Securities and Exchange Commission Chairman Gary Gensler has already had a rough time of it, and he’s only thirty days into the job.

Even Robert Kuttner of the very progressive American Prospect had to ask, “Which side is Gary Gensler on? But first Kuttner had to say the usual nice things about Gensler.

Progressives were elated when President Biden appointed Gary Gensler to chair the Securities and Exchange Commission. Though Gensler had been at Goldman Sachs before chairing the Commodity Futures Trading Commission under President Obama, he turned out to be the best sort of class traitor—someone who knew the insider games well enough to be disgusted by them and be a tough regulator. He was so effective, in fact, that he regularly tangled with Obama’s top aides and their Wall Street allies.

But then the knife goes in about the disastrous Alex Oh appointment:

But in his first major move as SEC chair, Gensler made an unforced error that left his admirers wondering about both Gensler’s judgment and his spine.

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I wrote last week that I’m not impressed by the Gensler SEC’s first big enforcement action, a long-awaited settlement with Under Armour. To be fair, the investigation was going on for at least two years under Jay Clayton, when the WSJ first reported it in November 2019, but Gensler signed off on this final resolution. I think it should have been an accounting fraud case and that it should have nicked executives, too.

The SEC still can’t seem to spot an accounting fraud, I wrote.

The Securities and Exchange Commission has been settling cases where companies and executives manipulate financial results to meet analyst expectations or internal metrics using Section 17(a) of the 1933 Securities Act more often than 10b and 10b-5. The cases the SEC brought after the financial crisis were charged predominantly under Section 17(a). The SEC also closed several investigations and never brought a case against several companies, or their audit firms, where accounting manipulation was front and center even though those allegations led to wildly successful private or state litigation — Lehman Brothers, MF Global, and Colonial Bank 2, for example.

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The party line is that Gensler deserves brownie points for leading efforts to impose restraints on the futures industry, in particular on a type of derivative known as swaps. A typical homage to Gensler characterizes him as a tough guy, ready to rumble with the big banks to make much needed reforms. It goes like this:

Gary Gensler, nominated to head the Securities and Exchange Commission, previously ran the Commodity Futures Trading Commission and is a former Goldman Sachs banker. At the CFTC, Gensler led an overhaul of regulations involving over-the-counter derivatives, which were widely blamed for exacerbating the 2008 financial crisis.
His reforms were central to the Dodd-Frank law passed in the wake of the crisis. Previously, as a congressional staffer, Gensler helped write the post-Enron Sarbanes-Oxley law that included accounting reforms, greater disclosure and stiffer penalties for offenders.

Gensler’s track record on swaps regulation has been the primary rationale for supporting him now, compared to when he was nominated for the CFTC chair by Obama after a stint in Clinton’s Treasury Department. Not everyone was convinced then that he was so great. In 2009, Senator Bernie Sanders told Democracy Now host Amy Goodman. “I don’t believe that we need more of the same old same old. The philosophy that [Gary] Gensler espoused when he was working for Bill Clinton in the Treasury Department was strongly deregulation.”

During his tenure in the Clinton administration as an undersecretary of the Treasury, Gensler and other administration officials had resisted efforts to regulate derivatives, which later contributed to the financial crisis. Gensler went on to serve as Hilary Clinton’s campaign finance chairman for her failed campaign against Donald Trump. If she had won, he would have been at top of the heap for a big job.

Source: Politico magazine’s Politico50 List from 2016

Gensler used to make speeches about how the Dodd-Frank bill’s “financial reform shines bright lights of transparency – to the public and to regulators – on the swaps [derivatives] market for the benefit of investors, consumers, retirees and businesses in America.”

Fast forward to 2021 and almost everything Gensler said about how Dodd-Frank would fix derivatives didn’t happen and now the numbers are much bigger.

Take Archegos.

The New York Times reported that one of the stocks held by Archegos was “$20 billion in shares of ViacomCBS,” which were “held through complex financial instruments, called derivatives, created by the banks.”

In his first Congressional testimony as SEC Chair on May 6, Gensler had to admit that the more things change, the more they stay the same. The word “accounting” doesn’t appear at all in his testimony.

