WASHINGTON (AP) — President Barack Obama's choice to head an agency overseeing potentially risky financial market activities is promising to act aggressively against misconduct to ensure investors' confidence.
The nominee as chairman of the Commodity Futures Trading Commission, Timothy Massad, said at his Senate confirmation hearing Thursday that he'll make enforcement a top priority if he is approved for the position.
Massad also said he would pursue final action on a revised rule aimed at clamping down on speculative trades that can drive up food and gas prices. The CFTC's original rule was struck down in 2012 by a federal court.
The CFTC, which regulates futures and options markets as well as derivatives trading, oversees some of the riskiest corners of the financial world. Derivatives were blamed for fueling the financial crisis.
Some consumer advocates are asking whether Massad, a Treasury Department official, will be as aggressive as his predecessor in holding big Wall Street banks to new, stricter standards.
If confirmed as expected, 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.
Massad would oversee the implementation and enforcement of CFTC rules that were enacted to meet the agency's mandate under the 2010 financial overhaul law.
"We must aggressively pursue wrongdoers — whatever their position or size — and we must deter and prevent unlawful practices," Massad testified at the hearing by the Senate Agriculture Committee. "Strong enforcement is vital to maintaining the public's confidence in our markets. Therefore, I will make it a top priority to fulfill the CFTC's responsibility to enforce the laws protecting these markets vigorously."
Before joining the government, Massad was a corporate attorney for 24 years at a leading white-shoe law firm, Cravath, Swaine & Moore.
He told the Senate panel that he had "substantial experience" with derivatives as a lawyer.
After the financial crisis that struck in 2008, 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.
Speaking of finalizing the anti-speculation rule, Massad said it's possible to find a balance: ensuring that companies that use derivatives to hedge against risks such as swings in commodity prices can continue to do so while also reducing excessive speculation.
Several senators, including Sen. Debbie Stabenow, D-Mich., who heads the committee, said it was important for the CFTC to ensure that companies such as airlines, oil companies and farmers will be able to hedge against unforeseeable business risks with derivatives contracts. Hundreds of businesses engage in the practice.
Massad said he was sympathetic to the concerns of "end user" businesses, having advised many of them in his legal work.
The committee also heard testimony 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.
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 originally 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 Wednesday.
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.