our economy, but under
regulation.
Chairman Harkin. Thank you very much, Mr. Gensler.
Senator Klobuchar?
Senator Klobuchar. Thank you very much, Mr. Chairman. We
will have to leave the tie swap idea behind because I don't
have one.
Mr. Gensler. Thank you, Senator.
Senator Klobuchar. But I wanted to congratulate you on your
nomination. I appreciate, Mr. Chairman, that this nomination
hearing was held in such a timely manner, given what we are
facing here, how important it is, and that we need a cop on the
beat to monitor commodity trading and giving us good advice
about what to do with financial derivatives.
I just noticed that the President at this very moment is
holding a press conference on financial regulations and what he
thinks needs to be done here. I have been just stunned by
everything that has gone on here. I remember your predecessor,
Mr. Lukken, when he appeared before our committee, and as a
former prosecutor, I was giving him some ideas of the things
that I thought maybe we could give to him as tools to use to
improve things.
We talked about staff improvements, which I think is
important, or additional staff. But then we talked about this
idea of more tools and he actually said, no, he didn't want
that tool. No, he didn't want this tool. We talked about the
London loophole or would he like more ability to go after
certain things, and he said that he didn't want that ability.
I said, you know, as a prosecutor, you want--if you think a
statute will help you with a certain group but you are not sure
if you are going to use it, you still might want that statute.
I just wonder how you would respond to that, because that is
what most stunned me about that hearing.
Mr. Gensler. Senator, thank you for asking the question and
taking the time at this hearing in your busy schedule. I
absolutely believe the CFTC needs more tools, unambiguously. I
believe it has to be a tough cop on the beat and strong on
enforcement. We need more resources to do that. I mentioned to
some others that the enforcement wing itself has 150 lawyers,
was shrunk to 110. This is in a period of time that the futures
markets went up sixfold in volume, in the last 8 years.
But beyond that, I believe that we do, working with
Congress, have a broad agenda, if I am confirmed, to try to get
additional authorities to address some of the very real issues
in the agriculture and energy markets and the over-the-counter
markets to control some of the excesses that we have seen.
Senator Klobuchar. Well, one of the things we talked about
last year was closing the so-called London loophole, to stop
traders from routing transactions through offshore markets to
get around limits on speculation. I worked with Senator Dorgan
and a lot of others on this speculation issue. Do you think
that would be helpful?
Mr. Gensler. Senator, I do. I congratulate your efforts on
that. I think that the CFTC has done some things
administratively, but I think it would be very helpful, working
with Congress, if confirmed, to actually have that in statute.
And it is really--the core principle I would have is that
markets are so interlinked around the globe that if it affects
American consumers, that we should make sure, even though we
might have reciprocal arrangements with other regulators around
the globe, that fraud and manipulation, that position limits
and reporting have some consistent regime. And so I would look
forward to working together on that and I do believe it is
important to have these position limits apply to various
trading platforms around the globe.
Senator Klobuchar. You know, credit default swaps have been
blamed for helping to accelerate the over-leveraging on Wall
Street. Do you share this view and do you think that something
should be done about this?
Mr. Gensler. Senator, I believe a great deal needs to be
done with regard to the over-the-counter derivatives
marketplace, not just credit default swaps but, as the Chairman
and I were discussing as you came in, to bring the whole over-
the-counter derivatives marketplace into a regulatory regime
with centralized clearing and exchanges.
Senator Klobuchar. Right.
Mr. Gensler. But beyond that, I do think credit default
swaps raise an additional set of unique challenges. In AIG, we
saw a book of business that wasn't even regulated. The
transactions weren't and the financial institution wasn't. I am
recommending that those should be regulated, and the credit
default swaps' unique properties, because often they are very
much like a corporate bond and it is a corporate bond with a
lot of leverage in it. And I believe that regulators need there
to work together to find the appropriate controls in addition
to clearing and exchanges. I think there is appropriate further
regulation in that market that is needed.
