[Senate Hearing 111-240]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-240
 
                     NOMINATION HEARING TO CONSIDER
                GARY GENSLER TO BE CHAIRMAN OF THE CFTC

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE


                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION


                               __________

                           FEBRUARY 25, 2009

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry


  Available via the World Wide Web: http://www.agriculture.senate.gov




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           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                       TOM HARKIN, Iowa, Chairman

PATRICK J. LEAHY, Vermont            SAXBY CHAMBLISS, Georgia
KENT CONRAD, North Dakota            RICHARD G. LUGAR, Indiana
MAX BAUCUS, Montana                  THAD COCHRAN, Mississippi
BLANCHE L. LINCOLN, Arkansas         MITCH McCONNELL, Kentucky
DEBBIE A. STABENOW, Michigan         PAT ROBERTS, Kansas
E. BENJAMIN NELSON, Nebraska         MIKE JOHANNS, Nebraska
SHERROD BROWN, Ohio                  CHARLES E. GRASSLEY, Iowa
ROBERT P. CASEY, Jr., Pennsylvania   JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado

                Mark Halverson, Majority Staff Director

                    Jessica L. Williams, Chief Clerk

            Martha Scott Poindexter, Minority Staff Director

                 Vernie Hubert, Minority Chief Counsel

                                  (ii)


                            C O N T E N T S

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                                                                   Page

Hearing(s):

Nomination Hearing to Consider Gary Gensler to be Chairman of the 
  CFTC...........................................................     1

                              ----------                              

                      Wednesday, February 25, 2009
                    STATEMENTS PRESENTED BY SENATORS

Harkin, Hon. Tom, U.S. Senator from the State of Iowa............     1
Cardin, Hon. Benjamin L., U.S. Senator from the State of Maryland     6
Chambliss, Hon. Saxby, U.S. Senator from the State of Georgia....     2
Lugar, Hon. Richard G., U.S. Senator from the State of Indiana...     3
Mikulski, Hon. Barbara A., U.S. Senator from the State of 
  Maryland.......................................................     4
Sarbanes, Hon. Paul, former U.S. Senator from the State of 
  Maryland.......................................................     7

                                Panel I

Gensler, Gary, Nominee to be Chairman and Commissioner of the 
  Commodity Futures Trading Commission...........................     9
                              ----------                              

                                APPENDIX

Prepared Statements:
    Cochran, Hon. Thad...........................................    40
    Gensler, Gary................................................    43
Document(s) Submitted for the Record:
    Committee questionnaire and Office of Government Ethics 
      Executive Branch Personnel Public Financial Disclosure 
      Report filed by Gary Gensler...............................    46
    Various organizations, letters of endorsement for Gary 
      Gensler....................................................    70
Question and Answer:
Harkin, Hon. Tom:
    Written questions for Gary Gensler...........................    74
Brown, Hon. Sherrod:
    Written questions for Gary Gensler...........................    77
Casey, Hon. Bob:
    Written questions for Gary Gensler...........................    78
Grassley, Hon. Charles E.:
    Written questions for Gary Gensler...........................    79
Nelson, Hon. Ben:
    Written questions for Gary Gensler...........................    81
Roberts, Hon. Pat:
    Written questions for Gary Gensler...........................    82
Stabenow, Hon. Debbie:
    Written questions for Gary Gensler...........................    84
Gensler, Gary:
    Written response to questions from Hon. Maria Cantwell.......    85
    Written response to questions from Hon. Dianne Feinstein.....    98
    Written response to questions from Hon. Carl Levin...........   108



                     NOMINATION HEARING TO CONSIDER



                GARY GENSLER TO BE CHAIRMAN OF THE CFTC

                              ----------                              


                      Wednesday, February 25, 2009

                                       U.S. Senate,
         Committee on Agriculture, Nutrition, and Forestry,
                                                     Washington, DC
    The Committee met, pursuant to notice, at 2:40 p.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Tom Harkin, 
Chairman of the Committee, presiding.
    Present: Senators Harkin, Conrad, Stabenow, Nelson, 
Klobuchar, Chambliss, Lugar, Roberts, Grassley, and Thune.

 STATEMENT OF HON. TOM HARKIN, U.S. SENATOR FROM THE STATE OF 
   IOWA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND 
                            FORESTRY

    Chairman Harkin. The Senate Committee on Agriculture, 
Nutrition, and Forestry will come to order. I know we just had 
a vote. We are waiting on some Senators to arrive. Senator 
Chambliss said he would be a few minutes late and to go ahead 
and proceed.
    Good afternoon, and we thank you all for joining us today. 
We meet this afternoon to consider the nomination of Mr. Gary 
Gensler to serve as the Chairman of the Commodity Futures 
Trading Commission. As many of you know, Mr. Gensler is not new 
to public service. He served as Assistant Secretary for 
Financial Markets, and later as Under Secretary for Domestic 
Finance at the Department of Treasury. He was at Treasury about 
3 years, so he brings this experience to this CFTC position.
    This nomination comes at a very challenging time. Since the 
CFTC was created 35 years ago, it has never faced more daunting 
market challenges than those that the next Chairman and 
Commissioners will face. Our financial markets are still 
unstable, and the physical commodities of energy, agriculture 
and metals have experienced dramatic price movements and 
volatility.
    Again and again, actions in our futures markets have caused 
some havoc across our country and economy. I thought about 
this, and in principle are supposed to provide some stability 
and certainty and not to create havoc.
    One year ago this weekend, we had an experience in the 
cotton market. Speculative funds ran up the prices of the 
cotton futures market at a time when there were record 
surpluses of cotton and not very much demand. So there was a 
ton of money, speculative money, going into the futures markets 
that had absolutely nothing to do with supply and demand. It 
served no constructive economic purpose except maybe to make 
some people wealthy.
    The markets for other agricultural commodities experienced 
similar disruptions for wheat, corn, and soybeans. They rose to 
record levels last year. Country elevators that had offered 
producers forward contracts and then hedged their positions on 
the Chicago Board of Trade struggled to find the cash resources 
to meet margin calls. Users of commodities from bakers to pork 
producers to ethanol facilities, suddenly realized that the 
price they would have to pay for the most critical inputs was 
double the price they had paid just a couple months before.
    Prices in the energy sector also shot up to unprecedented 
levels last summer. Energy users from airlines to commuters to 
farmers struggled with higher fuel costs. So in places like my 
State of Iowa, people are wondering; is Washington really 
asleep at the switch? Do we understand the disruption and 
damage caused by ineffective and inadequate oversight and 
regulation?
    Last night, President Obama urged Congress to move quickly 
on legislation that will finally reform our outdated regulatory 
system. He called for tough new common-sense rules of the road 
so that our financial market rewards drive innovation and 
punishes short-cuts and abuse. So it is our responsibility to 
rise to the President's challenge.
    This Committee and the Commodity Futures Trading Commission 
have a profound responsibility to craft and implement tough-
minded regulatory reforms. Last month, I reintroduced the 
Derivatives Trading Integrity Act. ``Integrity'' is a synonym 
for honesty. The bill would require that all futures contracts 
trade on a regulated exchange, including all derivatives 
contracts. I came to that position after our hearing in October 
on derivatives. Exchange-traded contracts are subject to a 
level of transparency and oversight that is just not possible 
in over-the-counter markets.
    The best-intentioned and most brilliantly crafted 
legislation will be only as effective as the regulators who 
implement it. We must have an unflinching determination on the 
part of the Commodity Futures Trading Commission to restore 
integrity to these important markets.
    That is why the position of Chairman of the CFTC is so 
critical. And that is why this Committee must gain assurance 
that the nominee before us is prepared to provide strong 
leadership at the CFTC, to work with this Committee to develop 
solutions to ensure that markets are open, transparent, free of 
excessive speculation, and that all trades clear. We need to 
know if Mr. Gensler will be committed to repairing the damage 
from abuses and mistakes of the past and ensuring that they are 
never repeated.
    With that, I will hold the record open at this point for a 
statement by Senator Chambliss. I would ask if Senator Lugar or 
others would have opening statements that they would care to 
make at this time.
    Senator Chambliss, for an opening statement.

STATEMENT OF HON. SAXBY CHAMBLISS, U.S. SENATOR FROM THE STATE 
                           OF GEORGIA

    Senator Chambliss. Mr. Chairman, thank you.
    I will submit my opening statement for the record, and let 
me just echo, Mr. Gensler, we welcome you to the Committee, and 
we welcome your girls to the Committee.
    We have had the opportunity to visit and obviously I know 
your background. We look forward to continuing a dialog on the 
issues that we know face this industry and look forward to 
working with you down the road with respect to making sure that 
we continue to provide financial investors in this country the 
type of regulation that is fair, reasonable, and will ensure 
safety and security in the market.
    So thank you, Mr. Chairman.
    Chairman Harkin. Thank you, Senator Chambliss.
    Senator Lugar.

STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM THE STATE 
                           OF INDIANA

    Senator Lugar. Mr. Chairman, let me just add that I 
appreciated especially the hearing you conducted in which we 
participated last October. I felt that was an educational 
experience for us and for the American people, and I appreciate 
the progress that has occurred at CFTC subsequent to that 
hearing. People were able to do some things administratively.
    But I would just simply chime in to say that as a very 
junior Senator, Senator Leahy and I sat at the end of the table 
and were assigned by Chairman Herman Talmadge the 
responsibility of oversight of the CFTC, because apparently no 
one else on the Committee understood what he was doing and no 
one really wanted to find out. So we have had some parental 
responsibilities in subsequent years, and I appreciate very 
much the evolution. But this is a pivotal moment today as we 
take a look at a new chairmanship, a new era, the regulatory 
suggestions you have made and other members likewise. And so I 
look forward to the hearing.
    Chairman Harkin. Thank you very much, Senator Lugar.
    Senator Nelson?
    Senator Nelson. Thank you, Mr. Chairman. Unfortunately, I 
have to leave, so I am going to make a couple of statements and 
leave open a question which I hope Mr. Gensler can respond back 
to us in writing.
    You have outlined very clearly and succinctly the problems 
that we face today with the volatility that we have experienced 
in the markets. I hope we have the opportunity to see where the 
weaknesses are and what fixes are necessary. Credit 
derivatives, obviously regular commodities, physical 
commodities, need to be bound by certain rules. But it is 
important that whatever regulations are put in place does not 
constitute strangulation of the commodities in the whole.
    I think the CFTC must preserve the price discovery aspect 
of the markets and risk management hedging benefits that it 
provides. It needs to regulate with a focus on what has become 
more and more important, the system risk, and not just look for 
bad actors in the situation.
    I think the thing that interests me most is the need that 
the CFTC should be proactive and try to anticipate matters that 
pose a threat to systemic risk than always be reacting. I know 
it is a very challenging thing to be able to predict and to 
anticipate without some market experience to guide you as to 
what needs to be done. But waiting until the systemic risk is 
so big or the fire is beyond the capability of being put out is 
not a course of action that we would like to see happen again.
    The question that I really have of Mr. Gensler, should he 
be confirmed, is--we proposed that the CFTC issued--they issued 
a report, and we came back and we asked that the report's 
recommendation of the review of, quote, whether to eliminate 
the bonafide hedge exemption for swap dealers and replace it 
with a new risk management exemption subject to certain 
conditions that we suggested that be done. And my question is 
do you know whether that has been done or, if it has not, 
whether it will be done. And if you can just get back to me on 
that, that certainly will satisfy me.
    But thank you very much for your willingness to serve, and 
I look forward to my two colleagues giving a great introduction 
of you. Thank you.
    Chairman Harkin. Thank you, Senator Nelson.
    Senator Grassley.
    Senator Grassley. Yes, thank you very much, Mr. Chairman. 
Obviously, we need to congratulate Mr. Gensler. I think we 
ought to also thank Walt and Michael for their acting 
chairmanship and the hard work that they put into the work of 
the Commission. I think our last year has shown that more 
aggressive activity on the part of the CFTC is really needed.
    This is a year when we are going to have to decide to a 
greater extent the appropriate role of regulation of 
speculators to a greater extent than we have in the past. We 
are going to have to decide if we are serious about giving the 
CFTC the resources it needs to do its job effectively. And that 
is what new leadership is all about, I hope, and, of course, 
the work of this Committee as well.
    So I am not going to be able to stay around here to ask 
questions, but I told Mr. Gensler that I would be submitting 
about eight questions for answer in writing. So I thank you, 
Mr. Chairman, for the privilege of making a statement, and I 
will put my entire statement in the record.
    Chairman Harkin. Thank you very much, Senator Grassley.
    We have a distinguished colleague and a distinguished 
former colleague, and I will recognize them in order for 
purposes of introduction. Senator Mikulski from the great State 
of Maryland, welcome to the Agriculture Committee.

