EXCLUSIVE DECEMBER 13, 2013
The Obama Administration is close to nominating Sharon Bowen, a Wall Street securities lawyer, to become one of five commissioners on the Commodity Futures Trading Commission (CFTC), according to multiple sources who have learned of the nomination. Bowen would replace outgoing commissioner Bart Chilton, an outspoken voice for tougher regulation; he was instrumental in beating back bank lobbyists and writing unexpectedly robust rules for derivatives and restricting proprietary trading. But advocates for tighter rules on Wall Street, who are working on the nomination and requested anonymity, expressed concern to The New Republic that Bowen, a partner in the New York office of Latham & Watkins, which has represented several big financial institutions, has little background in derivatives, commodities or agricultural markets—the core subjects of CFTC regulation—and no track record for reform. Her nomination, combined with the replacement of Chairman Gary Gensler by another securities lawyer without significant derivatives expertise, Timothy Massad, would put two “blank slates,” as one source put it, in charge of a commission that has acquired massive new responsibilities under the Dodd-Frank financial reform law for policing derivatives trading.
Bowen had previously been rumored as the choice to replace Chilton, but Wall Street reform groups and Democratic officials in the Senate protested, getting the White House to hold off for at least a few days. The groups said they had not been consulted about the Bowen choice, though they submitted a list of potential nominees who they claim would carry on the tradition of Chilton and Gensler in trying to crack down on the risky, opaque financial instruments that accelerated and magnified the financial crisis. But the White House could announce the choice as early as next week if it ignores the objections.
Nine Senate Democrats, including Elizabeth Warren and Volcker rule co-authors Jeff Merkley and Carl Levin, sent a letter to President Obama two weeks ago, urging him to find nominees to replace Chilton and Gensler with “the expertise, independence and track record necessary to… provide long overdue oversight to the swap and derivative markets that pose a systemic risk to our economy.” Their ideal candidate would have “demonstrated experience in futures, options and swaps markets,” according to the letter. Other signers included Dianne Feinstein, Barbara Boxer, Bill Nelson, Ron Wyden, Maria Cantwell and Ed Markey.
Warren and others were already uncomfortable with the choice of Massad, a Treasury Department official who before that spent decades as a securities lawyer and partner with Cravath, Swaine & Moore, a Wall Street law firm. At Treasury, Massad managed the Troubled Asset Relief Program, including the infamous housing initiatives that failed to meet their goals of rescuing millions of homeowners. “Massad is a complete unknown on derivatives and commodities,” said a Senate Democratic aide working on Wall Street issues, who declined to go on the record.
Now, the White House wants to follow up the Massad selection with Bowen. Her law firm, Latham & Watkins, has represented global financial institutions like Deutsche Bank, Goldman Sachs and Merrill Lynch in past cases, and advises a wide range of corporations in litigation as well as securities transactions. Bowen, who as an African-American woman would be the only face of diversity on a panel currently made up of all white men, also serves as the Acting Chair of the Board of Directors for the Securities Investor Protection Corporation (SIPIC), which seeks to restore funds for investors when collapsing financial firms hold their assets. SIPIC was active in the effort to rescue funds for investors in MFGlobal, the failed derivatives broker.
With the SIPIC experience, Bowen’s supporters can make a bank-shot case for her experience in derivatives. But her record on those issues is noticeably thin. “It’s like judicial nominations now,” said Jeff Connaughton, former Senate aide and author ofThe Payoff: Why Wall Street Always Wins. “She has a great resume but no track record to stir up specific complaints.”
There is recent precedent for nominees to the CFTC without major qualifications, and it didn’t work out well for reformers. Mark Wetjen, the only holdover Democrat on the commission, was a staffer for Senate Majority Leader Harry Reid similarly lacking in significant financial expertise when he was nominated to serve as commissioner in 2011. Since that time, Wetjen has proven an asset to Wall Street on the commission, time and again working to weaken or delay rules in ways favorable to the banks. For example, he forced changes to rules to make all bids in derivatives trades public before the transaction, as well as rules governing CFTC authority on overseas trades. Given the complexity of the issues involved, reform groups worry that a CFTC with Democrats Massad, Bowen, and Wetjen—two Wall Street securities lawyers and an ex-Hill staffer with a pro-industry record—will allow lobbyists to run roughshod over the commission, without an informed in-house advocate to push back. “When a derivatives dealer comes in with a complicated argument, there will be nobody to call B.S.,” said one source.
This comes at a time when the CFTC is under enormous pressure, empowered with multiple new authorities under the Dodd-Frank financial reform law. The commission wrote over 60 rules on derivatives trading as part of Dodd-Frank, and was one of the five agencies that this week passed the Volcker rule, designed to prevent commercial banks from making risky trades for their own profit. Now, they must enforce all these rules, requiring them to sift through a mountain of swap trading data to analyze trends and search for non-compliance and systemic risk.
As I reported last month, the CFTC is woefully underfunded to complete these tasks, and the addition of Volcker rule responsibilities makes this worse. The agency does not have enough personnel to conduct exams and has already delayed investigations and enforcement activities. Republican Commissioner Scott O’Malia has consistently claimed that the data stream has overwhelmed the agency’s computer systems, and that the information being gathered isn’t usable. In a perfect world, with reform-minded commissioners riding herd, the commission may not be up to the task, to say nothing of the administration’s proposed team. And regulatory enforcement is the entire ballgame for whether Dodd-Frank will have any effect at all in making the financial system safer.
Financial firms may seek to capitalize on the departure of Gensler and Chilton, two stalwarts for reforming derivatives markets, and try to re-open the rules. Already, trade groups are suing the CFTC over their cross-border guidelines, which allow the agency to regulate many derivatives trades outside the United States. And the industry is likely to seek relief from a host of other rules, especially if they view the new regime at CFTC as a collection of easy marks. “Given the critical importance of the Commission’s mission and the massive industry desire to roll-back reform,” said the Senate aide, “the remaining opening must be filled with someone who has real expertise in these markets and who has demonstrated commitment to continuing the work that Gensler and Chilton spilled blood, sweat, and tears to get done. None of the names rumored so far fit that bill.”
The Administration vetted Bowen before the Senate triggered the nuclear option, ending the filibuster for executive appointments and most judicial nominees. And while the Bowen pick may have been somewhat justified if the White House had to pick off a handful of Republican votes to confirm the nominee, the majority-vote Senate changes the game. Frankly, the Administration has on occasion used the need for Republican support to choose nominees at odds with the mainstream views of the party. This no longer holds, and it strengthens the case reformers have made against Bowen.
President Obama’s recent speech on inequality left out the role of regulation in protecting consumers and promoting a strong middle class. So much of regulation rests in the hands of those tasked to carry out the mission. Choosing untested leaders without relevant experience is one sure way to debilitate regulation from the start.
David Dayen is a contributing writer at Salon.