Senator Klobuchar. Good. One last question, following up
with the last questions that the Chairman was asking with the
custom issue. Last September, the CFTC issued a report on the
over-the-counter markets and it contained some recommendations,
and one important recommendation was to create enforceable
position limits by developing limited risk management
exemptions for swap dealers and requiring dealers to, first of
all, report to the CFTC about large customer positions, and
second, certify that none of the non-commercial customers
exceeded specific position limits in related exchange trading
contracts.
Do you support this action? Do you think that this is a
recommendation, and should that rulemaking activity continue?
Mr. Gensler. Senator, I do, but even further, as I
understand it, and again, I look forward to learning more about
this, if confirmed, but these various position limits that are
at the heart of the framework to comply with the mission of
this agency have some exemption that have been issued going
back nearly 20 years. Many of them were issued by staff, ``no
action'' letters. I believe that every one of those exemptions
needs to be reviewed. As Chairman, I would be looking forward
to working with my fellow Commissioners, Mike Dunn and Bart
Chilton, Jill Sommers, Walt Lukken, and really take a look at
all of these.
And second, also look at the process of issuing ``no
action'' letters themselves. Some should stay at staff level.
But others really are consequential and that is why you have
Senate-confirmed people in the jobs to look at these things.
Senator Klobuchar. OK. Thank you very much. I appreciate
it.
Mr. Gensler. Thank you, Senator.
Chairman Harkin. Thank you, Senator Klobuchar.
Senator Chambliss.
Senator Chambliss. Thank you. If I could go back to the
Chairman's chart there for a minute, Mr. Gensler, and I want to
see if I can ask this question the right way. I don't want to
take your language and interpret it in some way other than
exactly what you meant. But when you talk about the spikes in
the market and you talk about speculators causing that huge
spike, is it not a fair statement to say that speculators who
sought to manipulate the market are the ones that may have
influenced that spike versus speculators per se causing that
spike?
Mr. Gensler. I think that what I believe is that there are
many contributing factors, that we have had in our economy and
around the globe many imbalances, low savings rates here, very
high savings rates, nearly 40 percent saving rate in China.
There are great global imbalances that have been flooding into
markets.
Within those global imbalances, I believe that commodities
started to be viewed as an asset class for investment. And so
one of the contributing factors--there were other contributing
factors, too, but one of the contributive factors, I think, is
as investors started to look at commodities as an asset class,
and unfortunately, over the globe, risk was underappreciated,
terribly underappreciated, and when I say that, I mean it was
underpriced.
There were too many investors, and, yes, speculators who
thought it was more likely that something would go up than
down, that the demand factors from China and India or the low
refining capacity would keep pushing these prices up. And that
collective misjudgment of market participants is what I think
you see there, but not necessarily--I don't have the facts or
figures to say that it was manipulation, sir.
Senator Chambliss. You made a statement which I think is
correct and which I have argued with my colleagues who would
like to see all speculators eliminated. Are you going to have a
market that functions properly without speculators?
Mr. Gensler. Senator, again, I think at the heart of the
futures market since the first contracts, I believe, were put
in place in the 1870's is that for a hedger to have somebody on
the other side who is willing to bear that risk, we call the
person on the other side a speculator. We need--the markets
need that so that the commercial interests, the farmer, the
rancher, the grain merchant, has somebody on the other side to
bear that risk.
Senator Chambliss. And you have been on both sides of this.
You have been on the investment side as well as on the
regulatory side. You have got extensive experience on both
sides. If an investor in the market, somebody who trades in the
market regularly, is overregulated, including adding position
limits, and they have the availability of going offshore, what
is that person as an investor who feels like he is
overregulated going to do with respect to the American market
that CFTC regulates versus trading offshore?
Mr. Gensler. Senator, I believe these markets are
completely interlinked at this stage. So I think that it is
critical that the U.S. regulators work with our global
counterparties in Europe and in Asia to assure ourselves that
there is consistent regulation. And where we are unable to get
that consistent regulation, to work still to protect the
American public the best we can as to the transactions with the
American public, or where there is American product, a product
like West Texas intermediate, or products that are right here.