 STATEMENT OF HON. BARBARA A. MIKULSKI, U.S. SENATOR FROM THE 
                       STATE OF MARYLAND

    Senator Mikulski. Thank you very much, Mr. Chairman, and 
also Senator Cardin, who is currently presiding, will also be 
joining us, and it shows the enthusiastic support that Mr. 
Gensler enjoys from the Maryland delegation.
    First of all, in terms of the Commodity Futures Trading 
Commission, we know how important this Commission is. But as 
Senator Lugar so aptly said, it is often little understood or 
little noted, unless there is a crisis in the markets. And last 
summer, also the whole issue of commodities and the futures 
trading just exploded in our community and our media and in our 
marketplace.
    I had bakers lined up throughout in my office and out in 
the community wondering how they were going to buy rye and 
wheat and so on to keep their small and medium-sized businesses 
going. We were talking about the high price of gasoline. We 
were talking about something called the ``London loophole'' and 
how we needed to close that.
    So the whole issue of commodities we are seeing not only as 
something that was primarily an Agriculture Committee issue, 
but an American issue and how it affects our community.
    There is grave concern whether there was adequate 
oversight, adequate regulation, and what we needed to do. Well, 
I think now we are on the path in the right direction. But 
whatever the rules of the road, whatever Congress chooses to 
do, we need to have the right person in charge of the CFTC. 
That is why I enthusiastically endorse and introduce Gary 
Gensler to the Committee to be the Chairman of the Commodity 
Futures Trading Commission. We know his work when he was in the 
Senate. We know his work in the Clinton administration, and 
also he is and continues to be a community leader in Maryland.
    I know him to be a man of principle and great intelligence. 
He has a deep understanding of finance, both domestic and 
international, and how to turn that knowledge into workable 
policies that will protect the interests of our country and the 
interests of our consumer.
    During this time of great financial turmoil and 
uncertainty, we need someone with these skills, this background 
and experience, and these values to lead the Commission. So I 
enthusiastically support him for this important position.
    When you look at his resume, we know that he worked hard at 
Treasury and received the Alexander Hamilton Award, the highest 
award that the Department can give. He worked with our 
colleague Senator Sarbanes in terms of fashioning a response to 
not only the Enron scandal, but how we could make corporate 
America more responsible, the Sarbanes-Oxley bill.
    He has worked as a top economic adviser both in our own 
government and on Wall Street. He is also a strong community 
leader. Whether he has been on the board of Johns Hopkins 
University or whether he has helped the Community Enterprise 
Foundation be able to provide affordable housing, Gary has 
always been someone who has given of his own time and, I might 
add, of his own dime.
    And just speaking as a woman, I watched him and my heart 
went out to him when his own beloved wife, Francesca, struggled 
with breast cancer. He had to be a father; he had to be a 
mother; he had to be a devoted husband. He was always at his 
wife's side, and at the same time tending to his children.
    Someone who knows what sorrow is and has to go through 
that, and also what it means to his family, and then while he 
was doing that, to stay civically engaged while at the same 
time watching the marketplace. I think we have someone who 
brings talent, who brings dedication, and who brings values. I 
think the Committee would be well served in approving his 
nomination.
    Chairman Harkin. Thank you very much, Senator Mikulski, for 
that very strong supportive statement.
    Now our distinguished former colleague, Senator Sarbanes. 
Welcome back.
    Senator Sarbanes. Mr. Chairman, thank you very much, and I 
appreciate your courtesy in allowing me to appear. It is a 
risky proposition on your part because former Senators do not 
get much of a chance to speak, and there is always a danger 
they will abuse the microphone when the opportunity presents 
itself. But I know you want to move along.
    Actually, I will withhold and defer to Ben and keep it in--
I am out of office, and they are in office, and I respect the 
difference very much. Do you want to go ahead?
    Senator Cardin. I usually yield to my constituents, and 
Senator Sarbanes is my constituent. But let me----
    [Laughter.]
    Chairman Harkin. Senator Cardin.

  STATEMENT OF HON. BENJAMIN L. CARDIN, U.S. SENATOR FROM THE 
                       STATE OF MARYLAND

    Senator Cardin. Mr. Chairman, let me thank you for the 
courtesy of just a few remarks with regard to Gary Gensler. He 
is a friend. He is a person I have known for many years. I 
deeply respect his intellect, his integrity, his financial 
knowledge, and his commitment to public service. And I join 
Senator Mikulski and Senator Sarbanes in recommending him for 
confirmation.
    Gary has a tremendous depth and breadth of knowledge on 
financial issues. He was in the Department of Treasury from 
1997 to 2001, Assistant Secretary for Financial Markets and 
Under Secretary for Domestic Finance. He was a senior adviser 
to both Secretary Rubin and Secretary Summers.
    He received the Treasury Department's highest award, the 
Alexander Hamilton Award. He was an adviser to a very 
distinguished member of the U.S. Senate, Chairman Sarbanes, 
when Paul chaired the Banking Committee and helped Senator 
Sarbanes when we passed the Sarbanes-Oxley legislation, which 
regulated corporate America--very important legislation on 
corporate responsibility--we could use more of that today--and 
accounting and security laws.
    So Gary is well prepared through his experience to take on 
this very important responsibility as Chair of the Commodity 
Futures Trading Commission. But I want to tell you just one 
more thing about him. His background in the community, the type 
of volunteer activities that he has committed himself to, in 
helping educational institutions and helping health care 
institutions and helping those who are disadvantaged. It tells 
you a lot more about him. He is a person committed to our 
community.
    I will tell you one more thing about him. He has 
participated in nine marathons, and if he is confirmed, helping 
repair our economy will be his tenth marathon, and I am sure he 
will be just as determined to bring us to a successful goal, 
and I encourage his confirmation.
    Thank you, Mr. Chairman.
    Chairman Harkin. Thank you very much, Senator Cardin.
    Now Senator Sarbanes.

 STATEMENT OF HON. PAUL SARBANES, FORMER U.S. SENATOR FROM THE 
                       STATE OF MARYLAND

    Senator Sarbanes. Well, thank you very much, Mr. Chairman.
    First of all, I want to just underscore something that both 
Senator Mikulski and Senator Cardin said, and that is the very 
substantial, positive contribution that Gary Gensler has made 
in the Baltimore community through his civic involvement. If we 
talk about being a good citizen and sort of participating and 
meeting your responsibilities, this is a prime example of 
someone who has done that. And it has been of enormous benefit 
to our community, and we are all deeply indebted to him for it.
    He has been in a sense a star from the beginning. He was a 
summa cum laude graduate from the Wharton School of Business at 
the University of Pennsylvania, first a BA and then an MBA. He 
then went to work in the financial industry where he had 
extensive experience, and then he was in the Treasury for, I 
think, close to 4 years. He then wrote a book about mutual 
funds, and then I was fortunate enough--I was then Chairman of 
the Banking Committee, and we were confronted with the Enron 
situation.
    Enron was the seventh largest company in the country. It 
was reporting record profits in the first part of 2001, first 
quarter, second quarter, 20-percent increase in profits each 
quarter. By October, they were restating their earnings. 
November, they restated them again. December, they declared 
bankruptcy. The largest bankruptcy in U.S. history up to that 
point. It was subsequently eclipsed by WorldCom in June of 
2002.
    The Committee, which I then chaired, was charged with the 
responsibility of addressing the situation, and one of the 
things we did which made an enormous difference, as it turned 
out, was to get Gary Gensler to come and work with us as a 
senior adviser to the Chairman. And his contribution was 
enormous.
    He was integrally involved in shaping the legislation, 
which, of course, dealt with oversight of the accounting 
industry, the reform of corporate governance, and investor 
protection measures. And let me just quickly outline for the 
Committee the qualities he brought to that work, which I think 
will stand all of us in good stead should he be confirmed as 
Chairman of the CFTC.
    First of all, he thinks comprehensively in terms of what is 
necessary to make the financial system work. So he has a 
breadth and depth of vision which is somewhat rare, but which 
is extremely important, particularly when you are trying to 
deal with a situation where the system is breaking--seems to be 
breaking down and it needs to be, as it were, restructured and 
put back together again.
    He is extremely smart. I indicated his past 
accomplishments. Nowadays, people are around developing more 
and more complex instruments all the time, and you have got to 
have someone there who can not only stay with them every step 
of the way, but can be ahead of them, can anticipate what is 
coming and seek to address it.
    He knows the markets well, and he is very committed to 
ensuring that the markets work honestly and fairly. And the 
markets are an important part of the workings of our economic 
system. But if they do not work honestly and fairly, they will 
drive the economic system down, and all of us will pay a very 
high price for that.
    He is very hard-working. He is not ideological. He is 
pragmatic. He is a good listener. He seeks practical solutions, 
seeks to develop constructive and positive approaches. He is 
firm and fair. And he brings excellent judgment and very strong 
leadership skills. I think he will be very effective in heading 
the agency and imparting a sense of mission to the employees in 
terms of what needs to be done.
    I want to say to the members of the Committee, I have 
absolute confidence in his integrity and in his judgment, and I 
think it is an opportunity for the country to put his superior 
understanding of financial markets and his extensive experience 
to work on behalf of the American people. I can assure you he 
will be a fierce enemy of fraud and manipulation, that he will 
find it, root it out, and also try to make the systemic changes 
that will contribute to it not recurring again, which is, of 
course, very important. We can go after the bad actors, but we 
want to have a system in place that precludes the bad actors 
from coming along in the first place.
    Gary Gensler has a very, very deep commitment to the public 
interest. I have had occasion to talk to him at length about 
his feeling for the country, his own opportunities in life, and 
the need to make the system work fairly for all.
    And, finally, Mr. Chairman, let me just say he appreciates, 
I think, the role of the Congress and the workings of our 
political system. Sometimes you get these people in the 
executive branch, and they have difficulty understanding there 
is a legislative branch that plays a very important role. Gary 
Gensler I think clearly understands the role of the Congress. I 
think he is sensitive to it. He appreciates it is an important 
partner. And I want to say to the Committee I think he will be 
an absolutely first-rate partner for the Congress as you move 
to address the economic challenges which you, Mr. Chairman, and 
the other members of the Committee outlined at the beginning of 
this hearing.
    Thank you again for the chance to come and be with you.
    Chairman Harkin. Well, thank you very much, Senator 
Sarbanes. Good to see you back, and I am sure we do not have 
any questions for all of you, but I just would say for the 
record that Mr. Gensler is indeed very fortunate to have three 
such well-respected and well-liked advocates for his position 
as the two sitting Senators and the previous Senator from the 
State of Maryland. Thank you all very much for being here.
    Now I would like to call Mr. Gensler to the witness table.
    Mr. Gensler, before you take your seat, if you would rise, 
we have an oath that we have to administer.
    Mr. Gensler, do you swear to tell the truth, the whole 
truth, and nothing but the truth?
    Mr. Gensler. I do, Mr. Chairman.
    Chairman Harkin. And, Mr. Gensler, do you agree that, if 
confirmed, you will appear before any duly constituted 
committee of the Congress if asked?
    Mr. Gensler. I do, Mr. Chairman.
    Chairman Harkin. Thank you very much, Mr. Gensler. Please 
have a seat.
    Mr. Gensler, welcome to the Committee. My congratulations 
on your nomination by the President, and we have your written 
statement. It will be made a part of the record in its 
entirety, and the floor is yours. You may proceed as you so 
desire.

