Whose country is it? Wall Street occupies the regulatory agencies

Steve Suppan, Guest Blogger

The occupation of Wall Street by protestors against financial “innovations,” such as mortgage derivatives, which have devastated the real economy and its people, is beginning its fourth week; the Wall Street occupation of U.S. regulatory agencies, which are supposed to ensure fair and transparent markets, is into its ninth decade.  A vote tomorrow by the Commodity Futures Trading Commission (CFTC) on a weakened rule to reduce bank and hedge fund control of agriculture and energy markets will likely confirm the continued occupation by Wall Street.

Market deregulation, lubricated by a $5 billion lobbying budget from 1998 to 2008, according to Wall Street Watch, is a major cause of the economic crisis from which we are trying to recover. As CFTC Chairman Gary Gensler noted in an October 3 speech, the unregulated market now is seven times the size of the regulated market.

U.S. taxpayers have paid dearly for this unregulated market. A General Accountability Office report in July revealed that the Federal Reserve Bank system provided $1.2 trillion in emergency loans to the Wall Street elite by the end of 2008 to keep them in business. This relief was in addition to the $770 billion bailout authorized by the Troubled Asset Relief Program. How has Wall Street repaid the full faith and credit of the United States?

Since the 2008 crash, Wall Street, aided by its Congressional allies, has fought the Dodd-Frank financial reform legislation and now is fighting the rules proposed to implement the law. On October 11, Reuters reported that the CFTC now has the three votes of the five-person commission needed to pass a rule limiting ownership concentration in agriculture, energy and metals contracts regulated by the CFTC. The CFTC will vote on the final rule on October 18. It is very likely that CFTC Chairman Gary Gensler had to further weaken the rule to get a third vote. On September 1, the Commodity Markets Oversight Coalition (of which IATP is a member) wrote the CFTC to warn it that the draft rule would increase commodity price volatility, particularly for agricultural commodities.

There has been abundant documentation and dozens of academic studies about how highly concentrated ownership of commodity contracts, legalized during the Bush administration, has contributed to increased energy and food costs. IATP anthologized excerpts from some of these studies in Excessive Speculation in Agricultural Commodities: Selected Writings 2008 – 2011.

The CFTC vote scheduled for October 18 concerns one of the main tools against excessive speculation in commodity markets. A position-limit rule puts a ceiling on the percentage of contracts that any entity and its subsidiaries can control over a given trading period for a referenced commodity contract, e.g., Chicago Board of Trade corn. CFTC surveillance of trade reporting data can determine whether or not a trader has exceeded a position limit within a specific exchange and an aggregate position limit across all trading venues. With a high position limit or non-enforcement of position limits, a few big players can drive commodity derivatives prices.

The Dodd-Frank legislation allows an exemption on position limits for commercial hedgers, i.e., commodity users, such as grain or energy companies, and only for the commodities whose price risks they hedge. A leaked version of the draft CFTC rule reportedly would expand the exemption to allow major financial players to qualify for this exemption upon making a “good faith” claim that they were trading on the other side of a commercial hedge. Expansion of the very limited Dodd-Frank exemption would undermine both the legislation and commercial hedgers.

How has Wall Street apparently managed to dilute the position limit rule to the point where it will facilitate, rather than prevent, excessive speculation? Despite the support of both Chairman Gensler and Commissioner Bart Chilton for tough position limits that would serve the risk-management needs of commercial hedgers, the rulemaking process favors the big Wall Street firms with the resources to schedule more meetings and submit more regulatory comments, no matter how dubious their data and arguments.

Chairman Gensler said in his October 3 speech that commission staff have had a thousand meetings on Dodd-Frank rulemaking, conducted under an exemplary process for transparency in rulemaking. The CFTC’s register of these meetings shows the participants to be, overwhelmingly, lobbyists for Wall Street and their largest corporate clients. While the CFTC is legally obliged to take into account the cost of regulations to industry, they are not required to calculate the cost to the public of continued weak regulation. Wall Street’s occupation of the regulatory agencies is apparently paying off.

Steve Suppan is a senior policy analyst at the Institute for Agriculture and Trade Policy (IATP). (See previous guest posts here and here.)