Commissioner Bart Chilton’s speech at the SABEW fall conference presented on October 4, 2013

Special to SABEW

It’s Boss

It is an honor to be with you in the financial capital of the world, among those who serve a critical public good with your important works.

To a great extent, the media and regulators seek the same thing:  openness, transparency and accountability that ensures we have a free and fair society. That particularly is imperative in the business and financial sector—something most of you work on each day.  So, it really is a pleasure and privilege to be in your company.

To use what might seem like an ancient axiom, it is “boss” to be with you.  Maybe we should all try reintroducing it into our pop lexicon.  That would be cool if we started it right here, right now.  It might be boss to try.  If we succeeded, it would be “the boss.”   Who knows, boss might be back!

In My Hometown

Before we get going, my thanks go to your president, Kevin Hall of McClatchy, for the kind invitation. We first met, In My Hometown.  Kevin was a neighbor on the shores of the Chesapeake. In true inquisitive-reporter fashion, he walked up to my car after our family had bought our soft serve ice cream.  I was in a tee shirt, shorts and my freak flag hair…okay, you don’t want the visual.  Anyway, I was focused on not dripping my swirl.  He says, “Are you Commissioner Chilton?” After a short introduction, we agreed to a future meet.  For a short time, I did not recall his name  and when discussing the meeting with staff, I’d refer to Kevin simply as the “Ice Cream Man.”

We met a few weeks later in West River, Maryland in a restaurant on The River—actually Meeting Across The River from Kevin’s house.  I quickly became an avid Kevin Hall fan.  His extensive knowledge of all things economic and his inquisitive nature about what was going on in markets were impressive and appealing.  Some of the markets I regulate are pretty weedy—they’re Tougher Than The Rest—but, he “got it” and could explain things in a way that average readers understood.  He has an abundant ability to add a genuine Human Touch to his writing.

It wasn’t until after the meeting, I realized the extent of Kevin’s credentials, his award-winning writing and foreign reporting.  I’m gratified he was unhesitant the day we met.  Instead of Ice Cream Man, now he’


Well, some of you may hear where we’re headed today. Well, maybe not Over The Rise, but you may realize how we’re gonna get there.  Let’s hit some important issues, and pay a little homage to The Boss—Bruuuuuce—as we do.

A few Boss-infused issues will make our little ride, rolling down the tracks, a little easier.  After all, given the many speeches you’ve endured in your life, how many have featured a Rock and Roll Hall of Fame legend who has  written more than 400 songs, won 20 Grammy Awards and sold more than 120 million albums?  Significantly, at least to me, is the unique and unparalleled fashion in which The Boss shares his music and lyrics; how he describes the majesty and tragedy of the human condition from the perspective of ordinary folks.  Bruce Springsteen is a national treasure.

Alright then, I never read speeches, so this is somewhat of a Roll Of The Dice.  But, who cares, let’s gamble; Wall Street does it every day (Cover Me, Kevin).

Let’s take One Step Up and hop on this strange Mystery Train of a speech and see how it works out.  It just “…takes a Leap Of Faith to get things going…It takes a leap of faith you gotta show some guts.”  All aboard!

Wrecking Ball: The Economy

Our first stop is the economy.  Ah, the economy: never old, always new…ooh, the economy, yeah, woo-hoo!

Yesterday, October 3rd, was the five-year anniversary of a momentous legislative accomplishment.  Some of you may recall the days of yore when Republicans (back in the day when they were one party), Democrats and a president joined together to solve the problems of a nation.  It was not from some Book of Dreams—I promise.  In 2008 they passed and enacted the Troubled Assets Relief Program or TARP; you know, the bank bailout.  Engineered to repair those warped and distorted tracks that created some ugly economic Rocky Ground?

The financial sector had taken a Wrecking Ball to our economy—Trouble In Paradise—and we bailed out the banks with hundreds of bi bi bi billions of dollars (originally authorized $700 billion, then reduced in 2010 to $475 billion).

