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Jul. 22 2009 - 4:48 pm | 96 views | 3 recommendations | 18 comments

Obama leaves foxes in the Commodity Futures henhouse

Sommers, 40, is a former policy director for the International Swaps and Derivatives Association, a New York City-based group that represents derivatives market participants.

via Obama Nominates Jill Sommers to Additional CFTC Term (Update1) – Bloomberg.com.

In yet another win for the anti-regulation effort in general and banks like Goldman Sachs in particular, President Barack Obama has just re-nominated Jill Sommers to a spot as one of five commissioners on the Commodity Futures Trading Commission, the body that oversees derivatives and commodities trading.

First nominated to the CFTC by Bush last year, Sommers last worked outside government at the International Swaps and Derivatives Association, a powerful trade group that represents banks and other players in the derivatives market. To give you an idea of where the ISDA is at on the regulatory curve, it recently hired a high-powered lobbyist named Ed Rosen from Cleary Gottlieb Steen and Hamilton LLP to lobby against reform of the derivatives market, where almost wholly unregulated trading (since passage of the deregulatory Commodity Futures Modernization Act in 2000) helped cause both the housing crash and the insane speculative run-up in oil and other commodities prices last year. The ISDA has 25 directors, but it’s largely dominated by just a few players on Wall Street, in particular Goldman, JP Morgan, and Credit Suisse.

Prior to her policy director job at the ISDA, Sommers worked at the Government Affairs desk at the Chicago Mercantile Exchange, home (among other things) of the Goldman Sachs Commodities Index, the preferred gaming table for the speculative index traders who ran up the price of your gas and home heating oil last year.

Although technically Obama nominated Sommers, this is really a Republican nomination; the seats on the CFTC (like the SEC and FTC) are divided up between the two parties, and the minority Republicans are entitled to two seats to the Democrats’ three. Sommers now represents one of the Republican seats. Another Republican seat will soon be opening, with the resignation of former acting chairman Walt Lukken, who is going on to NYSE Euronext. And since that seat, too, will likely be filled “by someone from Goldman Sachs or its ideological equivalent,” according to someone I know who follows this world closely, that means bad news for the much-ballyhooed Obama effort to impose tough new reforms on the worldwide derivatives market — which now impacts, according to one estimate, over $592 trillion in underlying securities.

That Obama rubber-stamped the Sommers nomination is not particularly surprising, as the parties by custom have a sort of non-aggression pact in place with regard to these regulatory commissions, and the approval of the majority party for the minority nominees is considered pro forma. Given everything that’s happened in the last few years, however, one might have expected that President Obama might want to break with custom just a little bit and stack the regulatory deck, if he sincerely intended to impose derivatives laws that are “hard to evade,” as Tim Geithner recently put it. Then again, if Obama had been serious about reform, he probably wouldn’t have nominated a former deregulatory zealot and Goldman Sachs banker like Gary Gensler to be the CFTC commissioner in the first place.


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  1. collapse expand

    While much of the media have been crediting O’s recent drop in the polls to his “going too far” on certain issues, I suspect that it’s crap like this that plays a much greater role. It’s his lack of bold vision and change, I think, that is causing his supporters to begin to fall away. You’d think he’d be smarter than this.

    • collapse expand

      Actually, I think he is smarter than this, and not lacking vision so much as being caught up in the politics of policy change. Without campaign fairy dust, Obama supporters are beginning to see he’s fundamentally a politician, capable of missteps, as opposed to a middle-class crusading savior.

      It seems premature to assume Obama has dropped
      regulation reform off the national agenda or forgotten his meager beginnings. Whereas I’m confused and dismayed about his appointments to Treasury and the CFTC, I haven’t quite come to the conclusion he’s preserving the status quo. My humble guess is Obama is too entrenched in the health care issue for him to radically restructure Wall Street. Not to say he won’t, given enough public pressure.

