Creditflux Newsletter

Last month Wolseley had the pleasure of catching up with his old sparring partner Gary Gensler, chairman of the Commodity Futures Trading Commission and, as such, one of the most powerful regulators of our market and many others.

It is not unusual to meet Garrulous Gary. He makes it his business to get out and about, meeting and greeting as many market practitioners as he can. And he is very charming, remembering names and asking after family, health and business, and employing a great line in self deprecation: deferring to his staff for answers to difficult questions and offering, “We are only a small regulator, we aren’t even a full member of IOSCO [the international securities regulators body],” in a lovely down home, “Aw shucks!” kind of way. Let Wolseley confess: I like Gary Gensler.

And Gary likes us, too. He tells us that he wants to promote liquidity and transparency because that is good for markets. More liquid and transparent markets will be fairer to all. They’ll have lower bid-offer spreads, and whilst that might mean lower profits for a few big banks that can afford to have lower profits, the good news is lower costs for “American families and businesses”.

Gary even has folksy numbers to support his arguments. The credit index market is gazillions big, so one basis point tighter bid-offer spreads is a saving of billions of dollars, which is thousands of dollars for every man woman and child in America (or wherever you come from). Gary is going to work night and day to get credit indices centrally cleared, and he shared his hope with us that almost all will be in short order.

Isn’t it great to know that a nice man like Gary is looking after us all?

But what is disconcerting about Garrulous Gary is that he doesn’t seem to have thought his ideas through. An academic economist who was with us commented that lower bid offer spreads would increase volumes and that this, combined with mandatory central clearing, would create an environment ideal for high frequency traders. Was this the chairman’s plan? Garrulous Gary became guarded.

And when he was asked about the response of the big banks, on whom the market has until now relied for the provision of liquidity, the chairman couldn’t resist impugning his questioner’s motives by asking if it was one of the big banks that paid the questioner’s salary.

When a senior official from a clearing house catalogued the challenges of organising clearing for products that aren’t liquid, Gary appeared oblivious, using LCH’s success in clearing interest rate swaps as his benchmark.

And when the same individual pointed out that clearing houses have gone bust, the chairman’s response was limited to assuring us that he did know this.

None of this changes the fact that Wolseley likes Gary Gensler. He is conspicuously a good man, using his considerable talents to try to do the right thing as he sees it. But for the chairman seemingly not to have thought through these pretty basic issues is alarming.

However, maybe Gary doesn’t reckon he needs to think things through. He is one of the most forceful, thoughtful, well connected regulators in a world with far too few of his ilk. He has acute political antennae, he knows who has power and who doesn’t, to whom he needs to listen, and whom he can ignore.

What was clear from Wolseley’s meeting with Gary is that he’s confident he can safely ignore the big banks. He sees the demonstrations in Wall Street, he hears the radio phone-ins, and he knows that banker-bashing is still the consensus view.