Treasury Secretary Hank Paulson’s “blueprint” for revamping the financial regulatory system is already coming under fire from powerful agency heads. As early as Friday, even before the details of the plan were widely-known, the plan was lambasted by John Reich, the director of the Office of Thrift Supervision, which oversees the savings and loan industry. Immediately after Paulson’s speech this morning, Commodity Futures Trading Commission big shot Bart Chilton released a colorful and blisteringly critical statement describing the plan as “moving boxes around in Washington DC.”
Paulson’s plan would combine the Securities and Exchange Commission, which regulates equities and debt markets, with the Commodity Futures Trading Commission, which that regulates the exchanges trading commodities and financial futures. The two commissions have very different regulatory approaches, with the SEC favoring direct regulation and a rules-based approach and the CFTC favoring a principles based approach that relies heavily on self-regulation by commodities and futures exchanges. SEC head Chris Cox has been described as being disposed to supporting the plan.
After the jump, we delve into the dirty, metaphor-strewn past of the CFTC commissioner.
The thing you need to know about Chilton is that the man loves his metaphors. Last year, he described he commodities regulation in terms of highway safety. Politicians love these road metaphors—think about Al Gore with his information super-highway or Bill Clinton’s “bridge to tomorrow”—but Chilton really went the extra mile. "To continue with my traffic cop metaphor, it's like those commercials for drunk drivers: don't even try it, because the road blocks are set up, the sobriety check points are in place, and we'll make you walk the line. And if you stumble, we'll make you pay the price," he said.
This morning’s statement was no departure from form. This time it was a medical metaphor that fired up Chilton's prose.
“I think most Americans would prefer that government do our jobs, and that means doing everything possible to cauterize the subprime mess before performing major surgery on a regulatory system, parts of which are still very healthy,” Chilton said. “We shouldn't be about trying to cure what isn't sick. There is enough on the table, right now, that needs healing.”
So why the different reaction from Cox and Chilton? Part of it may be an anticipation of where the bureaucratic authority will shake-out. Despite media accounts describing the authority of the SEC perhaps being diminished by the plan, Cox may understand that the SEC apparatus will eventually dominate the regulation of all these markets. Clearly, its regulators have more respect and are regarded as more experienced than the CFTC. So this expectation might not be unfounded.
But the divergent reactions might also be a function of the different backgrounds of the two men. Cox is a creature of Republican party politics, with a long history of electoral experience and political ambitions to rise even further. He has been mentioned as a possible nominee to the Supreme Court, and may have his eye on a cabinet level position in a future Republican administration. He may even want to run for president himself. He may be ready to get on board with the blueprint because he wants to appear more reform-minded rather than a defender of bureaucratic turf.
Chilton, as far as we know, has never even run for dog-catcher. He’s been a long-term apparatchik, a member of the permanent regulatory class that dominates much of the administrative state from behind the scenes. He spent a the eighties and the early nineties as a legislative director to various congressmen, mostly those with farm-lobby connections. During the Clinton administration he served as deputy chief of staff to U.S. Secretary of Agriculture Dan Glickman. From there he went to Tom Daschle’s staff. Last year, he was sworn in as a CTFC commissioner. He has all the markings of a bureaucratic infighter tied to a lobby—the agricultural lobby—that might be worried it would lose influence under a new regulatory structure.
Statement of Commissioner Bart Chilton on Treasury Blueprint [CFTC.gov]
Posted by guest , Mar 31, 2008 4:00PM
Another way to look at it: Cox is an ambitious career politician eager to create the illusion of 'change' in order to win brownie points (think Spitzer or Dinallo); Chilton is a technocrat who'd much rather focus on doing his job rather than taking part in Paulson's publicity stunt.
Posted by guest , Mar 31, 2008 4:08PM
As someone who worked at the SEC and who has been subjected to a periodic audit by the National Futures Association, I'd say the NFA blows the doors off the SEC and the NASD in terms of their efficiency and effectiveness. The NFA should be the template on which this new super-regulator is based.
Posted by ab , Mar 31, 2008 4:20PM
A bit harsh on Chilton, I'd say. Sure, he wants to protect the stature and influence of his agency. But if you look at the two regulators, the CFTC does seem less heavy-handed. As much as everyone would like a single regulator, keeping the CFTC out of the limelight (and thus out of the sight of the pols in Washington) has allowed it to approach regulation with more flexibility and common sense. This is one reason US futures exchanges have grown in influence while the securities exchanges have lagged their foreign competition. One giant regulator is sure to be an easy whipping-boy and political tool when something goes wrong and populism boils up again. Innovation could end up getting smothered under the weight of overzealous risk-averse regulators.