      In response to another comment. See in context »
    • collapse expand

      It would be hugely ironic if Larry “pay-to-play” Summers, “Tiny” Tim Geitner and Rahm “fck you” Emmanuel can convince Obama via hints dropped to the echo chamber media that his numbers are dropping because he went “too far” on health reform rather than the truth which is that he hired too many status quo shills like themselves.

      In response to another comment. See in context »
  2. collapse expand

    Ditto Mark Bolton. I was a fundraiser and volunteer last year. Obama really started losing me in January with the speech before Congress where he talked about the days of reckless bank behavior being over. (It was obvious they weren’t and he was part of the reason why.) The fellow campaign volunteers I spoke with at the time were surprised and annoyed by my criticism of Obama, but I saw them last week and they had come around–openly contemptuous of Obama and his slavish preservation of the status quo.

    • collapse expand

      I’d love to see some poll results breaking down just who those dropping numbers represent. All I’ve seen is that he’s losing the most support among “independents.” That tells me nothing. I’m an independent, but I’m way to the left of our President (which is why I didn’t vote for him).

      In response to another comment. See in context »
  3. collapse expand

    Ditto yet again. I am a former precinct captain for the Obama Campaign and I was as committed as anyone to getting him elected. I am thoroughly disgusted with what he has been doing. He is a liar plain and simple. Pretty sad how quickly he forgot his middle class upbringing.

  4. collapse expand

    Matt,

    Forgive me, this is not related to this post, but to your Rolling Stone piece, but since there is no otehr way of contacting you here: you should read this post by Krugman:

    http://krugman.blogs.nytimes.com/2009/07/21/is-the-threat-of-speculation-a-reason-to-shun-cap-and-trade/

    re: your point in the RS piece that Goldman is behind the CO2 cap-and-trade system. He has a valid point there. Unlike energy, the market for CO2 permits is not likely to be inelastic. If indeed speculation were to artificially drive up prices for CO2 permits that wouldn’t be a bad thing at all, as it would force polluters to cut down their emissions. I.e. at some point the market price for CO2 permits would exceed what it would cost for the polluter to switch to less polluting technologies. Your other points are good, but on the CO2 permits you’re not really convincing me.

    • collapse expand

      Misha,

      I disagree with Krugman, as do Mike Masters, Michael Greenberger, and a lot of other people I trust on this issue.

      No one is saying cap-and-trade won’t help the environment. But there’s no reason we need to create a new derivatives market to get there. The government can simply auction off permits for future carbon emissions and we can skip this crazy derivative-based structure, which would add the cost of subsidizing all the cuts of these bankers and middlemen to our energy bills.

      As Masters notes, Krugman just a few weeks ago admitted that derivatives speculation was responsible for this year’s disruptions in crude prices, and yet somehow he wants to hand the keys to cap-and-trade over to the same people.

      I like Krugman on a lot of things, but he’s drinking the Kool-aid on this one.

      MT

      In response to another comment. See in context »
      • collapse expand
        Wes
        Wes

        http://krugman.blogs.nytimes.com/2009/06/28/health-care-is-not-a-bowl-of-cherries/

        Krugman says health care shouldn’t be left to the free market because of adverse selection and moral hazard.

        However, when it comes to carbon credits, the environment, and the future of the planet, the free market will get it just right!

        In response to another comment. See in context »
      • collapse expand

        Matt,

        On that I agree: derivatives on carbon credits are not needed at all and are indeed pernicious. But then again, I’m not sure what derivatives on carbon permits would look like. Carbon permits, unlike mortgages, don’t generate a continuous stream of cash, so what is it you would be securitizing? I any case, if there is such a thing as carbon credit CDOs, then the question is a different one. Namely, do you allow derivatives at all and, if so, how will they be regulated? Assuming we continue to have a derivatives market at all, there is nothing special about carbon permits that would require that market to be excluded from derivatives trading as opposed to any other assets that can be turned into derivatives. Either you outlaw/regulate derivatives as a whole or not.