Magic: Free-Marketeers

I don’t want to get too ahead of things, nor blame the financial sector for all of the mess.  After all, there was a Decade of Deregulation (roughly 1997-2007) during which Congress and regulators—guys like me, but not me—thought the best approach to creating economic growth was to unleash the awe-inspiring Magic of utterly free markets. The movement was led by a group of Free-Marketeers.  These wild and crazy guys…and girls—sorry, gentlemen and ladies—thought we should simply do away with rules and pesky government regulations; let the free markets rock n’ roll.  They had High Hopes, but we now know that markets rolled right over the American consumer like a locomotive.  In fact, markets rolled over people all around the planet.

Havin’ A Party: Dancing In The Dark

What the Free-Marketeers did was reduce, relax and replace existing laws.  For example, a provision contained in the Financial Modernization Act of 1999 (the Gramm-Leach-Bliley Act or GLB) sought to ensure that most over-the-counter trading of swaps would not be regulated.  Banks and others started Dancing In The Dark.  There would be no Light of Day, no transparency, no oversight, and no rules to guide what was taking place.  It was a Danger Zone, but the traders loved it, they were Happy and la-la- loved it.  Bring On The Night, Because The Night belonged to traders.  They like their dark markets.

With the coast clear, the largest of the large financial institutions created myriad complex financial instruments that many couldn’t even understand. These things were, many times, a bet upon bets upon bets that something or other—a package of home mortgages or some such thing—would fail.  Plus, there were no agreed upon valuations of what these financial instruments, like CDSs (credit default swaps), were even worth.  Lehman Brothers was littered with CDSs and ended up being leveraged 30 to one when they became a Dead Man Walkin’.

It’s A Shame, but Wall Street could trade these bad boys and that is what they liked. They were in their element, trading in earnest—looking for Easy Money in their Glory Days and Havin’ A Party.  That is, of course, until the music stopped in 2008 and there was the need for TARP.

Livin’ Proof: Glass-Steagall

Next stop, another Free-Marketeer provision during the Decade of Deregulation:  repeal of the This Depression-era law called the Glass-Steagall Act.  It used to be that banks engaged in the activities most of us imagine—taking deposits, making loans and even investing for their customers in various financial products.  But with the repeal of Glass-Steagall, the banks were able to engage in proprietary trading. That was a huge shift in policy.  They essentially had Two Faces.  They invested for their customers, like always.  Now, however, they were allowed to gamble with the house money—just some Roulette bets on their own behalf, for good measure.

That didn’t work out so well.  Here’s the Livin’ Proof.  Two banks urged their own customers to invest in newly-created funds—fake-out funds, if you will.  Once the fake-out funds were populated with their very own customers, the banks—Surprise, Surprise—invested on the other side.  They went short when their customers were going long.  They bet against their own customers.  Tenth Avenue Freeze-Out, Hearts of Stone, man.

The Securities and Exchange Commission (SEC) had something to say about both of those circumstances.  They told one bank, The Price You Pay is $550 million to make amends.  The other bank was fined $285 million, although the Judge actually rejected that level as too low.  The matter is still pending in court.  I’m curious if any of you covered these stories?  Raise Your Hand.  Thanks for getting the word out there.

By the way, some suggest banks don’t care if their customers are dead or alive.  I beg to differ.  They do care.  Just try missing a couple of payments.