     TESTIMONY OF GARY GENSLER, NOMINEE TO BE CHAIRMAN AND 
    COMMISSIONER OF THE COMMODITY FUTURES TRADING COMMISSION

    Mr. Gensler. Chairman Harkin, Ranking Member Chambliss, 
members of the Committee, thank you for the opportunity to 
appear here before you today. I am honored to be President 
Obama's nominee to be Chairman of the Commodity Futures Trading 
Commitment at this critical time in the commodities markets, 
and for our Nation.
    As a champion of the public's interest--for farmers, 
consumers, small businesses--the CFTC plays an essential role 
in our financial regulatory system and affects the lives of all 
Americans. And I firmly believe that strong, intelligent 
regulation with aggressive enforcement is what our economy 
needs and benefits the public.
    The current economic crisis clearly has shown, though, that 
our financial and regulatory systems have failed the American 
public terribly. Those of us who have spent our time, our 
professional lives, around markets have to approach the current 
crisis with humility following such broad failures. We have 
learned the limits of our ability to foresee how markets may 
evolve. We have learned the importance of being candid with the 
American public about the risks we face and that we must be 
unceasingly vigilant to address these risks. We have also 
learned that there is no substitute for strong, independent 
regulation, that we must bring transparency and accountability 
throughout the system, and we must always err on the side of 
protecting the American public.
    These are the lessons I draw from what has transpired this 
past decade. And, if confirmed, I pledge to this Committee and 
to the Congress that I will not forget these lessons.
    We must repair our regulatory system by enacting much 
needed reforms that promote transparency, fairness, and safety.
    If confirmed, I will fight hard on four essential 
priorities for reforming the commodities markets and our 
financial system.
    First, the CFTC must vigorously fulfill its mandates: 
enforcing existing laws, promoting market integrity, preventing 
against fraud and manipulation, and guarding against excessive 
speculation. I will work tirelessly to ensure that the 
Commission leaves no stone unturned, ferreting out and putting 
to a stop activities and practices that hurt the American 
public.
    I also look forward to working with Congress to provide the 
adequate resources for this agency which I believe currently 
lacks the sufficient funds to do even its current mission, let 
alone the missions I think it needs to take on.
    Second, I believe that increased speculation in energy and 
agricultural products hurts American farmers and consumers and 
businesses. I do not have any doubt about that. A transparent 
and consistent playing field for all physical commodity futures 
should be the foundation of our regulations. Position limits 
must be applied consistently across all markets, across all 
trading platforms, and exemption to them must be limited and 
well defined.
    Third, we must now urgently develop a broad regulatory 
regime for over-the-counter derivatives. Standardized products 
need to be brought into mandated clearing and mandated 
exchanges. Beyond this, I believe the institutions themselves--
the derivative dealers that make the markets in derivatives--
need to have direct regulation under Federal statute, capital 
rules, business conduct reporting, and regulations need to be 
developed for customized swaps and for credit default swaps 
given their unique nature.
    And, fourth, I believe the CFTC must work with Congress and 
other regulators around the globe to ensure that failures of 
the regulatory and financial systems, failures that the 
American people public has taken such a toll, never happen 
again. Now, this will not be easy. These are complex financial 
markets, and markets are irreversibly linked. But we will have 
to work with our global partners to make sure that around the 
world we have the same rules that we have here. This is the 
only way that Americans can really be protected.
    Mr. Chairman, Ranking Member Chambliss, I am a proud 
believer in financial reform, tough regulation enforcement. I 
have been privileged to have had broad exposure to financial 
markets, here and in Asia, in public service and on Wall 
Street, as an investor advocate, and as a Government official.
    And my experience has taught me the importance of having a 
strong working relationship with Congress. I appreciate Senator 
Sarbanes' comments on that. In these transformational times, I 
do believe we have a unique opportunity working together to 
bring bold and necessary reform forward. We must, though, take 
this opportunity to ensure we deliver on the expectations that 
all Americans have for us.
    I would like to close by saying how much the support of my 
family--my three daughters--means to me, and the great 
sacrifices they will make if I am so honored to serve. My 
eldest, Anna, is a freshman at college and could not be here. 
My two other daughters, Lee and Isabel, if it would be 
appropriate, I would just like to introduce to the Committee.
    Chairman Harkin. Please introduce them.
    Mr. Gensler. This is Isabel, my youngest, who is 12, and 
then my daughter Lee, who is 17, who are here with us today.
    Chairman Harkin. Welcome to the Committee.
    Mr. Gensler. Mr. Chairman, Ranking Member Chambliss, 
members of the Committee, I look forward to taking your 
questions.
    [The prepared statement of Mr. Gensler can be found on page 
43 in the appendix.]
    Chairman Harkin. Thank you very much, Mr. Gensler.
    Mr. Gensler, in confirming nominees and moving their 
nominations forward, I like to know about their background and 
history and where they are now, their present views and 
outlook. Obviously, you have had experience, you have served in 
a previous administration. I would like to cover some of that 
with you as a way of examining where we were in the late 1990's 
and where we are today regarding issues under CFTCS 
jurisdiction.
    On May the 18th, 1999, you testified before the House 
Agriculture Committee's Subcommittee covering risk management. 
In response to questioning by our distinguished ranking member, 
when he was a member of the House Agriculture Committee, you 
said you ``positively, unambiguously'' agreed with Mr. Larry 
Summers in his testimony to the Senate Agriculture Committee 
opposing additional regulation of the institutional over-the-
counter derivatives market.
    You went on to refer to the ``vibrancy and importance'' of 
the global over-the-counter derivatives market.
    Here is a direct quotation. You said quote, ``That large 
and vibrant market is part of, I believe, the American success. 
And we should recognize that and put the burden on those who 
are suggesting changes and further regulation, put the burden 
on them before we tamper on some of the successes of this 
marketplace for the economy.''
    Well, that is quite a resounding, unqualified, and 
categorical statement, no second thoughts or ambiguity.
    Ms. Brooksley Born, who was about to leave as the 
Chairperson of the CFTC, had advocated strenuously over the 
previous few years, including before this Committee, that the 
risk of these over-the-counter derivatives needed to be 
evaluated and appropriately regulated.
    However, you were part of the team arguing--and you can 
correct me if I am wrong on that--for a statutory enactment to 
take away all CFTC regulatory power over these over-the-counter 
derivatives. According to the Washington Post of October 15th, 
2008, this team was really quite dismissive of Ms. Born, to the 
point of it kind of becoming personal at that time. But I do 
not need to go into that.
    But this team was quite direct in advocating that these be 
exempted from CFTC regulation.
    Mr. Gensler, what was your own personal role in dealing 
with Ms. Born during the time she was chair of the CFTC? Did 
you attend any meetings during that period of time in 1998 or 
1999 or did you have any telephone calls or communications over 
that period of time with her? What was the nature of those 
interactions, and did you have any advice for her at that time?
    Mr. Gensler. Mr. Chairman, thank you for your question.
    First, may I say, looking back now it is clear to me that 
all of us that were involved at the time--and certainly 
myself--should have done more to protect the American public 
through aggressive regulation, comprehensive regulation. We 
should have fought harder for some of the things that we raised 
with Congress at the time, whether that be regulating 
derivative dealers or keeping the oil and metals markets 
consistently regulated with the corn and wheat and soybean 
markets. These were things we recommended and we should have 
fought harder for.
    I clearly look back on some things outside the jurisdiction 
of this Committee that I should have fought harder for, 
guarding against predatory lending practices.
    I believe there are many things that at the time that we 
could not foresee, or did not see. They were just dots on the 
landscape, as you, I believe, and other Senators here 
commented. And we have to do a far better job seeing that which 
is out on the horizon.
    You asked specifically about meetings with Chairman Born 
and I recall working with her, working with her as a staff 
member at Treasury. I was an Assistant Secretary working on a 
report on long-term capital management and the after effects of 
the collapse of long-term capital management where there was a 
joint report put together in the spring of 1999.
    During those earlier periods of 1998, when there was 
different views of the Treasury, the Federal Reserve, and the 
SEC from the CFTC, Ms. Born raised very good questions but I, 
in fact, at the time was recused because it did relate to a 
particular matter of my former employer. I had been at the 
full, big set piece President's Working Group meetings, as 
would be customary for the Assistant Secretary to attend, along 
with other staff of Treasury.
    Chairman Harkin. Well, Mr. Gensler, that is a very 
straightforward answer and I appreciate that. So would you say 
that your views and your thoughts on this have evolved and 
changed over the intervening years, looking back at what has 
happened in the last several years?
    Mr. Gensler. Mr. Chairman, I very much would say that my 
views have evolved. There is so much that has happened in the 
marketplace as electronic trading facilities, even that our 
exchanges now are public and for-profit enterprises and back 
then were not for-profit and public. And the financial crisis 
itself, to me, goes to the heart of some of the assumptions 
that I think collectively all of the Federal agencies and even 
Congress at the time grappled with.
    I believe now it is just so important that we bring the 
whole over-the-counter derivatives marketplace on the market, 
into exchanges, as you do. I share that goal. And to also bring 
that over-the-counter derivatives marketplace onto centralized 
clearing.
    I, frankly, though do not think that is enough. I also 
think we need regulation of the institutions, that Congress 
would actually have a statutory regime for derivative dealers, 
somewhat like we have for banks, where you have capital rules 
which address the excess leverage, have business conduct rules 
to make sure there is not fraud and manipulation in the sales 
practices. And then, of course, last and very importantly, 
reporting rules. These dealers--there is about 15 or 20 around 
the globe that make up 99 percent of the market for over-the-
counter derivatives.
    So I have come to believe strongly we need both, the market 
side, clearing and exchanges for the standardized products, the 
derivative dealers clearly regulated, all the information 
coming in.
    Chairman Harkin. I am going to follow that up in my second 
round because I want to ask about this whole idea of having 
some derivatives that are not on a regulated exchange. I will 
get to that.
    In my reading, my memory but also my reading of that period 
of time from 1998 through about 2000, was that the President's 
Working Group was very forceful in their position that these 
OTC derivatives should be exempted from the CFTC. As I said, to 
the point one time where it also got personal with Ms. Born. I 
remember that.
    And in my reading of it, about that, from various sources, 
it appears, of course, that you have some very strong 
personalities there. You have Mr. Greenspan, who was driving 
this, quite frankly. And he is a very forceful personality. He 
was driving this.
    Then you have Mr. Summers. He is no shrinking violet, as we 
all know. He was driving this, also.
    Then you have Mr. Rubin there, also. So you have a very 
forceful group.
    CFTC was sort of shunted aside. Well, Mr. Gensler, should 
you get this position as the Chairman of the CFTC, you will be 
on the President's Working Group. And I needn't remind you that 
you will not be working for Mr. Geithner. You may be a friend 
of his; that is fine. You will not be working for him. You do 
not work for Mr. Summers. You do not work for Mr. Bernanke. You 
are the chairman of an independent regulatory agency. You do 
not even work for the President. You are chairman of an 
independent regulatory agency.
    And as such, your views and your positions that you have 
should be that of a chairman of an independent agency. And one 
should not be reticent in advocating a position even to the 
extent that some of the other forceful personalities may not 
agree, if you get my point.
    I just want some assurances from you that you will be that 
independent voice. Like I said, I am not asking you to sever 
friendships or the like. I am saying the mindset, the mindset 
of the Chairman of the CFTC cannot be working for Mr. Summers 
or Mr. Bernanke or Mr. Geithner or anybody else. And that you 
will bring that independent mindset to the President's Working 
Group.
    Mr. Gensler. Mr. Chairman, I thank you for that question. I 
think being Chairman of the CFTC is an independent regulatory 
agency. The commitment I give this Committee and to the 
American public that I will bring that independence. If I have 
a concern or thought about the regulatory protections that the 
American public needs, I will absolutely share it as one of the 
President's advisors, as part of the President's Working Group, 
with the President and senior members of his economic team.
    But if we cannot reach any consensus and I believe 
something, I am going to bring it to this Committee, I am going 
to bring it to the American public. There is a real difference, 
in my mind, of being an Assistant Secretary of Treasury and 
being the chairman of an independent regulator.
    I appreciate that when the President asked me--then 
President-Elect Obama--to be his nominee in December and we had 
a chance to chat, that was what he understood and that is what 
I understood, that I will certainly be advising the President. 
It would be a great honor to advise him on regulatory reform 
and all that we need.
    But that which is at the core of my beliefs, that we have 
