Regulators battle Wall Street for brains, money
Long outgunned by Wall Street's big brains and big budgets, U.S. financial regulators are hoping to close the gap -- if they get the money to do it.
Bestowed with new powers from the Dodd-Frank reform law, the regulators are trying to attract people with Wall Street experience and retool antiquated surveillance systems.
The SEC had fallen pretty far behind, and so we've been catching up, Mary Schapiro, chairman of the Securities and Exchange Commission, said at the Reuters Future Face of Finance Summit this week.
If we can bring those people on, can we keep up with Wall Street? she said. I think we have a fighting chance.
That's a pretty big if with a congressional budget standoff depriving promised funding increases to the SEC and Commodity Futures Trading Commission, which is becoming the country's top derivatives regulator.
The major victim of this funding will be an effort to regulate derivatives, Democratic Representative Barney Frank told the summit. Frank is the co-author of the broad Dodd-Frank bill that dictates new rules for the $600 trillion over-the-counter derivatives market, among a huge list of other reforms.
The previously unregulated derivatives unsettled the global financial system in 2008 when insurer American International Group found itself on the wrong side of its stockpile of credit default swap contracts.
The CFTC is racing to get a handle on the derivatives market while trying to acquire better technology to catch bad traders.
The agency is pushing for a basic market surveillance system and wants an automated program to flag unusual market conditions and trader activity, such as around scheduled economic data releases.
The CFTC also wants to develop an algorithm to find the potential for trading in concert, as well as automated systems for identifying speculative position limit violations.
We're far smaller than the industry we regulate, CFTC Chairman Gary Gensler said. It's important to fund the agency so there is an effective cop on the beat.
BERNANKE JUST AS SMART AS DIMON
An intellectual showdown between Wall Street and Washington heavyweights does not worry Frank, who threw out the names of Federal Reserve Chairman Ben Bernanke and JPMorgan Chase & Co Chief Executive Jamie Dimon as examples.
Do I think that Jamie Dimon is smarter than Ben Bernanke? Frank said. No. I think they are both very smart.
But Frank and others said they were worried about the agencies being starved of money.
Democratic Senator Jack Reed, who chairs a panel that oversees the SEC, said the country needed well-resourced regulators, not just in terms of dollars but in terms of personnel.
The analogy is that, I have a 1991 Ford Escort which is a good city car, Reed told the Reuters summit. I couldn't catch a Ferrari. So if I've gotten a 1991 SEC-CFTC to catch high-frequency traders, it is never going to happen.
So we've got to get them maybe not up to the Ferrari level, but at least up to a Fusion, a hybrid.
Flaws in the country's market structure and decades-old technology came to light after the May 6, 2010, flash crash sent the Dow Jones Industrial Average down nearly 700 points before recovering in minutes.
Hindered by their inability to easily see orders across all markets, regulators took five months to piece together events that led to the crash.
I think we need to do some fairly basic things to be a much stronger, more capable, and more technologically-enabled regulator, and I think it will make a huge difference, said the SEC's Schapiro.
Regulators also say they could use a few less roadblocks from Congress.
Bernanke, Treasury secretaries under both the Bush and Obama administrations, and other top banking and market regulators have been pilloried for not doing enough to prevent the 2007-09 financial crisis.
Regulators should be able to take hard questioning, Federal Deposit Insurance Corp Chairman Sheila Bair said, but an atmosphere of mutual respect between Congress and regulators is critical, especially for keeping up morale among agency staff racing to get reforms in place.
Congress should be doing oversight of the regulatory process, Bair said. I welcome that... On the other hand, the tone and attitude and demeanor shown regulators can be very difficult.
(Additional reporting by Roberta Rampton, Kevin Drawbaugh, Jonathan Stempel; Editing by Lisa Von Ahn)
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