 Dodd-Frank: Better Days
Next stop: 2010, Congress and President Obama approve the Wall Street Reform and Consumer Protection Act, otherwise known as Dodd-Frank.  Many of these rules and regulations are in place today; others are going live before the end of the year; and there are some other key Loose Ends that need fast action.  Here is the good news, we are finally better protected than we were when the economy crashed in 2008.  These are Better Days.
Thankfully, some of those changes brought about by the Free-Marketeers during the Decade of Deregulation were reversed. We just spoke about dark swaps markets and about the banks betting for the house.  Both of those policies, things that were part and parcel to the economic collapse, were rejected in Dodd-Frank.
No More Darkness On The Edge Of Town
The most critically important thing in Dodd-Frank, as far as I’m concerned, is the oversight and enforcement of rules and regulations with regard to the previously dark over-the-counter (OTC) swaps markets.  No longer will there be all of that Dancing In The Dark; no Darkness On The Edge Of Town.  The swaps world is being brought into the Light Of Day.  In fact, many have complained there will be too much transparency; Wall Street will be Blinded By The Light.  I don’t get it, but there’s No Surrender by some of these Patron Saints of Denial.

Across The Border

One challenge that remains is Across The Border—others around the world who have yet to implement similar policies and procedures. They need to get on board, too. Here’s why that’s important. These are global markets today. They’re Open All Night, operating 24/7/365. What takes place in this City or Chicago impacts London, Tokyo and Singapore, and vice versa. Therefore, just because we have our own Born In The U.S.A rules to bring light to these previously dark markets, others need to undertake similar efforts.

Without harmonized global financial rules, we could see market migration to those with the thinnest of rulebooks, a regulatory race to the bottom. However, I don’t think that will happen. As the head of the CFTC’s Global Markets Advisory Committee (GMAC), I know we have been coordinating and consulting relentlessly with other regulators, particularly those in the European Union. We aren’t Worlds Apart. There is an understanding among global regulators that The Ties That Bind each of us are intertwined. Nevertheless, it remains a challenge.

Devil’s Arcade: The Volcker Rule

Next stop, and another key amendment contained in Dodd-Frank, reverses the policy that permitted banks from engaging in proprietary trading—that betting for their own book we spoke about, and the Livin’ Proof that the policy didn’t work out so well. This provision is familiar to many of you. It’s called the Volcker Rule—named, of course, after former Federal Reserve Chairman Paul Volcker. It brings banks back to the vicinity of Glass-Steagall where they only invested for their customers.

Here’s the problem with the Volcker Rule (other than the fact it remains unimplemented) and a reason I say “in the vicinity” of the previous Glass-Steagall law:  there’s a potential for a massive loophole.  I’ve communicated concern to Federal Reserve Chairman Bernanke and others over the last two years. While the banks can’t place bets for themselves, the Volcker Rule does allow them to “hedge” their own risk—their proprietary risk.  The problem is, while You Can Look at the banks, it’s extremely difficult to get a bead on what their risk actually is, to know if You’ve Got It right.  Understanding their risk is elusive, at best.

If regulators don’t craft the final implementation language of the Volcker Rule tightly, it will be worthless—a continuation of the Devil’s Arcade.  That might seem a bit harsh, but think about it.  If the rule isn’t Tougher Then The Rest, the banks might simply claim their trading is hedging their proprietary risk when in fact they are speculating, thus avoiding the clear intent of Congress and the President. Don’t think for a moment that isn’t the objective of some of the banks. I’ve been doing this for a long time, It’s My Life, and I’m keenly aware how they operate with their ten lobbyists for every single member of the House and Senate and their armies of lawyers.

The Answer is that the implementation of the final Volcker Rule must protect against the most basic of conflicts of interest.  It must prohibit banks from speculating in markets for their own interests, while potentially sacrificing the interests of their customers.  Perverse incentives that exist today need to be banished.

Take ‘Em As They Come

That’s a pretty big deal, but in the last few months we’ve learned of  an even greater complication that has not been reversed. Talk To Me!  It isn’t like we aren’t already drinking from a fire hose.  Look, we’ve got to Take ‘Em As They Come.

The Free-Marketeers changed Glass-Steagall to allow the banks to bet for the house.  That didn’t work; some took advantage of the change and hustled their own customers. Then, Dodd-Frank added the Volcker Rule to pull that back, but there could be a loophole if the rule isn’t implemented in a strict fashion.

