Journalism in the Public Interest


Obama’s Mystery Man for Derivatives

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President Obama has nominated Timothy G. Massad to head the Commodity Futures Trading Commission. If you thought, “who?” — well, that may be the point.

It’s difficult to escape the suspicion that his nomination is an effort to send a once-obscure agency back to obscurity.

In choosing a cautious lawyer like Mr. Massad, an assistant secretary at the Treasury Department, the Obama administration seems to be tacitly renouncing the era of the outgoing head of the agency, Gary S. Gensler. Having spent much of his career at Goldman Sachs, Mr. Gensler was viewed with suspicion on his appointment. Yet he turned out to have been a spine-stiffener among regulators who mostly went invertebrate as the banks sought to undermine financial regulatory reform.

Now he is leaving — some think he would have stayed had he been reappointed — before he has finished his work. It will be up to the Mysterious Mr. Massad to carry on.

Mr. Gensler was a reformed investment banker, which may have been the key to his success. But lawyers run Washington, and this transition would restore the trading commission to the hands of one.

So what kind of lawyer is Mr. Massad? (Through a Treasury spokesman, he declined to be interviewed. A call to his home was not returned.)

He was a loyal soldier in Timothy F. Geithner’s administration. Before that, he was a white-shoe corporate lawyer with banks as clients. He worked on the first standards for derivatives for the industry trade group.

Yet he also spent his early years working for both the A.F.L.-C.I.O. and Ralph Nader. (Those gigs are expurgated from his Treasury biography, which shows how little Establishment Washington values such experience.)

Perhaps most important, especially for confirmation hearings in this hyperpartisan era, he is a phantom. Even friends of his whom I spoke with don’t know his views on regulation of derivatives, the signature issue facing the trading commission as it puts Dodd-Frank rules into effect.

In July last year, Mr. Massad led a team of Treasury officials in a meeting about a proposal to seize foreclosed properties by eminent domain. Unsurprisingly, the banks are fighting the idea.

At the meeting, according to two attendees, Mr. Massad asked pointed questions about what the impact of such a proposal would be — on the banks.

An attendee, Robert C. Hockett, a Cornell law professor who has spearheaded the idea, recalled Mr. Massad as smart, engaged and “not gratuitously skeptical” of the idea. “He was clearly concerned with, as was his duty, the potential impact on the balance sheets of larger commercial banking institutions,” Professor Hockett said.

Professor Hockett thought Mr. Massad was merely examining all sides of the issue. Mr. Massad had concerns about whether people’s access to mortgage credit might be curtailed. But another attendee took a dimmer view: “It was as though I were talking to the banks,” this person said.

Has Mr. Massad so conditioned himself as a lawyer to see all sides that he has little ability to form views of his own?

Or, worse, has he internalized the views of the banks?

This was the congenital problem with Mr. Geithner’s Treasury. It was so concerned about doing anything that might harm fragile banks after the crisis that it blocked tougher regulations and hindered the government’s ability to help people victimized by the recession and by the banks, which continued to hurt homeowners through their mortgage-servicing divisions. Mr. Massad was intimately involved with the disastrous home mortgage modification program, which the Treasury never got working properly to help people in need.

This orientation toward the banks has persisted in Jacob J. Lew’s Treasury. In a discussion over derivatives regulations last summer, Mr. Gensler himself told Mr. Lew that talking to him felt like negotiating with adversarial banks, according to a Bloomberg News account of how banks weakened the regulations on the complex financial instruments.

This is a crucial issue. The banks’ potential exposure to derivatives is poorly disclosed, poorly understood and could lay waste to the economy. The Dodd-Frank Act brought the formerly unregulated instruments, which were central to the financial crisis, under the regulatory umbrella. The legislation is intended to bring most derivative transactions through clearinghouses to make them safer.

Will they indeed be safer? And will the banks find loopholes?

That’s up to the regulators, chiefly the Commodity Futures Trading Commission, which is underfunded, understaffed and perennially under attack. The biggest potential dodge is whether the overseas derivatives operations of American banks will be tightly regulated. Over the summer, the agency compromised, saying it would allow regulation by sovereign entities, as long as their rules are comparable to our own. Mr. Gensler’s successor will need to make sure that policy is enforced rigorously.

Mr. Massad is generally even-keeled, say people who have worked with him. But he can play the bulldog role. And he seems to have done so with Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, better known as the bank bailout. Mr. Massad first worked on TARP and then headed it up.

Mr. Barofsky apparently drove the Treasury nuts with his prominent and much-needed monitoring of TARP. For his part, Mr. Barofsky thought that the Treasury was needlessly antagonistic.

In his 2012 book “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street” (Free Press),” he accuses Mr. Massad, then TARP’s chief counsel, of “apparent dissembling” to him about a change the Treasury was making to the terms of the deal with the insurer American International Group.

Mr. Massad would go on to inherit TARP, whose investments, to the administration’s great pride, made money.

So there’s little reason for enthusiasm with this pick. But just as Mr. Gensler surprised his critics, Mr. Massad might do so as well.

Susan Ochs, who served with Mr. Massad in the Treasury and is now a senior fellow at the Aspen Institute, recalls him as a zealous advocate for the taxpayer in negotiations with the banks. He pushed Bank of America to increase a payment to the government that the bank was resisting.

“He knows the industry well enough to call them out when they are taking advantage and pushes back pretty hard,” she said.

If the public gets that side of this mystery man, we may be in good hands.

Michael Belzer

Nov. 20, 2013, 9:15 p.m.

The missing sentence at the end of this article:
“If not, we are in real trouble”.  The evidence suggests the latter, not the former.

Gary Gensler has embarked on a totally unnecessary over-regulation of interest rate derivatives which was a vital and stable market through the crisis.  Instead of clamping down on the real risky parts of the market he proceeds to kills the most efficient and safe.  Just dumb.

Hey Mark
you mean the derivatives that the thieves in $2000 suits used to bankrupt Birmingham? Or are you talking about some other form of bets on bets with nearly nothing to do with anything in the real economy?

The right way to look at derivatives is…well, as what they actually are:  Insurance.

If you don’t have a financial stake in something, you’re not allowed to insure it.

So, contract with your home heating oil company to hedge against rising oil prices?  Good derivative.  Investing in the probable failure of your neighbor to pay his mortgage?  Bad derivative.  Investing in the probable failure of your neighbor to pay his mortgage when you owe him money that you’re not paying him?  Fraud.


Bonus round:  Only allow people to bet money they actually have, so that the derivatives market isn’t dozens of times bigger than the global economy.

I saw Timothy G.. and first thought they were talking about Tim Geithner scoring an 8 figure job for rescuing wall street. Well I guess this Timothy G. Massas will have to deliver a few more favours till he get his 8 figure pay day. They should include a personal criminal clause if you write one of these derivative contracts and it goes wrong…you lose EVERYTHING. Just like old style partnership. Instead idiots write these contracts score massive bonuses for something they don’t understand as sometimes parameters go wrong and then massive destructions occurs…just like only a couple yeas ago. Fortunately Gary delivered what Goldman want and now he can score a lucrative PE or Hedge or think tank job funded with all the ill gotten gains from the wall street mafia! How many times does the system have to blow up before we do something. Who was punished for the latin america, long term capital, tech, housing bubbles, etc? The mafia was rescued each time.

Sure would be nice to click ‘print’ and have a regular format page pop up .... makes a clean print ..AND makes it a 5x faster read.

That said, derivatives are ‘insurance’?  Insurance is defined as a ‘loss-spreading mechanism’ ... how does one actually spread loss appropriately when one is skimming thirty percent of the pool monies?

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Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)