to bring the entire over-the-counter derivatives marketplace 
into a regulatory regime, these two pieces that I have talked 
about, these two big pieces I have talked about and the goals 
that we share, they have heard me saying this straight through 
since December 18th and they are going to keep hearing me say 
it. And I make that commitment to you, sir.
    Chairman Harkin. Thank you very much, Mr. Gensler. I will 
return to the issue of derivatives and trading on exchanges 
during the second round.
    With that, I would of course yield to our distinguished 
ranking member, Senator Chambliss.
    Senator Chambliss. Thank you, Mr. Chairman.
    Mr. Gensler, in your statement you state, and I quote, 
``The current economic crisis clearly has shown that our 
financial and regulatory systems have failed the American 
people terribly.''
    I know you are very familiar with the workings of the CFTC. 
Surely you have followed the markets over the last several 
years since your direct involvement at Treasury. Is there 
anywhere that you think, or any particular instance you think 
where CFTC falls into that category of having failed the 
American people terribly?
    Mr. Gensler. Senator Chambliss, I think that the great 
failures are largely beyond the CFTC. But even in this area, 
the CFTC is, by Congress, that Act in 2000 that the Chairman 
referred to, asserted that they are an agency that has to look 
after systemic risk as well. And we clearly have had a systemic 
failure.
    Second, though the CFTC, I do not think, has the tools to 
look after that much, I do believe that we have had speculation 
that contributed and hurt farmers and consumers and all 
Americans.
    And if confirmed, I would fight hard to make sure that we 
have the resources and that we can bring what is needed to be 
borne to these markets within the current authorities at the 
CFTC.
    Senator Chambliss. With the current authority that is out 
there and the current resources that you are familiar with, do 
you think there is anything that the CFTC did not do that they 
should have done relative to this systemic risk issue that you 
are talking about?
    Mr. Gensler. Well, again, when the failure is so broad and 
complete, Senator, I just think all regulators have to look 
into themselves and say what could we have done differently? I 
do that personally, in terms of my own record.
    I think that the CFTC has aggressively fought and tried to 
enforce fraud and manipulation in other areas. But if 
confirmed, I would certainly want to take a look at all of the 
individual hedge exemptions that are currently in place, some 
for 20 years or so. I think it is time to look back and see 
whether those exemptions are still appropriate, given the 
current times.
    There are processes that the CFTC uses to allow for markets 
or individuals to take action sometimes that are not brought up 
to the full Commission level, and I think we need to do that, 
as well.
    So these might sound like they are around the edges of a 
big financial calamity, but I think every agency needs to take 
a look to see what can we do better and what can we do more.
    Senator Chambliss. You and I talked about the potential for 
an SEC/CFTC merger that a lot of folks are advocating and have 
been advocating. And I noticed you are quoted, and I hope this 
is an accurate quote, ``CFTC performs vital functions and it is 
critical that all of its mandates are preserved, even as the 
demands on our regulatory agencies expand. A merger makes sense 
only if it enhances our ability to carry out the important task 
with which the CFTC is entrusted. Thus, I would not consider a 
merger simply for merger's sake.''
    I want to say that on the vital function of the CFTC, 
certainly you and I are very much in accord there. There has 
been much discussion about merging these two agencies, as well 
as the creation of a new systemic risk regulator to oversee all 
Federal financial regulators.
    Personally, I have great reservation about bringing these 
two regulatory bodies together, as I expressed to you. For one, 
the SEC's performance in regulating their current portfolio has 
been less than stellar. And second, the CFTC uses principle-
based regulation that has proven an effective approach to 
regulating commodity futures. It is difficult for me to see how 
welding these two regulators together will serve Americans 
well.
    First, are you a proponent of the CFTC's principle-based 
regulatory approach? And if so will you, as Chairman of the 
CFTC, work to preserve this regulatory approach, as regulatory 
reforms and reshuffling of bureaucratic boxes are contemplated 
and proposed? And second, what problems could you see arising 
from an SEC/CFTC merger?
    Mr. Gensler. Senator Chambliss, I appreciated the time we 
spent in your office. I think we may have talked about this as 
well at that moment, too.
    As I said, and that was an accurate quote, I think this 
financial crisis brings to bear so many other problems other 
than, as you say, the boxes. The CFTC was formed in 1974, but 
really it was formed back in 1922 to protect the interest of--
at that time--grain merchants and farmers so that they could 
appropriately and reliably hedge their risk in the future about 
their corn and wheat and then later soybean. And of course, we 
have added many other products to it.
    I think that is fundamentally very different than what the 
SEC does. They are both market regulators. They both need to be 
strong on enforcement and anti-fraud and anti-manipulation, and 
look out for the public.
    But at the core, the CFTC's mission about protecting 
farmers and merchants and later oil and metals, and though it 
has been expanded to financial products and it is critical to 
get the over-the-counter derivatives marketplace correct as 
well, is sort of around a different set of mission and goal 
than that which is the SEC.
    I think both very vitally important. And as you rightfully 
point out, one of them principles-based which, as Chairman of 
the CFTC, I would support and make sure it works. And if it did 
not work, I would be back here readily to work with Congress to 
see if we needed to fix something. And the Securities and 
Exchange Commission has another approach.
    Senator Chambliss. The 2000 Modernization Act was a very 
complicated piece of legislation that you were involved with 
back then, as were a number of us. We thought we were doing the 
right thing and I think we did absolutely the right thing by 
allowing the market to expand and putting more flexibility out 
there. As a result we saw these markets grow in a tremendous 
way. I think all of that has been healthy for the economy.
    Obviously, as you alluded to, over the last 10 years--or 
well, 9 years we have seen major changes in the industry. We 
have seen very volatile prices from time to time which can be 
attributed to any number of issues.
    But my question to you is looking back at the 2000 Act, and 
knowing what you knew then, is there any recommendation that 
you think was made that we did not follow that should have been 
followed that we ought to think about now? Or do you think that 
act worked the way that all of us intended for it to at that 
time?
    Mr. Gensler. Well, I believe, looking back now, knowing 
what we know now, there are two areas that we did raise then 
but we should have fought harder for, I personally felt--thank 
you, Senator--should have fought harder for.
    One was the concept of regulating the dealers themselves, 
the brokers, the voice brokers or derivative dealers that are 
making markets. We all know their names. I will not name them 
here, but the large financial institutions.
    We recommended that. In some cases, they were the 
affiliates of the broker-dealers. But one of the big lessons 
out of AIG, the insurance company that failed, they had an 
unregulated dealer in the derivatives business. And now, in 
that case, it was $450 billion in size. In that case, it was 
largely credit default swaps. But it was also unregulated. 
There was no, not the New York State Insurance Commissioner, 
nor any Federal regulation about its capital, its business 
conduct, its reporting. I think we need to put that in place.
    Second, at the time the President's Working Group did 
suggest and recommend that oil and metals and cotton and wheat 
all have a consistent regulatory regime. We were unable to 
achieve that, working with the various committees in Congress 
in working that through.
    But I think that is a good foundation. I still think that 
is the right foundation, that if something has finite supply 
and is more easily manipulated, that we should think of 
consistent regulation and make sure that we get that in.
    Senator Chambliss. Thank you, Mr. Chairman.
    Chairman Harkin. Thank you, Senator Chambliss.
    Senator Lugar.
    Senator Lugar. Thank you, Mr. Chairman.
    You have just mentioned, Mr. Gensler, the ideal of having 
the agricultural commodities but likewise, a broader group 
together. Certainly in testimony that we heard in October and 
before many advisors, even to pension funds and to college 
endowment funds, suggested a grouping of commodities which 
included corn and soybeans but also metals and oil and these 
combinations of commodities that serve those interests well for 
a period of time.
    But it did lead to an interesting question with regard to 
regulation of them, and it is a discussion that we had at the 
time of the reauthorization of CFTC a while back which, without 
going into who was for and against, the problem of the 
regulation of oil, for example, or of various other energy 
products, was fiercely resisted by some Senators, by some 
witnesses, by some members of the Administration at the time, 
as I recall.
    I mention that now because I really want your judgment as 
to what should be the scope of the CFTC? We think about the 
agricultural scene, that seems fairly clear. It has never been 
quite that clear with regards to other commodities, as they are 
thought of generally.
    What sort of scope do you envision as ideal, in terms of a 
regulatory regime?
    Mr. Gensler. Senator, I thank you for the question and I 
thank you for having--we had a good meeting together on these 
subjects.
    I think that the Commodity Futures Trading Commission 
currently has exclusive jurisdiction from Congress to regulate 
the futures markets. And it has proven well, as Senator 
Chambliss said, though in the midst of a crisis everybody has 
to look within. It has proven well in regulating over these 35 
years the futures markets.
    I believe that if we are able to bring over-the-counter 
derivatives into centralized clearing, into exchanges for these 
products, that the CFTC is best situated with expertise on the 
derivatives marketplace, if appropriately funded I must add. 
But I think they are best situated amongst the Federal 
regulators for these authorities.
    Senator Lugar. Now the appropriately funded point which you 
touched upon in your opening remarks, and which has often been 
touched upon by the leadership of the Commission, just has not 
been occurring. There is not an understanding I think, perhaps, 
of the scope of what this means if you are to take in all of 
the different types of derivative contracts and various other 
situations.
    From the beginning will you be able to give the Committee 
and work with us in terms of how many people you actually need 
or what sort of facilities are required to achieve something 
which the American people clearly want at this point?
    Mr. Gensler. Senator Lugar, I look forward, if confirmed, 
working with you and the Committee on that. I know under its 
current authorities the CFTC has just under 500 people. This is 
the same size it was in 1974.
    Senator Lugar. Yes.
    Mr. Gensler. So in 35 years, when the markets have grown 
more than 50-fold--again, markets have grown 50-fold, the 
agency is the same size. That is either efficiency or well, or 
it is underfunded. And maybe it is some of both, but I think it 
is underfunded.
    It was 600 people just a few years ago. The enforcement arm 
had 150 lawyers, it is now only 110 lawyers, just to enforce 
the laws currently in place.
    I believe the Agency has put a request in, and I am a 
private citizen but I was able to read this letter in the last 
few days, to get back up to 690 people. That gives you a sense 
of what they believe right now they need.
    Senator Lugar. I think it is probably incumbent upon us, 
but you if confirmed, to gain greater recognition for what the 
CFTC does. I think it has always remained in the shadows. But 
no longer. We have a financial crisis that still goes on.
    Let me add one further thought, as you are thinking about 
the budgets. I have no idea what the result will be of our 
debates on energy resources, climate change. But let us say 
that a cap and trade system was established in this country in 
which there was really a very conspicuous and very expensive 
market for carbon.
    I ask sort of in advance what your judgment would be as to 
whether the CFTC should be the agency that regulates huge sums 
that are likely to be involved if a very serious cap and trade 
situation involving all of our industries, utility, so forth, 
was to come about?
    Mr. Gensler. Senator Lugar, I believe under the current 
statutory authorities that the CFTC does have that oversight, 
and there is a very small cap and trade market now I am told, 
regional market, that they have some oversight.
    Senator Lugar. Yes.
    Mr. Gensler. If that were to grow into a national market, 
be listed on an exchange or in other ways, the CFTC, I have 
been told in my early investigation, does have that authority. 
But I would certainly look forward to working with Congress if 
we need to put more of that into statute and address that 
specifically.
    Senator Lugar. Let me just ask as a personal inquiry, I 
have become a member of the Chicago Climate Exchange, largely 
as a demonstration that farmers who have hardwood trees and 
have proper measurement and so forth are sequestering carbon in 
their trees. And each year we have an update of how much more 
is there.
    So on the website of the Chicago Climate Exchange, every 
day there is a quote for their price of a ton of carbon. It is 
$1.95 today. It was up to $7 at one point during the year.
    Similar situations in Europe, however, have had quotes of 
anywhere from $20 to $50 per ton, depending on the Kyoto 
Protocol and how seriously some countries looked at this.
    I mention this because there is, as you say, a modest 
attempt being made by people in Chicago, who also are working 
with the Europeans in this. And it may come to pass that the 
Congress debates this issue but puts it aside, as was the case 
last year.
    But if we do not put it aside, this is going to be a very, 
very large set of problems and sums of money and implications 
for something well beyond agriculture or speculators in 
commodities. And that is why I wanted to try to establish who 
is responsible. And your judgment, and I agree with it, is that 
it is the CFTC.
    But having the personnel, the regulations, the rest of it 