But wait, there’s another layer to the deal. The Free-Marketeers in our old favorite, the Gramm-Leach-Bliley Act, included a provision which allows the banks to own commodity-related businesses or the actual commodities themselves.

Under this authority, approval of which is granted by the Federal Reserve, more than a dozen banks requested permission that certain ownerships be granted.  The banks permitted to do so are pretty much the usual suspects.  And by the way, there are two banks that are using yet another exception to the law which don’t even require this approval from the Federal Reserve.

Here’s why this is a potential problem.  Markets are supposed to be driven by supply and demand.  However, if a bank owns important portions of the actual commodity (the supply), or owns the storage, warehousing or distribution of the commodity (impacting the supply and demand since they have an influence upon the speed of delivery), they can impact markets.

And guess what?  Regulators like me, who watch the markets in which the banks trade, don’t know much of anything about what they own.  I’ve looked a lot, and You Can Never Tell.  Seems like a potential problem, right?

Jack Of All Trades

There is a hearing in the Senate on this matter later this month.  I plan to urge that the law be amended by simply reversing the policies that allow for bank ownership.  We need to keep our Eyes On The Prize—better markets that ensure fair pricing for consumers.  Do we want banks owning actual commodities, warehousing and distribution?  How about a bank owning your electric company or a rail line?  Should a bank be a Jack Of All Trades?

As I’ve told some of the banks when visiting with them here this week, I’m stoked if they make lots of money, and they have.  In fact, every quarter since the financial sector helped Shut Out The Light and crash the economy, they’ve made more money than any other sector of our economy.  I’m good with them making ship loads of money.  I just don’t want them owning the ships and the ocean.  Banks should get back to banking.

Cross My Heart

Very few people will believe this, but Cross My Heart, I am a fan of the banking industry.   I know it To Be True.  We want them.  We need them.  We gotta have ‘em.  They build communities.  People wouldn’t own their own homes without bank lending.  We wouldn’t have our businesses.  We wouldn’t have the jobs that go along with those businesses.  We wouldn’t have our airports, roads, rail or bridges—our infrastructure.  Banks built our nation.

We have a super impressive and important financial sector with exceedingly smart people.  They are working everywhere from Wall Street to Lucky Town, from the Badlands of South Dakota to LaSalle Street, Out In The Streets and on the Back Streets throughout the nation.  These folks in the financial sector are part and parcel of the The Promise and health of our nation.  That’s always been the case.  They help to fuel the economic locomotive of our democracy.


But, there’s a “but”—has to be a “but.”  But…Boom Boom, something has gone hellishly wrong.   The financial sector and the banks in particular, have created a Jungleland.  Hear me out.

Regulators have been catching some real bad asses doing harm to markets and to individuals. We’ve seen record number of Ponzi cases in recent years—so much so that I wrote a book about it to help consumers better discern the scams.  We’ve seen crimes of all scales and types.  Crooks reaping the Wages Of Sin.  The thing is, like The Boss, it seems the hits keep coming.

Just last week we saw yet another—the fourth for those of you keeping score at home—massive settlement ($65 million) related to the manipulation of LIBOR—the London Inter-Bank Offered Rate.  We previously settled with Barclays, UBS and RBS.  In the ICAP matter, DoJ charged three people with violations of the law.  Libor rates impact prices people pay on interest for just about everything, everything, they buy on credit.  It matters.  Last week, here we were again, sadly, with traders again behaving badly.  ICAP traders were involved in insolent conduct, disregarding proper protocols.  And they were over-the-top brazen in their efforts.  Champagne and curry dinners were traded in exchange for currying favors.  One suggested a Ferrari the following year as a payment.

While ICAP was certainly the largest case, the CFTC had 10 cases in the news last week.  That’s just us.  We are only one regulator.