But I agree with you, sir, that paramount is working with
the global regulators. I believe that we can find that
consensus. But if confirmed, I know there will be challenges to
hopefully make sure it is around the globe.
Senator Chambliss. Well, if you are an investor, whether
you sit in Washington or New York or Atlanta, and you want to
buy a contract of a product that is sold internationally or on
a market that is regulated by CFTC and you have got the choice
of where to go to buy that, as an investor, are you going to
look for a market that gives you the greatest amount of
flexibility and therefore the greatest opportunity and a safe
way to ensure a profit, or are you going to go to a market that
just overregulates you to death?
Mr. Gensler. Senator, I think that investors in these
markets are so interlinked that they will find a fungible place
to go, and that is why, if confirmed, my commitment to you is
to, first, to raise with you and the rest of the administration
what rules I think will best protect the American public, but
then second to work feverishly with international regulators to
try to see if they agree, and where we agree, hopefully adopt a
consistent regime. Where there are disagreements, at least come
back to this Congress and the administration, because those
differences will possibly be important. Hopefully, those
differences won't be, but they may be really important to the
American public.
Senator Chambliss. Well, I think all of us want to make
sure that the American public is totally protected and make
sure that anybody who invests in the market is going to have
the assurance that somebody is looking over their shoulder. But
the fact is that these markets are traded on by individuals who
are extremely sophisticated, and as you said, things have
changed so much over the last 9 years. Gosh, we didn't have
electronic trading back then, and now, very few trades probably
are not in some way not connected to the electronic side of it.
And I know from talking to traders who have told me, look,
you start putting position limits on me, pure and simple, hey,
I can trade on the London Exchange from Atlanta just like I can
trade on ICE or CME or New York Exchange, and that is what we
will do. I just want to make sure that there is a clear
understanding that we can go too far and we have got to be
careful about that.
Mr. Gensler. And I think that, Senator, you and this
committee and the rest of this Congress worked last year, as I
understand, in the farm bill to say contracts that look like
the contracts here--they are called look-alike contracts--that
had a particular relevance to these markets here, those were
the ones that position limits.
There may be other contracts overseas that really are on
other markets involving other products. But where it really was
sort of almost like twins, those look-alike contracts, it was
appropriate to have consistent regulation. But I certainly, if
confirmed, understand it, as you say. I think that my
experience both on Wall Street and in government provides a
certain background to understand, exactly as you said, that we
have to get this right.
Senator Chambliss. With respect to the standardization of
products versus the customized products out there, I think if I
heard you correct, you say that there ought to be a
clearinghouse for the standardized products. But you and I, I
think, agree that we have got to be very careful with the
customized products because I am not sure how you do that, how
you are going to have a clearinghouse for all customized
products.
I know one thing that has concerned some of my colleagues
is that the way we all know these markets work are that a
customized product may change hands two or three, four, five,
ten times in one single day, and how in the world we are going
to clear all of those in a manner that has a regulator looking
over their shoulder, I don't know. I am concerned about those
types of contracts certainly going overseas.
But am I wrong in my thinking somehow? Is there some way
that you think that we can come up with a regulatory process
that not only is a clearinghouse for the standardized product,
but the customized product, also?
Mr. Gensler. I do, Senator. I know these are very complex
markets and these are challenges, but I do, and I think that
there can be a product that changes hands multiple times a day
is probably, with all respect, more standardized than
customized. There has been a number of approaches, I know both
here in the Senate and the House and some draft bills on how to
define what might be customized.
But centralized clearing adds a great benefit because it
means that these individual financial institutions, these 15 or
20 large financial institutions, are no longer exposed to each
other. And one of the great calamities of this past crisis is
that one financial institution couldn't fail because if it
failed, it was like interconnected, so interwoven that it was
going to bring down the whole system.
One of the big benefits of centralized clearing is that all
of these trades, rather than with each other, is with a central
mechanism, and there would be a posting, like on the futures
exchanges, a posting of collateral on a regular basis. AIG,
when it got the call, had to post $40 billion of collateral.
