Tuesday, January 31, 2023

Wall Street’s new sheriff is on a mission

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Financial markets may soon have a new regulatory sheriff. President-elect Joe Biden, who will be inaugurated on Wednesday, is should choose former head of the United States Commodity Futures Trading Commission, Gary Gensler, to head the Securities and Exchange Commission. Since America’s financial markets are the largest and deepest in the world, the chairman of the SEC is not only the most important market regulator for America, but also, arguably, the entire world. The good news is that Mr. Gensler is exactly the right fit for the job.

As a former Goldman Sachs associate who also served in the Treasury Department under the Clinton administration, he is a powerful choice in part because he is a “born again” regulator.

After 18 years at the US bank, including in the risk arbitrage unit, Gensler began his regulatory career working with his former boss Robert Rubin, who had been appointed US Treasury Secretary. He then became Deputy Secretary to Mr. Rubin’s successor, Larry Summers, who passed the Commodity Futures Modernization Act. This is the law that exempted credit default swaps, which blew up the global economy during the 2008 financial crisis, from regulation.

But later, as CFTC chairman under President Obama, Mr. Gensler spent much of his time cleaning up the mess created by such a lack of oversight. It has adopted dozens of new rules to increase transparency and reduce risk in swaps and futures markets – moving faster and further on financial regulation than any of its peers.

Indeed, Mr. Gensler almost seemed to see it as his own mission of penance. As he told me in an interview in 2012, “Knowing what we know now, those of us who served in the 90s should have done more [to protect] the derivatives market. “

Democrats generally denounce the revolving door between Goldman Sachs and Washington. But Mr Gensler is both beloved of financial reform types and feared on the streets in large part because of his former insider status.

“Gary can’t be intimidated and he’s generally smarter than you,” says Dennis Kelleher, president and CEO of Better Markets, a nonprofit financial reform organization. “He would have called the baloney on arguments that did not stand up to scrutiny,” Kelleher adds – recalling Mr Gensler’s tenure at the CFTC, when financial executives lobbied for or against various rules.

Since his resignation from the CFTC, Mr. Gensler, a specialist in mathematics, has been to MIT, studies and teaches the next big things in finance: blockchain and cryptocurrency. This experience will make him even more useful as a regulator at a time when the biggest tech platform companies – from Google and Facebook to Amazon and Apple – are enter the financial sector.

Mr Gensler has so far praised the convenience and low cost of retail financial services applications while cautioning against using decentralized technologies for financial speculation. In one MIT paper from November 2020, he and his co-author Lily Bailey discussed the ‘significant opportunities for efficiency, financial inclusion and risk mitigation of AI and big data in the financial sector, but also the possibility of’ gaps regulations’ which could lead to ‘the fragility of the financial system and risks at the scale of the economy’. Translation? In an SEC led by Gensler, fintech will come under closer scrutiny.

But it will also have to remedy the shortcomings of the past. In recent years, the SEC has been criticized for not being tough enough on American companies and not adequately protecting investors. Indeed, scams and frauds are on the rise during the Trump administration, according to the SEC’s Office of Investor Education and Advocacy.

As head of the SEC, Gensler would therefore have to balance two jobs. Above all, it would be about restoring confidence in the agency’s ability to accomplish its fundamental mission of protection, financial stability and sanctioning violations. In addition, however, as a longtime Democratic politician, he would like to help facilitate the priorities of the Biden administration, such as tackling income inequality, racial injustice and climate change.

In the first case, progressives will look to the next SEC chairman to recognize that it is not the banks that break the laws, but individual bankers. By appointing a stern director of the enforcement division – perhaps a former prosecutor or consumer advocate – the president could send a message: there will be no more freebies for individual leaders while organizations waive their regulatory fines as a cost of doing business. . The president could also revisit Trump-era deregulation and toughen rules for protecting whistleblowers, paying clawbacks for illegal gains and limits on executive pay for high-risk activities.

As part of Biden’s larger agenda, the SEC could in the meantime play an important role in increasing transparency and disclosure of hidden fees, predatory lending and invisible risks related to factors such as the weather. . Imagine, for example, if companies were to disclose their risk of potential litigation regarding loans to the fossil fuel industry or development of waterfront properties. This, combined with the opening of the algorithmic finance black box, could go a long way in mitigating risk at a delicate time for the global economy.

With a new administration and a new “born again” SEC director, the markets may soon become a regulatory religion as well.

rana.foroohar@ft.com

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