Guest post by Robert Gross
As the shutdown continues, the brinksmanship between the Obama administration and Republicans may have additional (and far-reaching) implications than what the press currently reports. In fact, data suggests that the proverbial Pandora’s Box of unscrupulous and illegal behavior in American financial markets has just been opened with the near-closure of a little-known U.S. regulatory agency.
The shutdown coincides with the derivatives industry’s last-ditch scorched-earth lobbying of the Commodity Futures Trading Commission (CFTC) to delay the mandated new rules of Dodd-Frank, scheduled to go into effect on October 2, 2013. The new rules are intended to make the swaps market more transparent, as well as prevent a repeat of the 2008 financial crisis when the market was thrown into chaos.
According to reports on CNN and Bloomberg, the CFTC will be hobbled by the government shutdown. Out of the 680 people employed at the CFTC, 643 people would be furloughed due to the shutdown. This ends up leaving the CFTC with a skeleton staff of 37 people that would conduct the agency's business.
Thirty-seven people simply aren’t enough staff to keep the lid on Pandora’s box closed, much less implement the new rules created by the section of Dodd-Frank regulating derivatives. As the headline of an article in Bloomberg Businessweek suggested, it’s a Madoff moment in the making.
This isn’t merely my idiosyncratic musing. In describing the ramifications of a government shutdown, CFTC Commissioner Bart Chilton himself said, "[G]overnment regulators will be handcuffed in our ability to go after crooks who are trying to evade our oversight and protection of markets.” He added, "The dark markets that Dodd-Frank brought into the light of day will go dark again. The lights will go out. Given the huge growth in the derivatives industry and our new oversight of swaps, CFTC’s market oversight functions are more important than ever."
Given this lack of government oversight, investors in the market may become the victims of manipulation and insider trading practices. What is also concerning is the fact that some Capitol Hill staffers and lawmakers might use the shutdown to exploit a change in the 2012 STOCK Act, championed by CD1 Congressman Tim Walz.
The 2012 Stock Act prevents lawmakers and the more highly-paid staff from using information garnered from their positions on Capitol Hill in order to gain an unfair advantage on the stock and commodities markets. After some lawmakers objected to making mandatory disclosure reports available to the public online, the reports were pulled and kept on file.
With Congressional offices closed, the reports aren’t readily available to the CFTC skeleton crew. With only few stressed CFTC employees on board, we may be looking at a possible outbreak of business and insider-trading politicians breaking bad.
Was this recipe for mischief accidental? As Francis Urquhart, the protagonist of the British version of “House of Cards”, was apt say, “I couldn’t possibly respond to that.”
Robert Gross is a social media political strategist completing his degree at Metropolitan State University.
Editor's note: Mr. Gross had run a draft of this post past me on Monday; yesterday, his main hunch was confirmed by Politico in Government shutdown bad timing for key market regulator.
Photo: The doors are locked at the CFTC while commodities markets remain open.
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