At the end of the Clinton administration, Gary Gensler was one of the Treasury officials who argued against regulating derivatives contracts. Now he's the head of the Commodities Futures Trading Commission (CFTC), the primary derivatives regulator. You'd think that would be a bad thing, but as our own Bob Kuttner chronicled and as my own reporting confirmed, he's morphed into a strong advocate for reform, pushing both the administration and Congress for strong rules to protect the financial system. Here's his op-ed today, which weirdly hints at his past experience before making a serious point: Roughly 90% of over-the-counter derivatives transactions are between two financial entities such as banks, hedge funds, finance companies, pension plans and insurance companies. As long as financial entities remain interconnected through their derivatives, one entity's failure could mean a run on another financial entity and a difficult decision for a future Treasury secretary. Every exemption for financial companies creates a link in the chain between a dealer's failure and a taxpayer bailout. Every slice of the financial system that we cut out through an exemption could allow one bank's failure to spread like fire throughout the economy.
The Dodd bill contains this language, as does the even-stronger bill from Blanche Lincon, which passed the Agriculture Committee -- a jurisdictional hangover from when the only derivatives were commodities futures like corn and soybeans -- today with a vote from Republican Sen. Charles Grassley, as well as all the panel's Democrats.
-- Tim Fernholz
