The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (23 page)

But the European bond bets at MF Global were the culmination of a decade of reckless behavior during which Corzine
had abandoned his first marriage and had begun an affair with a New Jersey union official, had
been critically injured in a highway car crash while not wearing a seat belt, and was televised
guffawing about getting drunk the night Lehman Brothers filed for bankruptcy. Having taken over a much smaller version of MF in 2010, Corzine had
fired fourteen hundred people and branched into an array of new businesses, aiming to make MF Global a far bigger force in the markets at a time when swaps and commodities had become part of the trading mainstream.

Now, flustered by the breakneck pace and unanswered questions about MF’s business, the handful of banks interested in a distressed purchase of the gravely ill brokerage soon backed away. Interactive Brokers, a Connecticut securities firm that planned to buy MF, was the last to back down. It did so during a harried Sunday night in which a reported $900 million in customer money could not be located on MF’s books.

At 2:30
A.M.
on Halloween, the phone rang at Gensler’s house. It was a CFTC staffer telling him that the deal with Interactive Brokers was on ice. “A hole” had been found in the customer account, the staffer told Gensler. “Alright,” said the chairman, incredulous at the timing of the call and the odd term being used to describe a large amount of missing public money. “What do I do?”

Gensler padded downstairs in his bathrobe. Over the pleas of the dogs Chloe and Alice, who wanted to be let out, he dialed into an open line for members of the Financial Stability Oversight
Council, the systemic-risk panel Dodd-Frank had created. By the time he was patched in, regulators from the SEC and the Fed were already being briefed. During Interactive’s due diligence on MF’s books, a $900 million to $950 million hole had indeed been located, regulators were told. Unable to get satisfactory answers, the buyer was likely backing away from the deal. MF Global’s bad bond bets were now an international crisis.

Later that day, MF filed for bankruptcy protection, creating havoc in some commodity markets, where the prices of some major agricultural products slipped notably and
crude-oil volumes were lower than usual. Customers of the bankrupt firm had been
effectively barred from the markets, able only to close out existing positions rather than put on new ones. The situation lowered trading volumes and left many people unable to put on new trades.

By Tuesday, Meister and the FBI had launched investigations. The missing customer money soon dwindled to the $600 million range, according to reports at the time. That was lower than the initial estimates, but the gap was still huge—and mixing customer money with firm money in the brokerage industry was a cardinal sin. The true size of the hole, overseers would eventually learn, was actually $1.2 billion.

Gensler decided not to participate in the enforcement phase of the MF debacle. He knew Corzine only slightly, as one of the scores of partners at Goldman and, briefly, his boss in the bond division. In 1991
he had used Corzine’s entry number to run in a marathon that Corzine hadn’t planned to run. That was about the extent of his direct dealings with the former Goldman head, and, even then, the conversation had occurred through a secretary.

But this was Washington, where no whiff of political scandal was too faint to create an embarrassing narrative. Chilton had
had this proven to him the hard way over the exact same investigation. Ironically, the December before MF’s failure, Corzine had come to Chilton’s New York office to lobby for modifications to CFTC Regulation 1.25, which addressed the handling of customer funds at brokerages—the very area that later proved to be MF’s weak spot. Chilton, who had arrived sweaty and late from a TV interview, had not promised anything, and was in fact chastised by Corzine, who was miffed over having been kept waiting on the night of an important Christmas party. But the mere occurrence of the meeting, and a follow-up phone call the next July, now appeared suspect. Chilton, who tended to publish his private meetings on the CFTC’s Web site—even though not all of his colleagues did—felt he was being punished for his transparency.

At the same time that it was reconstructing what had gone wrong at MF Global, the CFTC was making a name for itself as a tougher enforcement agent. Its crude-oil manipulation case against Arcadia,
Parnon, and the former BP traders was moving through the court system, and pivotal cases on LIBOR were well under way. Ten months into Meister’s first year in office, the agency had brought
ninety-nine different enforcement actions, a record number nearly double what it had accomplished the year before.

Unlike the SEC and the Justice Department, which had more accomplished enforcement arms with precedents to follow, Meister was making new rules as he went. Since there was no science to determining settlement fees, for instance, he often generated hefty fines through sheer will. “He pretty much knew that financial institutions weren’t willing to fight the government and he could settle for a high amount of money,” says someone who
worked with Meister at the time. “They used to settle for thousands of dollars and David said, ‘Well, how about $100 million?’”
Soon he was getting multiple hundreds of millions for settlements.

MF Global remained a central focus, intensified by the fact that Corzine had refused to acknowledge any wrongdoing with the customer funds. The agency was piecing together a case that would go after both the company and its senior management for negligence and possibly worse. At the same time, the CFTC was investigating questionable trading practices by a senior hedging manager at Delta Air Lines who had been actively using a personal account to buy and sell crude-oil contracts and other futures products while in possession of direct knowledge of the large airline’s hedging plans—plans that had the potential to move the market.

The rancor over position limits had not subsided. Against the objections of industry trade groups who had sued the CFTC to halt their imposition, the curbs were slated to take effect in the latter part of 2012. But on September 28, the federal judge handling the court challenge
threw out the CFTC proposal entirely, saying the agency had overstepped its authority in imposing the curbs without adequately justifying them first. The matter was remanded to the CFTC, which would be expected once again to conduct further study of its proposed rules and reassert them at a later point. In a mixed vote, the CFTC opted to appeal the decision, tying it up in court for many more months.