Well, we know what happened then. The U.S. taxpayers stepped in
and loaned the money to AIG.
I believe we really have to work feverishly and urgently to
try to make sure that doesn't happen again. I think that
centralized clearing, I think the bias that I am suggesting is
toward getting those contracts in, and if a clearing mechanism,
and there are a number of competing clearing mechanisms, but if
a clearing mechanism would accept a contract, that is certainly
one test it should be there, and then Congress can also dictate
certain rules. I mean, there is a lot that we would need to
work together, if confirmed, on how to structure this. But I do
think it does help lower the risk tremendously.
Senator Chambliss. The ``no action'' letter, would you
support elimination of ``no action'' letters, or do you support
still utilizing the ``no action'' letter process in appropriate
situations?
Mr. Gensler. As I have come to understand it, all of the
major regulatory agencies, whether it is the FTC or the SEC,
CFTC, has a form of ``no action'' letters. There are some
things that are truly administrative and staff writes a letter
and says they are not taking an action.
What I believe we need to do at the CFTC, working with the
other Commissioners, is really look at that process and see how
is that done and which ones are consequential and which should
come up to the full Commission, a five-member Senate-confirmed
Commission. So I believe at the end, there would still be some
that are really truly either administrative or ministerial or
consistent with role, but there are consequential ones, I
believe looking now in hindsight, and hindsight is--I know we
are foresight here, but I believe that we need probably to
really look at which ones come up to the full Commission for
their consideration.
Senator Chambliss. Last, let me just say, I think Senator
Lugar had a really good point. Even in Math 101 at the
University of Georgia, they taught me that if you can buy
something for $1.96 in the United States and take it to Europe
and sell it for $20, that is a pretty good deal.
I can envision 10 years down the road, if we have a true
cap on trade system, we are going to see these things traded on
a global market. So I just say that is something that has got
to be in your line of thinking here as we go through the next
12 months, 24 months, whatever it may be, if something does
come out of Congress in that respect, because, gee whiz, you
talk about electronic trading being a milestone. This is going
to overwhelm us, it would look like to me, with this
international cap in trade system that we potentially have out
there.
Thank you, Mr. Chairman.
Chairman Harkin. Thank you very much, Senator Chambliss.
We have been joined by our distinguished colleague from
North Dakota, Senator Conrad.
Senator Conrad. Thank you so much, Mr. Chairman and Ranking
Member Chambliss. Thank you, Mr. Gensler, for being here.
I was here earlier and had to go to--you know how this
place is--other obligations. I very much apologize for not
being here for the rest of the hearing. I was so struck by
having Senator Mikulski, Senator Cardin, and one of my all time
favorites, Senator Sarbanes, here, and it reminded me of my
favorite story about Senator Sarbanes, who was a great baseball
player in his youth.
Mr. Gensler. He was. He was. Not a lot of people know that,
but it is true.
Senator Conrad. Yes, he was a terrific athlete. He was
selected for the Maryland All-Star Team as a shortstop, and he
went to the practices and it came time for the game and he was
listed as starting at second base. And he went to the coach and
he said, ``Why is it that I am at second base? I was chosen as
the shortstop.'' And the coach said, ``Kaline will be playing
shortstop.''
[Laughter.]
Senator Conrad. That was Al Kaline. And I thought, that is
a great story, isn't it?
Mr. Gensler. It is terrific.
Senator Conrad. Sarbanes had to stand aside for Al Kaline.
Well, you, in essence, are coming into the big leagues,
too, and this is a different kind of big leagues. Our country
and our world are in very serious shape. I just spoke to a
group from back home talking about how we got in the situation
we are in, and I believe it is a combination of a very loose
monetary policy, a very loose fiscal policy, a very loose trade
policy, all coupled with deregulation, that created the seed
bed for bubbles to form. And we didn't get just a housing
bubble. We got an energy bubble. We got a commodity bubble. And
when those bubbles burst, it did enormous damage. There is a
lot of wreckage here. And all of us have responsibilities.