Additionally, I wanted to mention briefly the events in late March related to the failure of the family office Archegos Capital Management and the significant losses incurred by several global financial institutions that provided prime brokerage services to Archegos. At the core of that story was Archegos’ use of total return swaps based on underlying stocks, and significant exposure that the prime brokers had to the family office. Under Dodd-Frank, Congress gave the SEC rule-making authority to extend beneficial ownership reporting requirements to total return swaps and other security-based swaps. Among other things, I’ve asked staff to consider recommendations for the Commission about whether to include total return swaps and other security-based swaps under new disclosure requirements, and if so how.

On May 7, 2021, the day after he testified for the first time as SEC Chairman before the House Financial Services Committee, the SEC announced it had approved the registration of its first security-based swap data repository (SDR). DDR intends to operate as a registered SDR for security-based swap transactions in the equity, credit, and interest rate derivatives asset classes, according to the SEC’s press release.

“Implementing Regulation SBSR fulfills an important mandate under the Dodd-Frank Act," said SEC Chair Gary Gensler. “A centralized database of security-based swap transactions is an essential reform to better understanding these markets, for surveillance and for enforcement. The data repository also will facilitate public reporting of security-based swap transactions, bringing much-needed transparency to these markets.”

Although the SEC has implemented 26 Dodd Frank rules related to swaps since 2010, three more key proposals are still pending:

Section 763(c) Rules governing security-based swap execution facilities
Section 763(g) Rules regarding fraud in the security-based swap market
Section 765(a) Conflicts of interest

Gensler’s old agency, the CFTC, has so many Dodd-Frank rules related to swaps and derivatives still in the proposal stage and that have been proposed, revised, and re-proposed it’s hard to figure out what’s really left. I have to leave that to the experts.

I wrote a couple of articles at MarketWatch about swaps and derivatives regulation.
Split at SEC means swaps waiver rule likely to get big alteration August 10, 2015
CFTC fines Goldman Sachs $120 million for manipulating interest rate products December 21, 2016

Financial reformers who think Gensler is their guy seem to have forgotten all about what he did after the failure of MF Global. The ten-year anniversary of the MF Global bankruptcy will be October 31, 2021.

I haven’t forgotten.

For the last decade, while others have tracked esoteric Dodd-Frank rule-making, I’ve watched as some of the people central to the MF Global failure, and people who were central to the failure of regulators to detect and decipher what really happened, reemerge on the scene.

My interest in the MF Global scandal has never fully waned and was reinvigorated after the 2020 election. That’s when new President of the United States Joe Biden selected Gary Gensler first as his transition lead for financial regulatory agencies and then as SEC Chairman.

Politico said progressives would stop worrying now that Gensler, the Wall Street cop, was on the scene.

Former Wall Street cop Gary Gensler to join Biden transition
Gensler's involvement will likely calm the nerves of progressives who want Biden to take a hard line with the finance industry. The former Goldman Sachs partner faced off with the banking industry as chair of the Commodity Futures Trading Commission from 2009 to 2014, guiding the agency as it imposed new rules on Wall Street trading after the 2008 financial crisis.
Gary Gensler, a former Obama administration official best known for cracking down on Wall Street banks, will join Joe Biden's presidential transition team and lead its review of financial regulatory agencies, people familiar with the matter said.

Instead, Gensler’s fait accompli appointment seemed to me like the handing out of political favors I saw all my life in Chicago. It never mattered if there were conflicts of interest or or if the list of accomplishments were more myth than substance. There was often a whiff of payback involved. Someone works hard in unsexy political roles, pays his dues, gets to know all the right people, stays on the right side of the power brokers, and lends support for whomever or whatever they ask.

And then one day, when the time is right, he’s at the front of the line. They owe him the big job.

When Gensler had the chance to step-up in the past he, instead, stepped down.

When MF Global failed on his watch as chairman of the CFTC, Gensler recused himself from leading the investigation of the failure and heading up the effort to find the $1.6 billion in customer funds that went missing. He opted out against the advice of the CFTC’s General Counsel and its ethics official, according the CFTC’s own internal investigation. Gensler filed a “non-participation” letter because he and MF Global’s last CEO, Jon Corzine, had enjoyed a long personal relationship after working together at Goldman Sachs.