For Gensler, it was a humiliating setback. The decision was a blow to one of the agency’s key policy initiatives, one at which both Gensler, and certainly Chilton, had thrown substantial political capital. Still, “it’s just part of our democracy,” Gensler later said.

His comment typified the strange optimism of a man who successfully navigated some of the most toxic political conditions in recent memory. By late 2013, Gensler had just weeks left in office and no clear plans for what he would do after he left the agency. But, sitting in a drab conference room in the downtown Manhattan office that the agency shared with the investment firm Brown Brothers Harriman & Co., he resisted murmurs that he had been eased out.

Tapping his penchant for naming long lists of the legislators and political staffers with whom he had worked, Gensler said he’d been asked to stay by “Pete Rouse, Tim Geithner, Jack Lew, Denis McDonough,” and others, citing a former White House chief of staff, the past and current treasury secretaries, and the current White House chief of staff as examples of his supporters.

Even in those final days, Gensler remained ruthlessly efficient, using minutes freed up by a latecomer to hold an impromptu meeting with enforcement staff and, a bit later, abandoning other colleagues, who risked making him late for his train home that night, at the elevator. His impact had been broad. Since 2009 more than five dozen new rules and orders had been written as part of the agency’s obligations under Dodd-Frank. About $410 trillion of the swaps market was now reporting into the CFTC’s data banks, bringing never-before-seen scrutiny to the once opaque market for those off-exchange derivative trades. And that was only the policy front.

On the policing side, the CFTC’s enforcement unit had continued reeling in major settlements, including a $700 million civil fine against the Swiss bank UBS for LIBOR manipulations, and additional nine-figure fines for others. The Arcadia case was still in court, having survived a motion for dismissal, and a landmark case against the onetime natural-gas trader Brian Hunter, whose
outsize positions at the hedge fund Amaranth had caused a market crisis in 2006, was soon to be litigated. The CFTC had also filed suit against Jon Corzine, charging that he failed to supervise MF Global employees who squandered customer money in order to bail out his European trades. That case,
which Corzine was fighting, sought to bar him from participating in the futures industry, the sort of punishment rarely meted out to a person of the former governor’s stature in the markets.

Finally, position limits had been resurrected. On November 5, 2013, a little more than a year after the original proposal was vacated in court, the Commission approved an amended set of position curbs in a three-to-one vote, with only O’Malia dissenting. (Sommers by that time had left and had not yet been replaced, and Wetjen voted in favor of the proposal.)

This time, CFTC lawyers left no wiggle room in their
rule filing. The new proposal went through the fine language of the Dodd-Frank Act pertaining to position limits, arguing that the “necessity” of the limits was not the agency’s to prove and that repeated congressional studies conducted by Levin’s subcommittee had already shown speculative activity to have a very tangible price impact on crude oil, among many other markets.

Nonetheless, the agency made a stab at justifying its proposals anyway. The position limits proposed on twenty-eight major commodity markets were needed as a “prophylactic” measure to guard against manipulative activity such as corners and squeezes, the rule filing stated. But they were needed also because “excessively large speculative positions may cause sudden and unreasonable price fluctuations even if not accompanied by manipulative conduct.”

The filing was helped by additional academic research that had by then flowed into industry circles, as well as its own
experiences. In a throwback to a prior era, it cited as examples supporting the need for tighter curbs on speculation, first, the Hunt brothers’ infamous silver stockpiles of the late 1970s and early 1980s and, more recent, the natural-gas price volatility caused by the hedge fund Amaranth in 2006, both of which had made market participants wary of trading in such unnatural conditions. Unmentioned but present in the public mind were fears that spikes in the price of wheat and other foods had sparked revolution in the Middle East in 2011, and that commodity index investing had contributed to high agricultural costs and the resultant global food crisis in general.

Satisfied that his pet issue might finally come to fruition, Chilton announced his own plans to step down toward the end of 2013. He was writing a book on Ponzi schemes and eager to continue his television career. “It wouldn’t surprise me in the least if it was challenged legally,” Chilton said of the new speculative curbs, “but I think it’s a bulletproof rule.”

But in an interview with Bloomberg news,
he eviscerated the industry lobbying that had undermined his efforts at reform. “The lesson for me is: The financial sector is so powerful that they will roll things back over time,” he said. “The Wall Street firms have tremendous influence.” To pummel distasteful regulatory measures, he added, with a classic Chiltonesque flourish, that bank lobbyists employed what he called the “D.C. Quadra-Kill,” a four-pronged strategy that involved respectively squashing, defunding, negotiating, or, if all else failed, litigating until things turned in its favor. It was a depressing rant coming from one of the few voices, however glib at times, for reform.

Gensler eschewed such rants about Wall Street, preferring to keep his thoughts on the CFTC to broad policy successes. His
musings on the future, while vague, included a notable passing reference to Hillary Clinton, a potential Democratic candidate for president in the next election. “‘You don’t wake up every day wanting to read what they say about you,’” Gensler recalled Clinton once telling him at a gathering during her first White House primary race in 2008. “‘You do it because of the policy.’”