Goldman Deal-Maker Now Advocates Regulation

For 18 years, Gary G. Gensler worked on Wall Street, striking merger deals at the venerable Goldman Sachs. Then in the late 1990s, he moved to the Treasury Department, joining a Washington establishment that celebrated the power of markets and fought off regulation at almost every turn.

Getty Images Gary Gensler

Today, he is emerging as one of the nation’s archreformers, pushing to impose some of the most stringent new financial regulations in history. And as the head of the Commodity Futures Trading Commission, the leading contender to oversee the complex derivatives contracts that played a central role in the financial crisis and, in turn, the Great Recession, he is in a position to influence the outcome.

It may seem an unlikely conversion, but it is one that has won the approval of Brooksley E. Born, of all people, a former outspoken head of the commission. She sounded alarms more than a decade ago about the dangers hiding in the poorly understood derivatives market and was silenced by the same Washington power brokers that counted Mr. Gensler as a member.

Mr. Gensler opposed Ms. Born, according to people who worked at the commission in the 1990s, and in 2000 played a significant role in shepherding through Congress deregulation measures that led to explosive growth of the over-the-counter derivatives market.

That was then. These days, Ms. Born is convinced of Mr. Gensler’s reformist zeal, as he takes on Wall Street in what is becoming one of the fiercest battles over regulation in the postcrisis era.

“I think he is doing very well,” she said in an interview. “He certainly seems to be committed to robust oversight of derivatives and limiting excessive speculation and leverage.”

The proposals championed by Mr. Gensler, if adopted by Congress, would substantially alter what is now a largely unregulated market in over-the-counter derivatives, financial instruments used by companies and investors to protect themselves and bet on moves in variables, like interest rates or currencies, and to speculate.

The proposals include forcing the big banks that sell derivatives to conduct their trades in the open on public exchanges and clear them through central clearinghouses, so that any investor can see the prices that dealers charge their customers. Today, those transactions are bilateral and private.

The banks and their customers might have to post collateral or guarantees to prevent the kinds of panics seen during the financial crisis, in which some investors worried that trading partners might have trouble keeping their side of the contract.

In this way, the clearinghouses would work as circuit breakers in the great web of derivatives trading encircling the globe. Shifting the products, and the risk of default, off the books of the banks and onto these middlemen would ensure that no single bank was too interconnected to fail, the rationale goes.

The banks, for their part, sense a threat to the billions of dollars in profits they earn each year from trading in these complex derivatives.

The International Swaps and Derivatives Association, which represents the big Wall Street banks, says that if large dealers are forced to show their prices and trading positions in public, they may be reluctant to participate in the market — and the resulting drying up of liquidity would force up costs.

Conrad P. Voldstad, the association’s chief executive, said that derivatives were not the cause of the crisis. The problem was elsewhere, like subprime mortgages, he says, and those areas should be the focus of any new regulation.

Public statements from the organization’s member banks, however, have been less critical of Mr. Gensler’s proposals. Lucas van Praag, a spokesman for Goldman, said on Wednesday that the company supported letting regulators see derivatives trades and prices in real time, with a delay built in for public disclosure. Goldman also does not oppose a clearinghouse for trades, he said.

“We’re in favor of central clearing for derivatives,” he said. “We also think that all derivatives that can be traded on an exchange should be, but we don’t think it is a good idea to insist that derivatives can only be traded if they’re on an exchange.”

Some big nonfinancial companies that use the derivatives for hedging are fighting the reforms for their own reasons.

Organizations including the United States Chambers of Commerce have formed the Coalition of Derivatives End-Users, representing about 170 companies including Coca-Cola, Caterpillar and General Electric. The group argues that the changes could make derivatives too expensive for them to use — or tie up capital they should be putting to work in their businesses.