Posted by guest , Mar 31, 2008 5:12PM
Interesting comments about the CFTC. I am somewhat surprised that the Bush Administration couldn't get all their ducks in a row prior to Paulson's press conference. If the federal agencies are going to fight among themselves, and have different constituencies to answer to, how in the world does the Administration propose to get this off the ground?
Or is it only window-dressing?
Posted by guest , Mar 31, 2008 5:29PM
I once worked for one of the self-regulatory organizations under the CFTC.
The derivatives exchange like to keep the feds out of their business. They have enough political power that they can do so.
The regulation of these exchanges probably isn't as strict as it is at the SEC, but that's OK. All the the constituents do a pretty good job, all things considered, of policing themselves.
There are enough cutthroat people on both sides are pretty much every issue/trade/agreement that stuff balances itself out.
Sure there are people who cheat the system, but I'd guess that the markets under the CFTC as are fair as they are anywhere.
Personally, I don't see much benefit to merging the SEC/CFTC. It's an idea that's been around for a while. Plus, the current problems in credit markets have nothing to do with anything under the purview CFTC.
Now, this is beyond the immediate scope of Paulson's problems, but I think a lot of problems could be resolved by trying to get as many tradable things off the OTC market and onto exchanges.
I mean, given the size of the ABS market, the way these trade is almost comical. There's a better way to conduct business for dealers to send out emails to a few hundred people every day. There's no transparency at all.
If some 21 year old kid can set up facebook and connect millions of people to one another, why can't someone do the same thing for ABS?
Posted by ab , Mar 31, 2008 5:42PM
@5:29
The dealers probably COULD do that - they don't want to. With the transparency of exchanges, OTC products become commoditized, prices are out there for all to see, and the dealers lose some fat spreads.
Posted by guest , Mar 31, 2008 6:17PM
Yes look at what has happened to corporate bonds since Trace. I think CDS would be a natural fit on an exchange, and a central clearinghouse and good technology would clear up counterparty risk, but the banks have such a lucrative business right now they are loathe to cede it. Wasn't someone launching CDS futures, to the sound of one hand clapping from the broker dealers.
Posted by guest , Mar 31, 2008 6:31PM
ab,
Indeed, I agree, I should have said "why won't?" someone do such a thing. Heck, if I was a dealer right now, I'd be happy with business as usual.
At some point though, I'd hope that there are strong enough incentives for someone some come along and shake things up. It's ridiculous that the betting market for regular season NBA games is more transparent than the market for a senior RMBS bond.
It almost boggles the mind that in 2008, the "OTC dealer" is still a viable business. Even a rudimentary exchange would solve so many current problems, in my opinion.
Posted by guest , Mar 31, 2008 6:40PM
If I had followed up and acted upon one of the many excellent DB posts I have read over the last few weeks I would be a lot wealthier after the market closed today. Not "Maltese Falcon" yacht owning wealthy, but, you know, a dinghy and a bottle of wine, a ukelele and a lot of laughs on the pond with someone who is "CNBC sweetie-type hot" and likes a weekend at the Ritz-Carleton because of the heated bath robes wealthy.
Posted by guest , Mar 31, 2008 8:51PM
@ 6:40, ok you big tease... Whats Up? Or now Down? as the case maybe...
Posted by guest , Apr 01, 2008 6:52AM
The CFTC has a much better reputation in Europe than the SEC in so far as being pragmatic and open to working on common issues. As a more principle type regulator it is more in line with the FSA and other European regulators and it would be a shame to lose the progress that has been made in working with other regulators so far by a merger. The whole Paulson effort appears to be a giant smoke screen to cover the fact that nothing is being offered to address one of the major reasons for the current crisis, the lack of transparency about bank financial statements. Higher regulatory capital, strict limits if not an outright ban on off balance sheet vehicles and consistent treatment for banks and investment banks while painful would give people a measure of confidence in the financial services markets. This Paulson plan which many parts had been in the works way before the crisis has just been tossed out to keep people busy until Bush's term ends when it will become somebody else's problem and business will go on as usual.