for this is sort of a quantum leap and is the type of thing 
which hopefully we will not look back in a hearing 10 years 
later and say why did we have no vision, no preparation, and no 
people.
    Mr. Gensler. Right. And Senator, I think you raise a very 
good point. The Commodity Futures Trading Commission has the 
best experience and background and current authorities 
regulating the futures markets.
    But just as it does also work with the Department of 
Agriculture that has the best authorities and expertise on 
agriculture and the cash markets and so forth. So there is some 
shared protection of the American public between the Department 
of Agriculture and the CFTC in corn and wheat and other 
products, where the CFTC is focused on the futures.
    There may well be multiple agencies in a cap and trade 
situation where the CFTC brings its expertise to protect the 
American public in the futures markets and other agencies bring 
their expertise to protect the public in other regards.
    Senator Lugar. Thank you.
    Chairman Harkin. Thank you, Senator Lugar.
    Senator Stabenow.
    Senator Stabenow. Thank you very much, Mr. Chairman.
    First of all, welcome and I look forward to supporting your 
nomination.
    Mr. Gensler. Thank you, Senator.
    Senator Stabenow. Is this microphone on? It is not working. 
Well, I am going to move over here, just a second. We will see 
if this one works.
    OK, that is working, and I am not Senator Conrad.
    Welcome again, and I will say for the record, with the 
microphone on, I look forward to supporting your nomination on 
the floor and to working with you.
    I wanted to follow up with Senator Lugar, I think, what 
Senator Lugar was speaking about, the engines of cap and trade, 
which I think is such an important new area for us to focus on. 
President Obama spoke about it last night. We know that there 
is a lot of work being done, important work, being done to 
craft the right kind of balance for moving forward to tackle 
this issue, which I hope we will do.
    And some believe this will create the largest derivative 
market in the world. So there are a number of questions that I 
have in terms of how we approach this. It is a real 
opportunity, I think, to design a transparent, efficient, 
carbon market that builds on the practices for market 
regulation that we have.
    So I am wondering what you believe the lessons are that we 
have learned from other financial markets that would guide us, 
guide Congress and Federal regulators as we design a new carbon 
market?
    Mr. Gensler. Senator, first let me thank you for the 
support and confidence you have in me in this nomination, and 
that means a great deal to me.
    As I indicated, the carbon markets and the cap and trade 
markets may grow. The CFTC does have expertise in terms of the 
futures markets. And though I have not studied these issues in 
any depth, let me just mention a couple of things.
    I think that it is important, just as in other futures 
markets, to make sure that we have a transparent marketplace. 
So if there is a design of a contract, as there is design of 
contracts in corn and wheat and oil and so forth, design of 
contracts that there is some transparency and there is a 
marketplace where it trades, there the public can see and 
corporations can see that marketplace and have the benefit of 
that transparency. And that there really are protections, just 
as there are in other futures, from fraud and manipulation.
    But there may be things that are specific to this market 
that I, if confirmed, would look forward to working with you 
and your staff and this committee to better understand and 
better advise you as you go forward.
    Senator Stabenow. Thank you.
    This may be something, as well, that you have not focused 
on specifically regarding carbon. But there is another issue 
related to that which relates to bonafide hedgers and what is a 
bonafide hedger in this contact. And I would be interested in 
knowing if you have any thoughts on a definition or what the 
CFTC and the Congress should do relative to this issue when we 
think about the nascent carbon market.
    Mr. Gensler. Senator, I think that all of the markets that 
the CFTC has oversight for, futures markets and hopefully these 
other over-the-counter derivatives, where there is something of 
finite supply, it is susceptible, that underlying product is 
susceptible to both manipulation, corners--what is called 
corners and squeezes. I am old enough to remember when the Hunt 
brothers cornered the silver market. I know the lack of hair, 
but I remember that.
    And I am not familiar enough with the carbon markets, but I 
think that is probably a market that would fall into this 
category which is susceptible to some finite supply.
    And also, the position limits are critical to protect 
against excess speculation. Hedgers need the benefit of 
speculators on the other side. We have had, for 130-plus years, 
contracts in the futures market and hedgers want somebody on 
the other side to take a risk. But there is a burden if it gets 
so excessive, and we saw that volatility in the last several 
years.
    So I think as it relates to this new market, the lessons of 
guarding against manipulation, guarding against excessive 
speculation would inform me, as Chairman if confirmed, and 
quite possibly inform Congress as to thinking about a regime in 
the carbon market, as well.
    Senator Stabenow. Thank you. I look forward to working with 
you on this issue. We have a number of different discussions we 
need to have that relate to regulating carbon, how this is 
going to be done in a transparent way, how there is 
accountability, how we--again, as you indicated, make sure that 
we are doing everything we can to deal with speculation in the 
marketplace driving up costs and so on.
    So I think there is a very important opportunity and role 
going forward for the CFTC in this whole discussion, and what I 
hope will end up being a strategy for us to be able to address 
the issue of carbon and cap and trade.
    Mr. Gensler. Senator, if confirmed, I look forward to 
working with you on that.
    Senator Stabenow. Thank you.
    Chairman Harkin. Thank you very much, Senator Stabenow.
    Mr. Gensler, I had this chart prepared here. No, I am not 
Senator Conrad.
    [Laughter.]
    Chairman Harkin. He sits right there. That is an inside 
joke referring to Senator Conrad's use of charts.
    But this is the oil market from 1997, here is 2007, and 
here is the price spike of last year coming back down here to 
about $40, maybe a little bit less than $40 a barrel right now, 
somewhere in that neighborhood. So the consumers see this and 
they suspect something is wrong with this big spike. There 
really wasn't less oil. In fact, if anything, we were beginning 
to see the situation improve in Iraq, and Iraq has significant 
oil reserves. So it really wasn't a lack of a supply.
    So if these wild price swings are not a function of normal 
market factors, how is that explained to the public? As 
Chairman of the CFTC, how would you explain something like this 
to the public that happened last year in oil? How would you 
explain that?
    Mr. Gensler. Mr. Chairman, I think that we had an asset 
bubble in the oil markets, an asset bubble even in other 
commodity markets. To the American public, I would say, as we 
saw----
    Chairman Harkin. Explain that asset bubble as it regards 
this.
    Mr. Gensler. Well, similar to in the housing market, but 
driven by different factors, but just as the housing market, 
housing prices went up beyond what one might have said was the 
underlying cost to build the homes and so forth. In this 
marketplace, I believe that we had a great many people come to 
the conclusion that it is another asset class. The stock market 
is someplace you can invest. Maybe the bond market is someplace 
you can invest. Now the commodity markets is a third place one 
might invest to diversify risk, and there are great theories of 
diversification and theories I generally believe in.
    But that risk diversification led some investors to try to 
invest in commodities and I think over this period, just before 
the run-up, but over the period from 2004 to 2007, that some 
statistics that I saw, that increase of outside investors, and 
I have said publicly and I will say again here I believe that 
investors that were investing as an asset class, whether they 
were index investors or hedge funds or other financial 
investors around the globe, not just here, had the perception 
that this price was just going to keep going up so that the--
they were wrong. They were terribly wrong. But as a factor in 
that, the American public was hurt. I mean, it was terribly 
hurt by this speculative bubble.
    Chairman Harkin. So I could substitute speculators for the 
word ``investors.'' You use the word ``investors,'' but they 
were speculators. They were speculating on this market 
continuing to go up all the time.
    Mr. Gensler. That is true, like some people speculated on 
home values or some people speculated on real estate or other 
things.
    Chairman Harkin. This is something that I have wrestled 
with since I first came here in 1975 to the House Agriculture 
Committee and that is the role of speculators. The term 
speculator has a bad connotation. So what is the proper role 
for a speculator in a market? I don't care whether it is oil, 
it can be grains, it can be metals. What is the proper role? Is 
it beneficial? And how do you explain to the consuming public, 
most of whom, if you ask them should speculators be driven from 
the market, would say yes--nine out of ten, I bet, would say 
that--so how do you explain, what is the beneficial role of 
speculators?
    Mr. Gensler. I think at the history and the core of the 
futures markets, going back to the 1870's, in fact, when a 
farmer wanted to have a reliable price for corn or wheat that 
they might want to sell at the end of the harvest and know how 
much money they would have to plant their fields, on the other 
side of that transaction, there needed to be somebody who was 
willing to bear risk, almost like writing insurance.
    So for 130 years, since futures started trading, we have 
had a concept, and I believe it to be the right one, sir, where 
commercial interests, farmers, ranchers, and then later oil 
producers and natural gas companies and grain elevators and so 
forth, all wanted to have a reliable price for their product so 
that they can make business decisions.21Well, on the other 
side, then there is somebody in essence writing--taking on that 
risk. It is not an insurance company. In fact, it is somebody 
we call a speculator, somebody who is taking a position on the 
other side.
    What is at the heart of the CFTC authorities dating back to 
its founding is that that is to be allowed, but we also want to 
protect against excessive speculation and the burdens of 
excessive speculation, and there is a whole regime of position 
limits to limit that, and there is also clearly an important 
public interest to protect the American public against 
manipulation in markets. And sometimes when you see spikes like 
this, you say it broke down. What was happening may have broken 
down.
    Chairman Harkin. Could the CFTC have started to do 
something in here to stop that speculative bubble in oil 
prices?
    Mr. Gensler. I believe that all of these products need a 
consistent regime of position limits and those position limits 
should apply around the globe. The CFTC, in working with 
Congress, has addressed a number of these features. In the farm 
bill last year, I believe, to the credit of this committee, 
working with other members of the Senate and the House, you put 
in place a way to close part of that. There is also things that 
the CFTC has done subsequently, working with the regulators in 
London to try to address some limits so there is more 
transparency and that limits, where they are in place, apply to 
all markets consistently around the globe.
    Chairman Harkin. Well, at least with the oil market, you 
could see it happening. But I would like to turn, if I could, 
to over-the-counter derivatives, which really is an opaque 
market and which you can't see happening. First of all, would 
you agree or slightly agree or disagree with the statement that 
derivatives are more like futures contracts than just about 
anything else. Is a derivative a futures contract?
    Mr. Gensler. Senator, a future is actually technically a 
derivative. A derivative is just a broader term, and I believe 
that all of these products have great similarity. So I think 
that hopefully answers the question. And what they have 
similarities is that they derive their value from some other 
product. A future derives its value from the corn or wheat or--
--
    Chairman Harkin. That is a future. That is right.
    Mr. Gensler. That is a future, and an over-the-counter 
derivative derives its value possibly also from corn or wheat 
or oil or it might be from underlying interest rates. So they 
are very similar products. They are all forms of financial 
instruments that derive their value from some underlying 
feature.
    Chairman Harkin. OK. And a derivative's value basically 
depends on something happening in the future. A derivative is 
tied to something either happening or not happening in the 
future. So I always think of derivatives trading as a futures 
market. So, therefore, why should they be exempted? Why should 
they be exempted from the CFTC?
    Mr. Gensler. Mr. Chairman, I believe that the entire over-
the-counter derivatives marketplace, we need to bring those 
standardized products onto centralized clearing, and we get a 
great benefit from centralized clearing and we will lower the 
risk in the system and add to transparency. We actually 
attempted to do some of this 8 years ago and there was a 
voluntary clearing mechanism that was in that bill. I believe 
now it should be mandated for interest rate product, currency 
product, commodity product, credit default swaps, and the 
equity products, the whole regime.
    I also think the standardized products, we get great 
benefit from the transparency that can come from being on 
exchanges. There are some exchanges for these derivative 
products, but we can get a great deal more benefit from 
transparency from bringing those standardized products onto 
exchanges.
    Chairman Harkin. Help me think through this. I have a 
concern that you keep using the word ``standardized,'' and I 
saw that in your response to questions asked of you by both 
Senator Cantwell and Senator Levin. And you referred to it a 
number of times here, about the standardized credit default 
swaps for example, standardize.
    But it seems to me that if someone wanted to trade in an 
over-the-counter derivative market and not on a regulated 
exchange, they could simply do little things to make the 
contract customized, and you can't, in all your wisdom, define 
every little thing that could make it a customized rather than 
just a standardized swap or derivative. So how can you have 
both a regulated exchange for standardized, and then an over-
the-counter for customized? How do you define what is custom?