While I fought against what I thought was a very dangerous
fiscal policy and a dangerous trade policy, I, along with
others of my colleagues, voted for the Modernization Act, which
you supported, and I look back, while there were many good
things in the Modernization Act, I think there was one part of
it that was very, very wrong, and I regret deeply my own going
along with it, although I had grave reservations about it, and
that is the question of credit default swaps and derivatives
and whether or not they are regulated. You and others told us,
don't worry, these are very sophisticated players and there
will be a self-regulation because they are better able to
monitor those markets than we are.
Well, the more I have looked into it, the more convinced I
have become that this is one of the great Ponzi schemes of all
time. We think about Madoff's Ponzi scheme. That is a $50
billion Ponzi scheme. I think derivatives, while probably the
vast majority of it is completely legitimate, the part that was
not was the assessment of risk, the assessment of risk.
Last year, I was with a man who was head of all derivatives
trading for one of the major global financial firms and I said
to him, have you ever looked at the formulas these PhDs in math
have come up with to determine risk in these contracts? He
said, ``Yes.'' I said, could you understand it? He said,
``No.'' I said, I will tell you--and this is the guy who was in
charge of all derivatives trading. I said, I have got a
master's in business. I asked my staff to bring me one of these
formulas. I couldn't make head nor tails out of it. And it
turns out they didn't have in these risk formulas any
assessment of housing prices going down.
Well, to make a long story short, all of us who
participated in supporting that bear responsibility. There are
many other elements, the fiscal policy, monetary policy, other
deregulation that was done. But you, too, have responsibility,
because, you know, at least for some small part of that, you
gave us bum advice.
What can you say that would make us comfortable, if we have
that view, and maybe you have got a different view and I
certainly respect that, especially in the presence of your
daughters, who are very patient--what would you say to us who
are now deeply concerned about the mistakes that were made?
What would you say to assure us that you would be part of the
solution?
Mr. Gensler. Senator Conrad, I appreciate the question.
Looking back now, it is clear to me that those of us involved
at the time should have done more to protect the American
public through strong, comprehensive, and aggressive
regulation. There are some things that we raised and looking
back now should have fought harder for, to regulate the actual
institutions, the derivative dealers, to keep oil and metals
consistently regulated with wheat and corn and other products.
We should have fought--we did recommend that, but in the final
bill were unable to achieve either of those. We should have
fought harder.
I think there were also things that were but dots on the
landscape. You raised credit default swaps at the time of that
legislation. Approximately 97 percent of the market were
interest rate derivatives and currency derivatives, and the
bulk of the remaining 3 percent was actually equity derivatives
and commodity derivatives, as small as they were back then. And
that market has burgeoned since then.
Senator Conrad. Exploded.
Mr. Gensler. And in very consequential ways, where an AIG
had a book of business so significant, and I believe that those
credit default swaps at AIG were often being misused, and
sometimes by regulated institutions, banks in Europe that were
getting protection and lowering their capital charges with
regard to that.
I think also, Senator, and you raised this in your
question, I think there was an assumption at the time about
whether the regulation of institutions, these large financial
institutions, would be enough. And I do think in retrospect
that assumption was thoroughly tested for a couple of reasons.
One, even where there was broad regulation, at the holding
company and of everything, there was no specific regulation of
the derivatives affiliate. I believe that even now, where the
Federal Reserve might have broad holding company regulation,
that if confirmed, I would look forward to working with
Congress and the other regulators to make sure that the dealers
themselves have to have capital, business conduct, and
reporting requirements. But capital is the shock absorber, so
to speak, to guard against excess leverage. I have come firmly
to believe that.
At the same time, I believe that we need to have a full
regulatory regime for the market so that the centralized
clearing, and we could get the benefits of centralized clearing
as we have in the futures market, and those benefits might
sound like back-office plumbing, but they are very real because
just as in the futures markets, you have to post margin on a
regular basis and have a sort of a daily reckoning of these
contracts and at the same time have to send in the information
and have all the positions and the recordkeeping and reporting.