Basically, Gensler bailed. The captain left the ship before the passengers were all safe. Maybe it was a “damned if he did, damned if he didn’t” situation. But it would have been arguably a lot better for the MF Global customers if he stayed, but then he would have had to avoid taking a call from Corzine about delaying the rules for how MF Global could use customer segregated funds the summer before.

Farmers who had their MF Global accounts “vaporized” were angry with Gensler. Sen. Jon Tester, D-Mont., was quoted in his home state newspaper.

Speaking about financial reforms with The Billings Gazette editorial board, Tester said Gary Gensler, chairman of the Commodity Futures Trading Commission, should be fired for the government’s role in the collapse of MF Global, a trading house accused of raiding customer accounts to cover bad investments in European sovereign debt. Legally, the customer accounts were “segregated” meaning they should have been off-limits.
MF Global failed despite the cash grab and last October filed a $42 billion bankruptcy, the eighth largest bankruptcy in U.S. history.
“CFTC was asleep at the switch. They were in the building when all that stuff went on, too. Maybe Gary Gensler needs to go,” Tester said…
Gensler has been accused of being asleep at the switch while accounts that should have been regulated were drained by MF Global. The CFTC chairman has also been accused of cronyism. Both Gensler and MF Global CEO Jon Corzine worked for Goldman Sachs. Corzine, a former Democratic senator and New Jersey governor, is alleged to have lobbied Gensler to delay financial reform rules affecting MF Global’s handling of customer accounts.

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An SEC spokesman did not respond to a request for comment on Gensler’s past with MF Global, present challenges to hire key staff, or future plans at the SEC.

Gensler has failed up from MF Global, in my opinion, to a big comeback as SEC Chairman. Another example of failing up to a comeback? MF Global’s former CEO, Jon Corzine.

Corzine’s star faded quickly after the MF Global debacle. On Dec. 24, 2011, President Obama’s re-election campaign returned $70,000 of Corzine’s personal campaign contributions. Corzine was one of 41 donors who bundled more than $500,000 to help re-elect President Obama in 2012.

Corzine has since attempted a comeback. Despite a CFTC civil enforcement action against him in 2013 that prohibits him from serving on any registered firm’s advisory or compliance boards, or having authority over its compliance officers—an action that severely limits the type of assets in which his firm can invest—Corzine went ahead with a plan to start a hedge fund that would accept outside money.

That hedge fund, JDC-JSC, won the approval to register from former SEC Chairman Jay Clayton’s SEC in the fall of 2019. That’s right. Corzine was rewarded with an approval to start a hedge fund by the very agency that failed to follow-up after MF Global’s failure, and failed to find all the money Corzine had lost.

Corzine and his hedge fund even get the lede in a Bloomberg story last week about comebacks, his and New York’s, after the pandemic.

Jon Corzine was about to leave his Upper East Side apartment at 7:25 on Wednesday morning before his wife, Sharon, stopped him.
“Your mask,” she reminded the former head of Goldman Sachs Group Inc. Corzine, who’s now running the hedge fund JDC-JSC, stepped into the elevator and out onto Fifth Avenue to walk to the midtown Manhattan office where he spent nine months alone. But things are changing. A trader joined him in March, and next week he’s going to take his first in-person meeting since Covid-19 began ravaging New York more than a year ago.

How about another related example of a Teflon CEO ?

Jamie Dimon still leads MF Global’s bank JPMorganChase. He’s also seen his star go up, down, and then up again since MF Global’s failure. I thought MF Global would be the end for him and I was too optimistic.

And then I thought the “London Whale “ debacle would be the end of Dimon. Mr. Dimon went to Washington in June of 2012, not long after MF Global’s failure, to explain to Attorney General Eric Holder how he had personally committed "unsafe and unsound practices” at his own bank. Then JPMorgan had to pay more than $1 billion in fines to US and UK regulators for the $6 billion “London Whale” proprietary trading fiasco.

Dimon was quoted saying, "I should have caught it ... I didn't."

