Regulatory handicapping: the CFTC edition

By Finance Addict

And just two days after I reported on the starve-the-beast strategy that’s forcing the SEC to pursue Mickey-Mouse settlements with the big banks, we learn of plans to handicap the Commodities and Futures Trading Commission in a similar fashion. From Reuters:

“Republicans and Democrats in the U.S. Congress on Monday agreed to a measure that would set the U.S. Commodity Futures Trading Commission’s budget for fiscal 2012 at $205 million, $103 million less than what was requested by the Obama administration.”

This year the CFTC had a budget of around $170 million.

Brilliant timing, coming as it does after the ignominious end of Jon Corzine’s vanity project, MF Global. The FT reminds us what a shock its downfall was:

“It is a mantra of the futures industry: no customer lost a dime because regulators failed.”

Now MF Global’s customers haven’t lost a dime, but rather $600 million due to MF’s failure to observe a broker’s cardinal rule: keep the house money separate from customers’ cash. People now want assurances about all the other brokers and want the CFTC to, among other things, help audit 120 U.S. futures firms to make sure that they’re no MFs. The CFTC is already short one man because their chairman, Gary Gensler, had to recuse himself due to his close ties to Corzine. (That’s another story entirely.)

Meanwhile we know that:

1. there’s a shooting contest to see who will be the last eurozone country standing; of the 17 countries only 1, Germany, looks like it will make it at the moment
2. nobody really knows just how much U.S. banks are exposed to Europe–best guess we have is an absurdly large range of $46.4 billion to $767.5 billion, and
3. chances are that a huge, if not the biggest, part of their exposure is in the form of derivatives.

And guess who’s the regulator responsible for the $600 trillion over-the-counter derivatives market? The CFTC, of course! So it’s very comforting to hear that they are already “several months behind in implementing [OTC derivatives] rules…required under last year’s Dodd-Frank law.”

Now $35 million extra dollars for next year might be a lot for you and me, but it’s very little for an agency tasked with overseeing, as Buffett so nicely put it, “financial weapons of mass destruction”. Short-sighted much?

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