Exchanges bring transparency to transactions. Where small
businesses, small commercial interests right now, I believe,
actually pay more for even the standardized products, more
because they don't have that transparency. Now, just one basis
point might be a little bit, but transparency to an overall
market, I think, brings further economic prosperity, as well.
So I do think, looking back now, it is clear to me we
should have done more. But over time, I believe that some of
these weaknesses have been sorely tested. The regulatory and
financial system completely failed the American public in this
regard. And I look forward, if confirmed, working with you, as
I did with Senator Sarbanes, to try to sort of sort through
some of that complexity, the dust that might be kicked up by
opponents, and they will be very strong and loud opponents,
some of them raising legitimate concerns, but trying to find
how we can best protect the American public and bring a
regulatory regime to a field that hasn't had one to this date.
Senator Conrad. Well, I appreciate that answer. You know, I
look back. I have been trying to write an analysis of what has
happened here, a broader look at all the factors that
contributed, and I do very much believe that it is a very
unusual combination of a loose monetary policy, after 9/11 we
had very low interest rates for a very extended period of time,
a very loose fiscal policy with massive Federal deficits.
At the time when the economy was strong, we still had a
very loose fiscal policy, very unusual to have loose monetary
policy and loose fiscal policy simultaneously, coupled with
very loose trade policy with record trade deficits. And then
the deregulation that occurred and, you know, I will stand up
and I will be held accountable. I made a mistake.
I mean, I will assert there were many good things in that
Financial Modernization Act, but I believe there was an
Achilles heel that some of us were worried about at the time
but we thought the good things would overcome that weakness.
Well, we were wrong and we were wrong big time and all of us
need to 'fess up about mistakes that have been made here. We
have got to try to get this back on track.
I thank the Chairman for your patience.
Mr. Gensler. Senator, I thank you for that. I agree with
your assessment, if I could, Mr. Chairman, that there was a
great many things that were imbalances, and you named those,
but also the regulation, that if confirmed, I would look
forward to working with you and this Congress that we really do
bring a full regulatory regime not only to the institutions,
which I think we need to do, but also, as the Chairman has laid
out in his bill, with the goal to bring it to the markets, as
well.
Senator Conrad. Thank you, Mr. Gensler. Thank you for your
very honest answers.
Mr. Gensler. Thank you.
Chairman Harkin. Thank you, Senator Conrad.
Well, Mr. Gensler, this has been a great hearing. I think
we have gotten great responses and an open and frank
discussion. I don't mean to belabor it any longer, although in
listening to just the last two questioners here, Senator
Chambliss and Senator Conrad, I was just jotting down here CMS,
CVOs, CMOs, CMBSs that is commercial mortgage-backed
securities--CDSs. Now we have gotten into things like CDO-
squared, CDO-cubed, and you just keep slicing these tranches of
derivatives out there all the time.
The financial sector has come up with all of these exotic
products. No one really understands them except maybe a few
people on Wall Street, and they may not fully. But credit
default swaps didn't exist before about 1998, not really.
Mr. Gensler. That is right, sir.
Chairman Harkin. And the world seemed to operate just fine
without them. The same with collateralized debt obligations or
collateralized mortgage obligations. All this creativity in new
contracts happened in the early 1980's, through the late
1980's, and then they really boomed in the 1990's, all these
different derivative contracts and financial products.
I asked the question in our October hearing, I said, what
market forces out there demanded these products? Who was
demanding this? The answer came, no one. It is just that a few
of the financial institutions had some of these whiz kids and
mathematical geniuses. Now they have big computers that could
slice and dice these obligations into all these little
tranches, securitize them as bonds, and then sell tranches, a
highly leveraged tranche, or one that is not so highly
leveraged, and on and on until finally you get this morass out
there of instruments that no one really understands.
I asked Secretary Paulson one time when we had one of our
meetings last fall, before the TARP. I said, why don't we
insist, if we are going to put this money out, we insist that
each one of those entities receiving this federal money give us
a valuation of each one of those instruments that they have and
insist on what is the value. His response, and we were all in
that room together, his response was, ``Well, they don't even
know what the value is.'' Billions of dollars, and they have no
idea what the value is.