    Mr. Gensler. Mr. Chairman, I couldn't agree with you more. 
I believe that is why we also need, working with Congress, to 
come up with a regime for the customized product. There is 
still commercial interest, whether they be a grain elevator or 
it can be an airline that wants a certain grade of jet fuel 
delivered on a certain day to a certain airport, and those 
dates and that grade of jet fuel and that airport may be 
different than a particular contract. That is customized.
    But at the same time, if we bring reporting to that and 
required reporting, required capital or margin requirements, 
and we level the playing field between that and what might be 
the standardized products, I believe that working together 
still allows the legitimate commercial interest to try to hedge 
in that little example a particular jet fuel at a particular 
date at a particular airport.
    Chairman Harkin. Maybe there is something here I don't 
understand, because I have thought about this a lot and I have 
read a lot about it. But it just seems to me that if you are 
going to close the loophole, you have got to put them all on a 
regulated change. If someone says they have got a custom deal, 
well, put it on the exchange anyway. Then we know what you are 
doing.
    Many thousands of contracts would avoid daylight by one 
little custom change. I have said before, if you and I want to 
swap something, you want to swap your tie for my tie, no one 
else cares. But if you own a whole portfolio of stocks and 
bonds and you want to swap that for my little piece of land 
someplace that may have tenants on it and things like that, 
well, then you see a lot of other people are involved in that 
custom swap.
    And I am thinking, why not just put those on a regulated 
exchange? And if you can't do that, well, then you are just--
you just outlaw those customized kind of swaps unless they are 
willing to put them on a regulated exchange.
    Mr. Gensler. Mr. Chairman, that is why actually I believe 
that we, in addition to what we are talking about, also bring a 
full regulatory regime to the dealers themselves, these large 
financial actors that deal in these markets. My fear, Mr. 
Chairman, of saying they are outlawed entirely is not only that 
which might hurt, whether it is a grain elevator in Iowa or 
whether it is an airline that wants a certain jet fuel on a 
certain date in a certain city, that they will find some other 
way. That is true economics. An airline wants to hedge that 
risk some other way that is then outside of the regime.
    So I think working with Congress, if confirmed, I would 
look forward to making sure that 100 percent is reported, that 
it is not opaque, that it is all brought in and aggregated into 
central data warehouses, which I know a number of Members of 
Congress have looked at and worked on, that there is no hole in 
the bottom of the boat that it all flows out of, but that the 
hundreds of products and the great majority of the products 
that are standardized are on exchanges, and if an exchange 
accepts it on the exchange, it has got to be on the exchange. 
And if the clearinghouse accepts it in the clearinghouse, it 
has to be in the clearinghouse.
    But we still--like you said, if we swap ties--and I do like 
your tie--but if we swap ties, Mr. Chairman, that it might well 
be that that has to be reported and we have to have capital 
charges for it but not have that on an exchange.
    Chairman Harkin. I see Senator Klobuchar is here and I am 
going to yield to her. I have more to go into on the topic in a 
little more depth, but it just seems that once you have an 
over-the-counter market, derivative market for customized 
contracts, you can just about exempt anything. If I have a 
futures market that says the expiration date is July 20, but 
then I say, no, I need July 21, does that make it a custom 
contract? Does that exempt it from exchange trading? That is 
what I mean. It just seems to me I can make any little change 
and all of a sudden I am exempt and can trade the contract 
over-the-counter.
    Now, you say, well, you report the trading anyway and so 
forth, but I am still not certain that gets to the nub of the 
benefit of putting the trade on that regulated change where 
every day it is transparent. One can know exactly what is 
happening and you don't have these customized things drifting 
around out in the OTC market. I think you just open the door 
for proliferation of inadequately regulated OTC trading.
    Mr. Gensler. Mr. Chairman, you and I share exactly the same 
goal, that we bring this whole marketplace into what I believe 
is two regimes. One regime is the centralized clearing in the 
marketplaces. The other regime is that the dealers themselves 
have serious regulation on capital, business conduct, and 
reporting, and that we rely on both to bring a marketplace that 
is very important and large into our economy, but under 
regulation.
    Chairman Harkin. Thank you very much, Mr. Gensler.
    Senator Klobuchar?
    Senator Klobuchar. Thank you very much, Mr. Chairman. We 
will have to leave the tie swap idea behind because I don't 
have one.
    Mr. Gensler. Thank you, Senator.
    Senator Klobuchar. But I wanted to congratulate you on your 
nomination. I appreciate, Mr. Chairman, that this nomination 
hearing was held in such a timely manner, given what we are 
facing here, how important it is, and that we need a cop on the 
beat to monitor commodity trading and giving us good advice 
about what to do with financial derivatives.
    I just noticed that the President at this very moment is 
holding a press conference on financial regulations and what he 
thinks needs to be done here. I have been just stunned by 
everything that has gone on here. I remember your predecessor, 
Mr. Lukken, when he appeared before our committee, and as a 
former prosecutor, I was giving him some ideas of the things 
that I thought maybe we could give to him as tools to use to 
improve things.
    We talked about staff improvements, which I think is 
important, or additional staff. But then we talked about this 
idea of more tools and he actually said, no, he didn't want 
that tool. No, he didn't want this tool. We talked about the 
London loophole or would he like more ability to go after 
certain things, and he said that he didn't want that ability.
    I said, you know, as a prosecutor, you want--if you think a 
statute will help you with a certain group but you are not sure 
if you are going to use it, you still might want that statute. 
I just wonder how you would respond to that, because that is 
what most stunned me about that hearing.
    Mr. Gensler. Senator, thank you for asking the question and 
taking the time at this hearing in your busy schedule. I 
absolutely believe the CFTC needs more tools, unambiguously. I 
believe it has to be a tough cop on the beat and strong on 
enforcement. We need more resources to do that. I mentioned to 
some others that the enforcement wing itself has 150 lawyers, 
was shrunk to 110. This is in a period of time that the futures 
markets went up sixfold in volume, in the last 8 years.
    But beyond that, I believe that we do, working with 
Congress, have a broad agenda, if I am confirmed, to try to get 
additional authorities to address some of the very real issues 
in the agriculture and energy markets and the over-the-counter 
markets to control some of the excesses that we have seen.
    Senator Klobuchar. Well, one of the things we talked about 
last year was closing the so-called London loophole, to stop 
traders from routing transactions through offshore markets to 
get around limits on speculation. I worked with Senator Dorgan 
and a lot of others on this speculation issue. Do you think 
that would be helpful?
    Mr. Gensler. Senator, I do. I congratulate your efforts on 
that. I think that the CFTC has done some things 
administratively, but I think it would be very helpful, working 
with Congress, if confirmed, to actually have that in statute. 
And it is really--the core principle I would have is that 
markets are so interlinked around the globe that if it affects 
American consumers, that we should make sure, even though we 
might have reciprocal arrangements with other regulators around 
the globe, that fraud and manipulation, that position limits 
and reporting have some consistent regime. And so I would look 
forward to working together on that and I do believe it is 
important to have these position limits apply to various 
trading platforms around the globe.
    Senator Klobuchar. You know, credit default swaps have been 
blamed for helping to accelerate the over-leveraging on Wall 
Street. Do you share this view and do you think that something 
should be done about this?
    Mr. Gensler. Senator, I believe a great deal needs to be 
done with regard to the over-the-counter derivatives 
marketplace, not just credit default swaps but, as the Chairman 
and I were discussing as you came in, to bring the whole over-
the-counter derivatives marketplace into a regulatory regime 
with centralized clearing and exchanges.
    Senator Klobuchar. Right.
    Mr. Gensler. But beyond that, I do think credit default 
swaps raise an additional set of unique challenges. In AIG, we 
saw a book of business that wasn't even regulated. The 
transactions weren't and the financial institution wasn't. I am 
recommending that those should be regulated, and the credit 
default swaps' unique properties, because often they are very 
much like a corporate bond and it is a corporate bond with a 
lot of leverage in it. And I believe that regulators need there 
to work together to find the appropriate controls in addition 
to clearing and exchanges. I think there is appropriate further 
regulation in that market that is needed.
    Senator Klobuchar. Good. One last question, following up 
with the last questions that the Chairman was asking with the 
custom issue. Last September, the CFTC issued a report on the 
over-the-counter markets and it contained some recommendations, 
and one important recommendation was to create enforceable 
position limits by developing limited risk management 
exemptions for swap dealers and requiring dealers to, first of 
all, report to the CFTC about large customer positions, and 
second, certify that none of the non-commercial customers 
exceeded specific position limits in related exchange trading 
contracts.
    Do you support this action? Do you think that this is a 
recommendation, and should that rulemaking activity continue?
    Mr. Gensler. Senator, I do, but even further, as I 
understand it, and again, I look forward to learning more about 
this, if confirmed, but these various position limits that are 
at the heart of the framework to comply with the mission of 
this agency have some exemption that have been issued going 
back nearly 20 years. Many of them were issued by staff, ``no 
action'' letters. I believe that every one of those exemptions 
needs to be reviewed. As Chairman, I would be looking forward 
to working with my fellow Commissioners, Mike Dunn and Bart 
Chilton, Jill Sommers, Walt Lukken, and really take a look at 
all of these.
    And second, also look at the process of issuing ``no 
action'' letters themselves. Some should stay at staff level. 
But others really are consequential and that is why you have 
Senate-confirmed people in the jobs to look at these things.
    Senator Klobuchar. OK. Thank you very much. I appreciate 
it.
    Mr. Gensler. Thank you, Senator.
    Chairman Harkin. Thank you, Senator Klobuchar.
    Senator Chambliss.
    Senator Chambliss. Thank you. If I could go back to the 
Chairman's chart there for a minute, Mr. Gensler, and I want to 
see if I can ask this question the right way. I don't want to 
take your language and interpret it in some way other than 
exactly what you meant. But when you talk about the spikes in 
the market and you talk about speculators causing that huge 
spike, is it not a fair statement to say that speculators who 
sought to manipulate the market are the ones that may have 
influenced that spike versus speculators per se causing that 
spike?
    Mr. Gensler. I think that what I believe is that there are 
many contributing factors, that we have had in our economy and 
around the globe many imbalances, low savings rates here, very 
high savings rates, nearly 40 percent saving rate in China. 
There are great global imbalances that have been flooding into 
markets.
    Within those global imbalances, I believe that commodities 
started to be viewed as an asset class for investment. And so 
one of the contributing factors--there were other contributing 
factors, too, but one of the contributive factors, I think, is 
as investors started to look at commodities as an asset class, 
and unfortunately, over the globe, risk was underappreciated, 
terribly underappreciated, and when I say that, I mean it was 
underpriced.
    There were too many investors, and, yes, speculators who 
thought it was more likely that something would go up than 
down, that the demand factors from China and India or the low 
refining capacity would keep pushing these prices up. And that 
collective misjudgment of market participants is what I think 
you see there, but not necessarily--I don't have the facts or 
figures to say that it was manipulation, sir.
    Senator Chambliss. You made a statement which I think is 
correct and which I have argued with my colleagues who would 
like to see all speculators eliminated. Are you going to have a 
market that functions properly without speculators?
    Mr. Gensler. Senator, again, I think at the heart of the 
futures market since the first contracts, I believe, were put 
in place in the 1870's is that for a hedger to have somebody on 
the other side who is willing to bear that risk, we call the 
person on the other side a speculator. We need--the markets 
need that so that the commercial interests, the farmer, the 
rancher, the grain merchant, has somebody on the other side to 
bear that risk.
    Senator Chambliss. And you have been on both sides of this. 
You have been on the investment side as well as on the 
regulatory side. You have got extensive experience on both 
sides. If an investor in the market, somebody who trades in the 
market regularly, is overregulated, including adding position 
limits, and they have the availability of going offshore, what 
is that person as an investor who feels like he is 
overregulated going to do with respect to the American market 
that CFTC regulates versus trading offshore?
    Mr. Gensler. Senator, I believe these markets are 
completely interlinked at this stage. So I think that it is 
critical that the U.S. regulators work with our global 
counterparties in Europe and in Asia to assure ourselves that 
there is consistent regulation. And where we are unable to get 
that consistent regulation, to work still to protect the 
American public the best we can as to the transactions with the 
American public, or where there is American product, a product 
like West Texas intermediate, or products that are right here.
    But I agree with you, sir, that paramount is working with 
the global regulators. I believe that we can find that 
