WASHINGTON (AP) — When President Barack Obama's choice to head an agency that oversees some of the riskiest corners of the financial world faces senators Thursday, one question could dominate:
Will he be as aggressive as his predecessor in holding big Wall Street banks to stricter standards?
The nominee, Timothy Massad, has been tapped to be the next chairman of the Commodity Futures Trading Commission, which regulates futures and options markets. If confirmed, he would succeed Gary Gensler, a Wall Street veteran who surprised many by becoming a tough regulator who pushed for stricter rules that large banks had lobbied against.
For three years, Massad, 57, oversaw the Treasury's Troubled Asset Relief Program, the bank bailout program that was launched in response to the crisis. Under TARP, the government lent about $422 billion to bail out financial companies and automakers. The companies have repaid around $370 billion.
Obama, in praising Massad's supervision, has cited the roughly $30 billion in returns for taxpayers under TARP. But the Treasury has estimated that taxpayers will still lose about $40 billion. It attributed much of the loss to declines in stock prices of bailed-out General Motors and American International Group, which Treasury sold, and in the estimated value of its holdings of Ally Financial stock.
After the 2008 financial crisis, the CFTC brought the secretive $600 trillion market for derivatives under regulation for the first time. The goal was to prevent another crisis and resulting taxpayer bailout. Derivatives are complex investments that helped ignite and escalate the financial meltdown.
The value of derivatives is based on a commodity or security, such as oil or currencies. They are often used to protect businesses that produce or use the commodities, such as farmers or airlines, against price fluctuations. But they also are used by financial firms to make speculative bets.
After its hearing Thursday, the Senate Agriculture Committee is expected to approve Massad's nomination and send it to the full Senate for confirmation.
Massad, who has worked for the Treasury since Obama took office in 2009, would oversee the implementation and enforcement of CFTC rules that were enacted to meet the agency's mandate under the 2010 financial overhaul law.
Before joining the government, Massad was a corporate attorney for 24 years at a leading white-shoe firm, Cravath, Swaine & Moore.
Massad "has no reform track record" and little experience with the markets the CFTC regulates, said Marcus Stanley, policy director of Americans for Financial Reform, a coalition of consumer and labor groups. "He's a bit of a blank."
But neither was Gensler viewed as an aggressive reformer. Yet he took a leading role in the agency's writing and adoption of rules to bring transparency to derivatives trading. Those rules have been intended, among other things, to put most transactions into a network of clearinghouses and require firms that trade derivatives to put up more money to cover potential losses
Gensler also pushed to expand the CFTC's authority to regulate derivatives trading abroad and thereby lessen risks to the global financial system. That stance put him at odds with the industry and with Republicans as well as some members of his own party.
As chairman, Massad will face pressure from big banks to weaken the new rules — a situation "where a lot of toughness and commitment to reform is necessary," Stanley said in an interview.
In writing the rules, the CFTC set up a framework. But the real-world details will come from decisions the agency's commissioners will make on how to apply the rules.
Obama described Massad as someone who doesn't seek a spotlight but consistently delivers results.
The Agriculture Committee also will hear testimony Thursday from two Obama nominees to fill vacancies on the five-member CFTC panel: Sharon Bowen, a securities lawyer, and J. Christopher Giancarlo, a brokerage firm executive. Bowen would fill a Democratic seat on the commission, Giancarlo a Republican one.
The CFTC is an independent regulatory agency with about 1,000 employees and an annual budget of around $215 million. That represents around 12 percent of the $17.9 billion earned last year by JPMorgan Chase & Co., one of the five U.S. mega-banks that together account for more than 90 percent of derivatives contracts. At the same time, the CFTC's powers and oversight responsibilities were expanded by the 2010 law.
Obama said in November that budget cuts have left the agency "undermanned" and "outgunned," to the point of having to drop some enforcement cases for lack of resources.
The administration's proposal for the budget year that starts in October, released Tuesday, calls for $280 million to fund the CFTC. That would be an increase of $65 million from the agency's budget in the current year but is $35 million less than what the administration proposed for this year.