Well, I don't know. I just think we have to--and this is
not really in your bailiwick, but I just think we in the
Congress have to really think about whether or not all these
financial products and instruments are worthy of legitimacy.
And they are all off exchanges. These aren't on exchanges. We
have no idea what is going on out there. So I don't know if
they are legitimate or not. I tend to think in some of these
cases they are probably not, especially when you get into
synthetic derivatives or you get into the naked credit default
swaps. It boggles the mind about what people are doing with
these instruments.
Now, it would be all right if these investment bankers were
using their own money to do that. I could care less. But they
are using my money, your money, my constituents' money that is
in 401(k)s, pension plans, all other kinds of devices where
they have taken money now and are investing it in these and so
they are playing with our money.
So I just raise the question, I guess, on markets. We all
believe in the market, but as you pointed out, I think for a
market to really function, you have to have three things.
Correct me if I am wrong. You have an MBA; I don't.
[Laughter.]
Mr. Gensler. But an MBA, sir, doesn't mean--with all
respect, it doesn't mean that you have----
Chairman Harkin. I am just kidding you. My daughter has
one. I keep asking her this. But it seems for a market to
function, you have to have many buyers, many sellers, and
transparency. If you mess up one of those, you don't really
have a market. You may call it a market. Many buyers, many
sellers, transparency. Once you have few buyers, many sellers,
or you have buyers and sellers and you don't have transparency,
you don't have a market.
And so when we talk about markets, we have to keep in mind
just what we are talking about. What kind of markets do we
want? Very few real markets exist any longer out there.
Mr. Gensler. Mr. Chairman, I would--I know that you mean
this, but I would add something else to what is a component of
markets. We need regulation. We need regulated markets and so
that is what I am here to say, and if confirmed, I would look
forward to working with you. Senator Conrad had asked me about
what I had done in the past, and, I mean, I even wrote a book
called The Great Mutual Fund Trap, and it wasn't by mistake
that on the cover of the book it has that old three monte game.
I mean, I just brought it here just because I remember it. But
there is a reason that the book has that here.
Chairman Harkin. I have got to read that.
Mr. Gensler. Well, we will give it--it is all right if you
don't read it. I am just saying there is a reason that is
there.
Chairman Harkin. But what I say about sellers, buyers, and
transparency, that is what is called the, quote, ``unfettered
free market.'' Now, you are right. Do we want an unfettered
free market? Do we want the free flow of capital? I hear that
all the time. I read that we want the free flow of capital.
Well, an economist who was at our hearing in October said, I am
not certain we want the free flow of capital. We want the
efficient flow of capital.
And he used an analogy which struck home with me. He said,
well, it is like traffic. If you want the free flow of traffic,
get rid of all your stop signs. Get rid of the stoplights. Get
rid of the speed limit signs. Get rid of all the warning signs.
You will have the free flow of traffic, but you will have a lot
of wrecks. What you want is the efficient flow of traffic.
The same is true in financial markets. You want the
efficient flow. Therefore, you need the stop signs and the
caution signs and the regulations so that capital is efficient,
not just free.
So anyway, I just wanted to make that point, to say that I
think we really have to take a look at whether all of these
types of instruments are really necessary and legitimate. If
they are, they ought to be regulated. That is all I am saying.
Now, this does get into your bailiwick. Every single one of
those instruments, I submit, is a future. Every single one of
them is some derivative and it is based on something happening
or not happening in the future and therefore would come under
the purview of the CFTC. I don't know if you have any comment
about that, but if we are going to continue these kinds of
contracts, should they not be regulated?
Mr. Gensler. Sir, I believe that we do need regulation and
many of the list, and it was a bit of an alphabet soup for the
public, but many of them are actually currently even regulated
around what is called asset securitizations, not by the CFTC,
but by the SEC as securities. Collateralized debt obligation is
actually an asset security.