JP Morgan paid $920 million in fines related to the 2012 London Whale trading debacle, and $389 million related the bank’s treatment of their own credit card customers.  The Office of the Comptroller of the Currency ordered JP to conduct an exhaustive overhaul of its debt-collection operations, the first time ever that’s happened.  There were even questions as to if the bank had tried to collect from dead people.  See, I told you they cared if We Are Alive.

This was all just last week.  Some of you may recall last year, Capitol One and Discover paid $210 million and $214 million for similar endeavors.

Of course, The Line that is way too often used by many in the financial sector when the enforcement authorities go after them is, “We neither admit nor deny any wrongdoing.”  What a Brilliant Disguise.  There is a report that Senator John McCain asked, relative to JP Morgan, if it was a crime of Immaculate Conception.  In July, I made it clear that we needed to ensure admissions of wrongdoing in settlements—enough already.

You’ve Got It

I won’t go through the torrid and myriad examples of financial malfeasance. You read that in the papers. You write the papers.  So, you know what I’m talking about. My concern is that we are simply getting used to all of this financial culture of corruption and that we aren’t doing enough about it—especially in the aggregate.

On the one hand, we can only do so much.  We take the cases as they come.  Many of you report upon them.  But unless there is  greater public awareness that all of this is going on and that it’s incessant, we will create a decision by default that what is happening is tolerable, and it is not.

For my part, I continue to discuss these things, call for greater accountability and seek increased penalties.  We have a very antiquated penalty regime that limits our fines to $140,000 per violation.  That’s Loose Change, a cost of doing business, for the financial sector.  It is neither a deterrent nor an effective disincentive. It does little, if anything, to derail efforts to manipulate the market.

What does motivate them is their reputation, their brand.  That’s why your jobs are important and hold so much power.  You aren’t Radio Nowhere.  You’ve Got It, you’ve got the power to help hold people accountable.  Keep putting them Into The Fire of public opinion and accountability.

There is a story coming out in Bloomberg Markets tomorrow.  I know about it because I was interviewed.  Here’s what it says: managed money firms are fleecing their customers through fees.  Reporter David Evan, who by the way was a CFTC Trial Attorney before he went to Bloomberg, spent months collecting information on managed futures firms. He did deep data dive and aggregated and sliced and diced the numbers. Here’s the headline: many firms fleeced consumer with fees, commissions and expenses.  In fact, from 2003-2012, 89 percent of the $11.5 billion in managed futures customer profits were eaten up with these fees, commissions and expenses–89 percent of the investors profits went poof.

That type of journalism serves a greater good, a public service.  When I began, we discussed our common interests.  Quite frankly, Without You, the media, we couldn’t do as an effective job as we are doing.  The reason people don’t want to admit things is because you will write that so and so “admits” such and such.  It’s not simply la-di-da  And The Band Played On.  I like to think that both regulators and journalists contribute to a process that increases transparency and accountability. Hopefully, we can keep corrupt markets from becoming a third rail of American politics.

I like President Truman’s quote about Wall Street.  He said, “I never did give them hell, I just told the truth and they thought it was hell.”

This Life

So, we’re all only here for a short time in This Life.  Most of us try to Be True.  Like many of you, I feel fortunate to have been in a position to try and make a difference by being an honest broker, calling BS, and when needed, putting people on the Thunder Road of public attention.

It has been a Long Time Comin’, but we are close—we really are—to having a more reasonable and responsible financial sector.  It’s just not too far Down The Road Apiece.  It won’t require The Wish of Magic or us Countin’ On A Miracle. It won’t be just an Empty Sky, Land Of Hopes And Dreams.  It will be real.

We only have to continue to do what we’ve been doing; being persistent  and persevere.  Me with the available regulatory tools, and you–armed with a keyboard or microphone and the truth.  I’m ready—Born To Run, and I know you are ready.   C’mon, it will be…the boss.

Thanks for your time and for all you do.

Bart Chilton is commissioner of the United States Commodity Futures Trading Commission appointed by George W. Bush and confirmed by the U. S. Senate in 2007.


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