Dimon had been hailed as the wisest and most responsible executive during the 2007-2009 financial crisis. Eighteen months later the bank was a financial punching bag. JPM faced criminal investigations and potential charges for market manipulation in the trading of precious metals and Treasury securities from the same CFTC still reeling from MF Global. The case wasn’t settled until September of 2020 when the bank agreed to pay $920 million and admit wrongdoing.

None of this has stopped Dimon from being perennially being mentioned as a good choice for Treasury Secretary by both parties and even as a potential presidential candidate. Both Dimon and Corzine were floated as potential replacements for Obama’s outgoing Treasury Secretary Timothy Geithner.

President-elect Donald Trump's advisors floated Dimon’s name again as a potential Secretary of Treasury in 2016, although Dimon said at the time he would not be interested. Later, in 2018, Trump insulted Dimon, after the banker said that he could defeat the president if he chose to run for that job in 2020. Trump said Dimon “didn't have the aptitude or 'smarts' and is a poor public speaker and nervous mess." Dimon’s name has popped up again for potential roles in a Biden administration as advisors send up trial balloons.

Finally, former US Attorney Preet Bharara has been a vocal supporter of Joe Biden and was suggested for various roles in his administration, although none have yet come through. No worries. He seems to be doing ok with a podcast production company. Bharara has a history with MF Global, too. He originally sent the executives from MF Global’s predecessor firm, Refco, to jail for fraud and he was still the US Attorney for the Southern District of New York when MF Global went belly-up October 31, 2011. The missing $1.6 billion immediately generated talk of criminal charges for Corzine and other MF Global executives.

Guess what happened?

A couple of months after MF Global filed bankruptcy on October 31, 2011, Gary Gensler knee-jerk reacted by pulling out a proposal that had been inactive for months. He put lipstick on the pig by limiting the types of financial instruments futures commission merchants, or FCMs like MF Global, can use to invest the customer funds they hold. He and his CFTC colleagues passed it unanimously.

The new rule had nothing to do with what actually caused the MF Global failure. The Wall Street Journal wrote a scathing critique:

As if to underline that Monday was a political exercise to deflect blame and make the CFTC look busy in the wake of the disaster, the commission also invited market players to seek exemptions from the new rule on a case-by-case basis. So the reforms are "critical," but well-connected players can still lobby Mr. Gensler to avoid them.
This bureaucratic eyewash is not going to satisfy MF Global clients who have had their funds frozen, if not plundered. The CFTC chairman sought and received vast powers under the Dodd-Frank law on the premise that he and his staff had the wisdom and knowledge to re-engineer derivatives trading. CFTC regulators have now failed at a much less complicated task, and one of central importance to customers.
In classic Washington fashion, Mr. Gensler is nonetheless using his agency's regulatory failure in MF Global to impose still more rules and argue for still more power. A better response would be to acknowledge that the political system has already entrusted too much power to regulators, who can never be all-knowing and all-seeing but are often vulnerable to political influence from executives or firms they know and like. Investor beware: Regulators cannot protect you.

When questioned at a hearing of the Senate Agricultural Committee about the penalties for MF Global, a firm that didn’t segregate customers’ funds from its own and, “essentially, steals the money and gambles it away …,” Gary Gensler didn’t seem to know what might be possible. The SEC chair at the time, Mary Shapiro, had to step up and answer for him.

Shapiro left the SEC in 2012, turning the MF Global investigation over to Mary Jo White, who left the SEC after Donald Trump appointed Jay Clayton chairman in May 2017. Clayton closed the SEC’s six-year investigation of MF Global’s accounting and disclosure fraud one month later. The SEC never filed any charges against MF Global, MF Global executives, or its auditor PwC.

The CFTC’s enforcement action against Jon Corzine left enough holes to drive a John Deere tractor through, thus his second chance to lead a new hedge fund.

PwC settled a $3 billion lawsuit in March 2017 brought by the MF Global bankruptcy trustee after only a few weeks of trial testimony. PwC’s settlement amount is a secret.

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© Francine McKenna, The Digging Company LLC, 2021

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Gary Gensler is not the guy