And I believe that part of regulatory reform, as the
President has called for and Congress and the President are
going to work closely together, and if confirmed, I am eager to
lend a hand there, is that I believe that we really have to
look at all asset securitizations, whether they are called
collateralized debt obligations, asset-backed securities,
commercial mortgage-backed securities that you mentioned, or
even asset-backed securities, uncollateralized debt
obligations, which because there are two sets of letters there,
somebody caused that squared term you called it. That whole
world of asset securitization needs to be looked at.
At the same time, the American public, though, needs the
benefit of capital to start moving again, to purchase their
automobile, to have the student loans, to get their credit
cards rolled over, and to get their mortgages, and a lot of
that is done in this securitization market, particularly as
banks have so constrained their market.
So we need the rules, just like you said on the road. We
need that flow of capital to the American homeowner to get the
student loan, to get the car loan, to get their mortgage. But
at the same time, I believe, and if confirmed, I look forward
to working with you on the additional regulations that are
needed even in the world of asset securitizations that come
under another regulator than the CFTC.
Chairman Harkin. We need to discuss this further because I
had a student loan, and I bought a car with a loan long before
any of these derivatives ever existed. So what was wrong? I
don't know if these derivatives are necessary for people to get
car loans or student loans or mortgages or anything else.
Mr. Gensler. It worked well in America and it worked well
for you. As many things were just dots on the landscape eight
or 9 years ago, this market, too, has taken off, and so I
believe it is time to work together as regulators and with
Congress to see what additional rules are necessary there.
Again, somewhat out of the jurisdiction of the CFTC.
Chairman Harkin. That is true, and some of what I described
is not part of the CFTC's jurisdiction.
Senator Chambliss. Mr. Chairman?
Chairman Harkin. Yes?
Senator Chambliss. One reason that I was kind of pursuing a
line of questioning relative to what may happen with respect to
offshore trading is I think Mr. Gensler is exactly right, that
we didn't envision 10 years ago what was going to happen in the
marketplace. You talk about eliminating products. Shoot, there
are some smart guys out there right now that are thinking about
additional products.
Chairman Harkin. That is true.
Senator Chambliss. We can't even conceive what they are.
Chairman Harkin. That is true.
Senator Chambliss. But the one thing I am impressed with is
that when you say that we need to think this through and we
need to make sure that we regulate these in the right way, we
have got to look ahead to what type of products there may be
out there that get us into this same mess again 10 years, 20
years from now if we aren't careful. We are never going to be
able to anticipate exactly what those products are and nobody
ever thought about packing mortgages and selling them five or
six times a day.
If you talk about eliminating, I think you really cause
problems. But if you are talking about making sure that you
regulate in the right way and you give these guys the tools and
the resources, primarily, which they don't have now, then I
think we will do a better service to the consumer out there.
Chairman Harkin. Well, Mr. Gensler, thank you very much. I
thought this was a very enlightening session. I appreciate your
forthrightness.
We have several letters of support, and, I might add, one
letter in opposition to Mr. Gensler's nomination. I ask
unanimous consent that these letters be made a part of the
record.
[The following information can be found on page 70 in the
appendix.]
Chairman Harkin. I ask unanimous consent that if there are
materials that other Senators wish to submit for the record,
that those also be included.
I will leave the record open until noon tomorrow for any
additional written questions that any Senators want to submit
to Mr. Gensler, and then the record will be closed at noon
tomorrow.
Mr. Gensler. Mr. Chairman, Ranking Member Chambliss, if I
can thank you both for your hearing and the inquiry. I also
want to thank Senator Mikulski, Senator Cardin, and Senator
Sarbanes on the record for their support. If confirmed, I look
forward to working with you and your staffs on this very
significant agenda we have forward.
Chairman Harkin. Mr. Gensler, may I say that it is great
you have had two of your daughters here. They probably think it
is probably the most boring thing that has happened to them in
a long time and they deserve to have a nice dinner out tonight.
[Laughter.]
Mr. Gensler. I thank you. I think you are right about that.
Chairman Harkin. Thank you very much. The committee will
stand adjourned.
[Whereupon, at 4:56 p.m., the committee was adjourned.]