consensus. But if confirmed, I know there will be challenges to 
hopefully make sure it is around the globe.
    Senator Chambliss. Well, if you are an investor, whether 
you sit in Washington or New York or Atlanta, and you want to 
buy a contract of a product that is sold internationally or on 
a market that is regulated by CFTC and you have got the choice 
of where to go to buy that, as an investor, are you going to 
look for a market that gives you the greatest amount of 
flexibility and therefore the greatest opportunity and a safe 
way to ensure a profit, or are you going to go to a market that 
just overregulates you to death?
    Mr. Gensler. Senator, I think that investors in these 
markets are so interlinked that they will find a fungible place 
to go, and that is why, if confirmed, my commitment to you is 
to, first, to raise with you and the rest of the administration 
what rules I think will best protect the American public, but 
then second to work feverishly with international regulators to 
try to see if they agree, and where we agree, hopefully adopt a 
consistent regime. Where there are disagreements, at least come 
back to this Congress and the administration, because those 
differences will possibly be important. Hopefully, those 
differences won't be, but they may be really important to the 
American public.
    Senator Chambliss. Well, I think all of us want to make 
sure that the American public is totally protected and make 
sure that anybody who invests in the market is going to have 
the assurance that somebody is looking over their shoulder. But 
the fact is that these markets are traded on by individuals who 
are extremely sophisticated, and as you said, things have 
changed so much over the last 9 years. Gosh, we didn't have 
electronic trading back then, and now, very few trades probably 
are not in some way not connected to the electronic side of it.
    And I know from talking to traders who have told me, look, 
you start putting position limits on me, pure and simple, hey, 
I can trade on the London Exchange from Atlanta just like I can 
trade on ICE or CME or New York Exchange, and that is what we 
will do. I just want to make sure that there is a clear 
understanding that we can go too far and we have got to be 
careful about that.
    Mr. Gensler. And I think that, Senator, you and this 
committee and the rest of this Congress worked last year, as I 
understand, in the farm bill to say contracts that look like 
the contracts here--they are called look-alike contracts--that 
had a particular relevance to these markets here, those were 
the ones that position limits.
    There may be other contracts overseas that really are on 
other markets involving other products. But where it really was 
sort of almost like twins, those look-alike contracts, it was 
appropriate to have consistent regulation. But I certainly, if 
confirmed, understand it, as you say. I think that my 
experience both on Wall Street and in government provides a 
certain background to understand, exactly as you said, that we 
have to get this right.
    Senator Chambliss. With respect to the standardization of 
products versus the customized products out there, I think if I 
heard you correct, you say that there ought to be a 
clearinghouse for the standardized products. But you and I, I 
think, agree that we have got to be very careful with the 
customized products because I am not sure how you do that, how 
you are going to have a clearinghouse for all customized 
products.
    I know one thing that has concerned some of my colleagues 
is that the way we all know these markets work are that a 
customized product may change hands two or three, four, five, 
ten times in one single day, and how in the world we are going 
to clear all of those in a manner that has a regulator looking 
over their shoulder, I don't know. I am concerned about those 
types of contracts certainly going overseas.
    But am I wrong in my thinking somehow? Is there some way 
that you think that we can come up with a regulatory process 
that not only is a clearinghouse for the standardized product, 
but the customized product, also?
    Mr. Gensler. I do, Senator. I know these are very complex 
markets and these are challenges, but I do, and I think that 
there can be a product that changes hands multiple times a day 
is probably, with all respect, more standardized than 
customized. There has been a number of approaches, I know both 
here in the Senate and the House and some draft bills on how to 
define what might be customized.
    But centralized clearing adds a great benefit because it 
means that these individual financial institutions, these 15 or 
20 large financial institutions, are no longer exposed to each 
other. And one of the great calamities of this past crisis is 
that one financial institution couldn't fail because if it 
failed, it was like interconnected, so interwoven that it was 
going to bring down the whole system.
    One of the big benefits of centralized clearing is that all 
of these trades, rather than with each other, is with a central 
mechanism, and there would be a posting, like on the futures 
exchanges, a posting of collateral on a regular basis. AIG, 
when it got the call, had to post $40 billion of collateral. 
Well, we know what happened then. The U.S. taxpayers stepped in 
and loaned the money to AIG.
    I believe we really have to work feverishly and urgently to 
try to make sure that doesn't happen again. I think that 
centralized clearing, I think the bias that I am suggesting is 
toward getting those contracts in, and if a clearing mechanism, 
and there are a number of competing clearing mechanisms, but if 
a clearing mechanism would accept a contract, that is certainly 
one test it should be there, and then Congress can also dictate 
certain rules. I mean, there is a lot that we would need to 
work together, if confirmed, on how to structure this. But I do 
think it does help lower the risk tremendously.
    Senator Chambliss. The ``no action'' letter, would you 
support elimination of ``no action'' letters, or do you support 
still utilizing the ``no action'' letter process in appropriate 
situations?
    Mr. Gensler. As I have come to understand it, all of the 
major regulatory agencies, whether it is the FTC or the SEC, 
CFTC, has a form of ``no action'' letters. There are some 
things that are truly administrative and staff writes a letter 
and says they are not taking an action.
    What I believe we need to do at the CFTC, working with the 
other Commissioners, is really look at that process and see how 
is that done and which ones are consequential and which should 
come up to the full Commission, a five-member Senate-confirmed 
Commission. So I believe at the end, there would still be some 
that are really truly either administrative or ministerial or 
consistent with role, but there are consequential ones, I 
believe looking now in hindsight, and hindsight is--I know we 
are foresight here, but I believe that we need probably to 
really look at which ones come up to the full Commission for 
their consideration.
    Senator Chambliss. Last, let me just say, I think Senator 
Lugar had a really good point. Even in Math 101 at the 
University of Georgia, they taught me that if you can buy 
something for $1.96 in the United States and take it to Europe 
and sell it for $20, that is a pretty good deal.
    I can envision 10 years down the road, if we have a true 
cap on trade system, we are going to see these things traded on 
a global market. So I just say that is something that has got 
to be in your line of thinking here as we go through the next 
12 months, 24 months, whatever it may be, if something does 
come out of Congress in that respect, because, gee whiz, you 
talk about electronic trading being a milestone. This is going 
to overwhelm us, it would look like to me, with this 
international cap in trade system that we potentially have out 
there.
    Thank you, Mr. Chairman.
    Chairman Harkin. Thank you very much, Senator Chambliss.
    We have been joined by our distinguished colleague from 
North Dakota, Senator Conrad.
    Senator Conrad. Thank you so much, Mr. Chairman and Ranking 
Member Chambliss. Thank you, Mr. Gensler, for being here.
    I was here earlier and had to go to--you know how this 
place is--other obligations. I very much apologize for not 
being here for the rest of the hearing. I was so struck by 
having Senator Mikulski, Senator Cardin, and one of my all time 
favorites, Senator Sarbanes, here, and it reminded me of my 
favorite story about Senator Sarbanes, who was a great baseball 
player in his youth.
    Mr. Gensler. He was. He was. Not a lot of people know that, 
but it is true.
    Senator Conrad. Yes, he was a terrific athlete. He was 
selected for the Maryland All-Star Team as a shortstop, and he 
went to the practices and it came time for the game and he was 
listed as starting at second base. And he went to the coach and 
he said, ``Why is it that I am at second base? I was chosen as 
the shortstop.'' And the coach said, ``Kaline will be playing 
shortstop.''
    [Laughter.]
    Senator Conrad. That was Al Kaline. And I thought, that is 
a great story, isn't it?
    Mr. Gensler. It is terrific.
    Senator Conrad. Sarbanes had to stand aside for Al Kaline.
    Well, you, in essence, are coming into the big leagues, 
too, and this is a different kind of big leagues. Our country 
and our world are in very serious shape. I just spoke to a 
group from back home talking about how we got in the situation 
we are in, and I believe it is a combination of a very loose 
monetary policy, a very loose fiscal policy, a very loose trade 
policy, all coupled with deregulation, that created the seed 
bed for bubbles to form. And we didn't get just a housing 
bubble. We got an energy bubble. We got a commodity bubble. And 
when those bubbles burst, it did enormous damage. There is a 
lot of wreckage here. And all of us have responsibilities.
    While I fought against what I thought was a very dangerous 
fiscal policy and a dangerous trade policy, I, along with 
others of my colleagues, voted for the Modernization Act, which 
you supported, and I look back, while there were many good 
things in the Modernization Act, I think there was one part of 
it that was very, very wrong, and I regret deeply my own going 
along with it, although I had grave reservations about it, and 
that is the question of credit default swaps and derivatives 
and whether or not they are regulated. You and others told us, 
don't worry, these are very sophisticated players and there 
will be a self-regulation because they are better able to 
monitor those markets than we are.
    Well, the more I have looked into it, the more convinced I 
have become that this is one of the great Ponzi schemes of all 
time. We think about Madoff's Ponzi scheme. That is a $50 
billion Ponzi scheme. I think derivatives, while probably the 
vast majority of it is completely legitimate, the part that was 
not was the assessment of risk, the assessment of risk.
    Last year, I was with a man who was head of all derivatives 
trading for one of the major global financial firms and I said 
to him, have you ever looked at the formulas these PhDs in math 
have come up with to determine risk in these contracts? He 
said, ``Yes.'' I said, could you understand it? He said, 
``No.'' I said, I will tell you--and this is the guy who was in 
charge of all derivatives trading. I said, I have got a 
master's in business. I asked my staff to bring me one of these 
formulas. I couldn't make head nor tails out of it. And it 
turns out they didn't have in these risk formulas any 
assessment of housing prices going down.
    Well, to make a long story short, all of us who 
participated in supporting that bear responsibility. There are 
many other elements, the fiscal policy, monetary policy, other 
deregulation that was done. But you, too, have responsibility, 
because, you know, at least for some small part of that, you 
gave us bum advice.
    What can you say that would make us comfortable, if we have 
that view, and maybe you have got a different view and I 
certainly respect that, especially in the presence of your 
daughters, who are very patient--what would you say to us who 
are now deeply concerned about the mistakes that were made? 
What would you say to assure us that you would be part of the 
solution?
    Mr. Gensler. Senator Conrad, I appreciate the question. 
Looking back now, it is clear to me that those of us involved 
at the time should have done more to protect the American 
public through strong, comprehensive, and aggressive 
regulation. There are some things that we raised and looking 
back now should have fought harder for, to regulate the actual 
institutions, the derivative dealers, to keep oil and metals 
consistently regulated with wheat and corn and other products. 
We should have fought--we did recommend that, but in the final 
bill were unable to achieve either of those. We should have 
fought harder.
    I think there were also things that were but dots on the 
landscape. You raised credit default swaps at the time of that 
legislation. Approximately 97 percent of the market were 
interest rate derivatives and currency derivatives, and the 
bulk of the remaining 3 percent was actually equity derivatives 
and commodity derivatives, as small as they were back then. And 
that market has burgeoned since then.
    Senator Conrad. Exploded.
    Mr. Gensler. And in very consequential ways, where an AIG 
had a book of business so significant, and I believe that those 
credit default swaps at AIG were often being misused, and 
sometimes by regulated institutions, banks in Europe that were 
getting protection and lowering their capital charges with 
regard to that.
    I think also, Senator, and you raised this in your 
question, I think there was an assumption at the time about 
whether the regulation of institutions, these large financial 
institutions, would be enough. And I do think in retrospect 
that assumption was thoroughly tested for a couple of reasons.
    One, even where there was broad regulation, at the holding 
company and of everything, there was no specific regulation of 
the derivatives affiliate. I believe that even now, where the 
Federal Reserve might have broad holding company regulation, 
that if confirmed, I would look forward to working with 
Congress and the other regulators to make sure that the dealers 
themselves have to have capital, business conduct, and 
reporting requirements. But capital is the shock absorber, so 
to speak, to guard against excess leverage. I have come firmly 
to believe that.
    At the same time, I believe that we need to have a full 
regulatory regime for the market so that the centralized 
clearing, and we could get the benefits of centralized clearing 
as we have in the futures market, and those benefits might 
sound like back-office plumbing, but they are very real because 
just as in the futures markets, you have to post margin on a 
regular basis and have a sort of a daily reckoning of these 
contracts and at the same time have to send in the information 
and have all the positions and the recordkeeping and reporting.