        But in your RS piece, your argument (and my post above) was about speculation in carbon credits. You did not mention carbon credit derivatives.

        I think you’re still missing one key point here that distinguishes oil futures from carbon credits: you can’t compare speculation in oil futures to speculation in carbon permits. The oil market is an inelastic market, because there is too little supply in the way of alternatives and a very steady demand. Whereas for carbon permits the market is not nearly as inelastic, since much of our industrial infrastructure is antiquated and can be replaced with less climate-damaging technology. Ergo, at any point when carbon permit prices become too high, polluters will find technology upgrades to be the cheaper option, and that will be a good thing.

        Secondly, you are inadvertently buying into the right-wing paranoiac propaganda about how cap-and-trade will supposedly increase our energy bills to intolerable levels. The generation of electricity accounts only for 20% of the costs of production (and those 20% include the amortization and maintenance for the power plants), while 80% goes towards the maintenance of our outdated distribution system! Also, the carbon credits would leave nuclear, hydro, solar and wind unaffected since these don’t generate CO2. So the proportion of your energy bill that would be affected by cap and trade is minuscule.

        MK

        In response to another comment. See in context »
      • collapse expand

        I agree with Taibbi on this one, too. However, I’m curious about the “over $592 trillion in underlying securities” you mention. Not that I disagree, but what estimate are you citing here?

        In response to another comment. See in context »
    • collapse expand

      I think Krugman would like to see the cost of CO2 rise. That would create greater opportunities for alternatives. However, from another economic standpoint, we are simply creating an opportunity for our savings to fuel another bubble. I’m not certain that another bubble serves anyone.

      In response to another comment. See in context »
  5. collapse expand

    Let’s give Obama his due, he’s a smooth operator and a first class salesman. But there’s not much beyond that. He spent more than a billion getting elected President. A lot of that money came from the oligarchy that runs the government. No way is the oligarchy going to give millions and get nothing in return. They pretty much bought the status quo for peanuts. No big surprise there. If McClown had won the election, and that was almost impossible, things would probably be worse. McClown was basically the senile version of the Obama. As for the CFTC, most people never heard of it and don’t care. Of those that do known about it most of them probably think it’s just great to be an insider and wonder how they can become one. That’s the world we live in, Matt. And lest we forget, Obama said he’d build a new economy where there aren’t any asset bubbles. But when he took office in mid January the price of oil was around $38 a barrel. It then proceeded to rise up to $75 but has now backed off a bit. What has Obama done about that? In a word…nothing. But no doubt he “feels our pain” when we go down to the pump.

  6. collapse expand

    Yes, Obama is a politician, and as a politician, he has to take into account the opinions of those who differ from you – I think that’s a good thing. We have our opinions, but we haven’t been proven right more than anyone else. If rough consensus takes longer to achieve than dictatorial fiat, that’s a small price to pay for democracy.

    • collapse expand

      Obama – peace with the Muslim world ? Increased bombing of Afghanistan, staying in Iraq with worlds largest military compound / embassy, standing by Israel with settlements, creates worlds largest bunker buster bomb for Iran – Kudos.

      Hands trillions to banks which simply inflate the stock market at the expense of currency – Australia has spent more on its actually stimulus than the US.

      No more illegal prisons, hasn’t closed GITMO, has set up an increased reliance on secret off shore detention facilities.

      Has resisted all global and domestic calls for investigations of corruption in US war activities –

      All of this as a symbol of bi-partisanship – is this not the greatest double speak for Im a Republican – as a committed liberal – this guy is a stooge – come on.

      In response to another comment. See in context »
  7. collapse expand

    In his May 1999 testimony on the reauthorization of the CFTC, Gensler told a House panel that the $70 trillion worldwide derivatives market “shows the vibrancy and the importance of this market for all sorts of participants to hedge their risks and transfer risks,

    “We should recognize that and put the burden on those who are suggesting changes and further regulation,…before we tamper on some of the successes of this marketplace for the economy,”

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