    Exchanges bring transparency to transactions. Where small 
businesses, small commercial interests right now, I believe, 
actually pay more for even the standardized products, more 
because they don't have that transparency. Now, just one basis 
point might be a little bit, but transparency to an overall 
market, I think, brings further economic prosperity, as well.
    So I do think, looking back now, it is clear to me we 
should have done more. But over time, I believe that some of 
these weaknesses have been sorely tested. The regulatory and 
financial system completely failed the American public in this 
regard. And I look forward, if confirmed, working with you, as 
I did with Senator Sarbanes, to try to sort of sort through 
some of that complexity, the dust that might be kicked up by 
opponents, and they will be very strong and loud opponents, 
some of them raising legitimate concerns, but trying to find 
how we can best protect the American public and bring a 
regulatory regime to a field that hasn't had one to this date.
    Senator Conrad. Well, I appreciate that answer. You know, I 
look back. I have been trying to write an analysis of what has 
happened here, a broader look at all the factors that 
contributed, and I do very much believe that it is a very 
unusual combination of a loose monetary policy, after 9/11 we 
had very low interest rates for a very extended period of time, 
a very loose fiscal policy with massive Federal deficits.
    At the time when the economy was strong, we still had a 
very loose fiscal policy, very unusual to have loose monetary 
policy and loose fiscal policy simultaneously, coupled with 
very loose trade policy with record trade deficits. And then 
the deregulation that occurred and, you know, I will stand up 
and I will be held accountable. I made a mistake.
    I mean, I will assert there were many good things in that 
Financial Modernization Act, but I believe there was an 
Achilles heel that some of us were worried about at the time 
but we thought the good things would overcome that weakness. 
Well, we were wrong and we were wrong big time and all of us 
need to 'fess up about mistakes that have been made here. We 
have got to try to get this back on track.
    I thank the Chairman for your patience.
    Mr. Gensler. Senator, I thank you for that. I agree with 
your assessment, if I could, Mr. Chairman, that there was a 
great many things that were imbalances, and you named those, 
but also the regulation, that if confirmed, I would look 
forward to working with you and this Congress that we really do 
bring a full regulatory regime not only to the institutions, 
which I think we need to do, but also, as the Chairman has laid 
out in his bill, with the goal to bring it to the markets, as 
well.
    Senator Conrad. Thank you, Mr. Gensler. Thank you for your 
very honest answers.
    Mr. Gensler. Thank you.
    Chairman Harkin. Thank you, Senator Conrad.
    Well, Mr. Gensler, this has been a great hearing. I think 
we have gotten great responses and an open and frank 
discussion. I don't mean to belabor it any longer, although in 
listening to just the last two questioners here, Senator 
Chambliss and Senator Conrad, I was just jotting down here CMS, 
CVOs, CMOs, CMBSs that is commercial mortgage-backed 
securities--CDSs. Now we have gotten into things like CDO-
squared, CDO-cubed, and you just keep slicing these tranches of 
derivatives out there all the time.
    The financial sector has come up with all of these exotic 
products. No one really understands them except maybe a few 
people on Wall Street, and they may not fully. But credit 
default swaps didn't exist before about 1998, not really.
    Mr. Gensler. That is right, sir.
    Chairman Harkin. And the world seemed to operate just fine 
without them. The same with collateralized debt obligations or 
collateralized mortgage obligations. All this creativity in new 
contracts happened in the early 1980's, through the late 
1980's, and then they really boomed in the 1990's, all these 
different derivative contracts and financial products.
    I asked the question in our October hearing, I said, what 
market forces out there demanded these products? Who was 
demanding this? The answer came, no one. It is just that a few 
of the financial institutions had some of these whiz kids and 
mathematical geniuses. Now they have big computers that could 
slice and dice these obligations into all these little 
tranches, securitize them as bonds, and then sell tranches, a 
highly leveraged tranche, or one that is not so highly 
leveraged, and on and on until finally you get this morass out 
there of instruments that no one really understands.
    I asked Secretary Paulson one time when we had one of our 
meetings last fall, before the TARP. I said, why don't we 
insist, if we are going to put this money out, we insist that 
each one of those entities receiving this federal money give us 
a valuation of each one of those instruments that they have and 
insist on what is the value. His response, and we were all in 
that room together, his response was, ``Well, they don't even 
know what the value is.'' Billions of dollars, and they have no 
idea what the value is.
    Well, I don't know. I just think we have to--and this is 
not really in your bailiwick, but I just think we in the 
Congress have to really think about whether or not all these 
financial products and instruments are worthy of legitimacy. 
And they are all off exchanges. These aren't on exchanges. We 
have no idea what is going on out there. So I don't know if 
they are legitimate or not. I tend to think in some of these 
cases they are probably not, especially when you get into 
synthetic derivatives or you get into the naked credit default 
swaps. It boggles the mind about what people are doing with 
these instruments.
    Now, it would be all right if these investment bankers were 
using their own money to do that. I could care less. But they 
are using my money, your money, my constituents' money that is 
in 401(k)s, pension plans, all other kinds of devices where 
they have taken money now and are investing it in these and so 
they are playing with our money.
    So I just raise the question, I guess, on markets. We all 
believe in the market, but as you pointed out, I think for a 
market to really function, you have to have three things. 
Correct me if I am wrong. You have an MBA; I don't.
    [Laughter.]
    Mr. Gensler. But an MBA, sir, doesn't mean--with all 
respect, it doesn't mean that you have----
    Chairman Harkin. I am just kidding you. My daughter has 
one. I keep asking her this. But it seems for a market to 
function, you have to have many buyers, many sellers, and 
transparency. If you mess up one of those, you don't really 
have a market. You may call it a market. Many buyers, many 
sellers, transparency. Once you have few buyers, many sellers, 
or you have buyers and sellers and you don't have transparency, 
you don't have a market.
    And so when we talk about markets, we have to keep in mind 
just what we are talking about. What kind of markets do we 
want? Very few real markets exist any longer out there.
    Mr. Gensler. Mr. Chairman, I would--I know that you mean 
this, but I would add something else to what is a component of 
markets. We need regulation. We need regulated markets and so 
that is what I am here to say, and if confirmed, I would look 
forward to working with you. Senator Conrad had asked me about 
what I had done in the past, and, I mean, I even wrote a book 
called The Great Mutual Fund Trap, and it wasn't by mistake 
that on the cover of the book it has that old three monte game. 
I mean, I just brought it here just because I remember it. But 
there is a reason that the book has that here.
    Chairman Harkin. I have got to read that.
    Mr. Gensler. Well, we will give it--it is all right if you 
don't read it. I am just saying there is a reason that is 
there.
    Chairman Harkin. But what I say about sellers, buyers, and 
transparency, that is what is called the, quote, ``unfettered 
free market.'' Now, you are right. Do we want an unfettered 
free market? Do we want the free flow of capital? I hear that 
all the time. I read that we want the free flow of capital. 
Well, an economist who was at our hearing in October said, I am 
not certain we want the free flow of capital. We want the 
efficient flow of capital.
    And he used an analogy which struck home with me. He said, 
well, it is like traffic. If you want the free flow of traffic, 
get rid of all your stop signs. Get rid of the stoplights. Get 
rid of the speed limit signs. Get rid of all the warning signs. 
You will have the free flow of traffic, but you will have a lot 
of wrecks. What you want is the efficient flow of traffic.
    The same is true in financial markets. You want the 
efficient flow. Therefore, you need the stop signs and the 
caution signs and the regulations so that capital is efficient, 
not just free.
    So anyway, I just wanted to make that point, to say that I 
think we really have to take a look at whether all of these 
types of instruments are really necessary and legitimate. If 
they are, they ought to be regulated. That is all I am saying.
    Now, this does get into your bailiwick. Every single one of 
those instruments, I submit, is a future. Every single one of 
them is some derivative and it is based on something happening 
or not happening in the future and therefore would come under 
the purview of the CFTC. I don't know if you have any comment 
about that, but if we are going to continue these kinds of 
contracts, should they not be regulated?
    Mr. Gensler. Sir, I believe that we do need regulation and 
many of the list, and it was a bit of an alphabet soup for the 
public, but many of them are actually currently even regulated 
around what is called asset securitizations, not by the CFTC, 
but by the SEC as securities. Collateralized debt obligation is 
actually an asset security.
    And I believe that part of regulatory reform, as the 
President has called for and Congress and the President are 
going to work closely together, and if confirmed, I am eager to 
lend a hand there, is that I believe that we really have to 
look at all asset securitizations, whether they are called 
collateralized debt obligations, asset-backed securities, 
commercial mortgage-backed securities that you mentioned, or 
even asset-backed securities, uncollateralized debt 
obligations, which because there are two sets of letters there, 
somebody caused that squared term you called it. That whole 
world of asset securitization needs to be looked at.
    At the same time, the American public, though, needs the 
benefit of capital to start moving again, to purchase their 
automobile, to have the student loans, to get their credit 
cards rolled over, and to get their mortgages, and a lot of 
that is done in this securitization market, particularly as 
banks have so constrained their market.
    So we need the rules, just like you said on the road. We 
need that flow of capital to the American homeowner to get the 
student loan, to get the car loan, to get their mortgage. But 
at the same time, I believe, and if confirmed, I look forward 
to working with you on the additional regulations that are 
needed even in the world of asset securitizations that come 
under another regulator than the CFTC.
    Chairman Harkin. We need to discuss this further because I 
had a student loan, and I bought a car with a loan long before 
any of these derivatives ever existed. So what was wrong? I 
don't know if these derivatives are necessary for people to get 
car loans or student loans or mortgages or anything else.
    Mr. Gensler. It worked well in America and it worked well 
for you. As many things were just dots on the landscape eight 
or 9 years ago, this market, too, has taken off, and so I 
believe it is time to work together as regulators and with 
Congress to see what additional rules are necessary there. 
Again, somewhat out of the jurisdiction of the CFTC.
    Chairman Harkin. That is true, and some of what I described 
is not part of the CFTC's jurisdiction.
    Senator Chambliss. Mr. Chairman?
    Chairman Harkin. Yes?
    Senator Chambliss. One reason that I was kind of pursuing a 
line of questioning relative to what may happen with respect to 
offshore trading is I think Mr. Gensler is exactly right, that 
we didn't envision 10 years ago what was going to happen in the 
marketplace. You talk about eliminating products. Shoot, there 
are some smart guys out there right now that are thinking about 
additional products.
    Chairman Harkin. That is true.
    Senator Chambliss. We can't even conceive what they are.
    Chairman Harkin. That is true.
    Senator Chambliss. But the one thing I am impressed with is 
that when you say that we need to think this through and we 
need to make sure that we regulate these in the right way, we 
have got to look ahead to what type of products there may be 
out there that get us into this same mess again 10 years, 20 
years from now if we aren't careful. We are never going to be 
able to anticipate exactly what those products are and nobody 
ever thought about packing mortgages and selling them five or 
six times a day.
    If you talk about eliminating, I think you really cause 
problems. But if you are talking about making sure that you 
regulate in the right way and you give these guys the tools and 
the resources, primarily, which they don't have now, then I 
think we will do a better service to the consumer out there.
    Chairman Harkin. Well, Mr. Gensler, thank you very much. I 
thought this was a very enlightening session. I appreciate your 
forthrightness.
    We have several letters of support, and, I might add, one 
letter in opposition to Mr. Gensler's nomination. I ask 
unanimous consent that these letters be made a part of the 
record.
    [The following information can be found on page 70 in the 
appendix.]
    Chairman Harkin. I ask unanimous consent that if there are 
materials that other Senators wish to submit for the record, 
that those also be included.
    I will leave the record open until noon tomorrow for any 
additional written questions that any Senators want to submit 
to Mr. Gensler, and then the record will be closed at noon 
tomorrow.
    Mr. Gensler. Mr. Chairman, Ranking Member Chambliss, if I 
can thank you both for your hearing and the inquiry. I also 
want to thank Senator Mikulski, Senator Cardin, and Senator 
Sarbanes on the record for their support. If confirmed, I look 
forward to working with you and your staffs on this very 
significant agenda we have forward.
    Chairman Harkin. Mr. Gensler, may I say that it is great 
you have had two of your daughters here. They probably think it 
is probably the most boring thing that has happened to them in 
a long time and they deserve to have a nice dinner out tonight.
    [Laughter.]
    Mr. Gensler. I thank you. I think you are right about that.
    Chairman Harkin. Thank you very much. The committee will 
stand adjourned.
    [Whereupon, at 4:56 p.m., the committee was adjourned.]
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