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PAUL JAY: Welcome to The Real News Network. I'm Paul Jay in Washington. During and after
the crash in 2008 of the finance sector, which created a global economic crisis, many people
were talking about facing the Apocalypse, the global economy going over the cliff. And
the lack of regulation was pointed to as the critical factor helping to trigger the crisis.
So what followed was a bill called the Dodd-Frank bill that was passed that was supposed to
create the mechanism to control and--what was called an out-of-control or casino-capitalism
Wall Street. Now joining us to talk about how that act is being enacted and how successful
it is proceeding is Bart Chilton, and he's a commissioner with the Commodity Futures
Trading Commission here in Washington. Thanks for joining us.
BART CHILTON: Good to be with you, Paul.
JAY: So how's it going? We were told that without regulation this could all happen again.
So what's happening that might prevent this from all happening again, if in fact something
is happening?
CHILTON: Well, you're right that it could happen again without appropriate regulation.
The law that was passed by Congress a year ago July makes significant changes. And what
it does is it brings the dark markets--these are markets that regulators didn't see at
all before. And that's where a lot of this crazy trading took place. People have heard
about credit default swaps and bets upon bets upon bets that bundled groups of mortgages
would fail. That's sort of a casino mentality. You talk about it in your intro. And that
could happen again, because right now, today, we are heretofore not regulating that market.
The law allows us to do so, but we've got to put these regulations in place, as you
indicated. So I think we're going to have those done by the end of the year, but we're
working hard to get them in place, and it's been a real tough struggle, to be honest with
you.
JAY: A struggle against what? I mean, I understand this is very complex, and just writing these
regulations would be complex, but you're not writing these regulations in a vacuum. You're
in a real political world. So what are the obstacles, political obstacles, you're facing?
CHILTON: Well, we want to make sure we get the regulations correct. These are very complicated
markets. I'll give you an idea of the size and scope that we're dealing with. We currently
regulate on exchanges like the Chicago Mercantile Exchange and the New York Mercantile Exchange
roughly $5 trillion in annualized trading--$5 trillion. But this dark market that we're
going to regulate is over $600 trillion. So we've got a lot to look at. We're creating
all of the mechanisms to regulate that. Ultimately, I think it's going to be--we're going to get
things in place that make a difference for consumers, but we've got lots of competing
interests out there. You know, there's an old saying in Washington: if you're not part
of the solution, there's plenty of money to be made being part of the problem. And that's,
I think, at work here now. We meet with folks who--some genuinely want us to get the regulations
correct. Some don't want us to get them in place at all. So figuring out what the fine
line is there between the guys who want to get it done right and the guys who want to
just run the clock out and not have any regulation is a challenge, but we're doing our best.
JAY: So let's talk about running the clock out. The idea here is, I suppose, that they're
going to keep--they're going to slow you down (they being lobbyists, primarily for people
that know how to make money out of the problem), run the clock out until they're into a presidential
election, nobody really wants to do anything, and then they hope after a presidential election
they're going to have even more ways to slow you down.
CHILTON: That's absolutely correct. That's one scenario. The other is that people's memories
are short, and if the economy improves, maybe folks won't remember how calamitous this economy
has been. I'm amazed at some of the people I hear out even on the presidential trail
talking about the evils of government and the horrible regulations. We had no regulations.
We--this economic calamity was caused because we didn't have regulations. And, actually,
some of these regulations will encourage economic activity, it will create innovation, it will
help fuel the economic engine of our democracy. The question for us as regulators is just
to get them right, to ensure that they're good for markets, good for the country, and
importantly, good for consumers.
JAY: Well, is part of the reason there's no longer a sense of urgency is that there is
a sense that if it all happens again, it will all happen again, which means there'll be
another bailout, because there's no reason why there wouldn't be, 'cause what's changed?
If the finance sector goes down the drain again, it's going to have the same consequences.
CHILTON: There's a provision in the law, Paul, that says that we will not have another bailout.
I mean, this thing was a hideous, you know, hundreds of billions of dollar bailout, and
these systemically important institutions--that's why the regulations are so important, that
we guard against them going down. And so while they might not like regulators looking over
their shoulder, our job is to ensure that they don't go down and to have appropriate
sideboards on this crazy casino-like trading that you've talked about to ensure that they
are stable.
JAY: But they're fighting you tooth and nail.
CHILTON: They're fighting us, some more stridently than others.
JAY: Let's drill into some of the things you're trying to deal with and let's start with the
dark markets. So explain for people that don't know what you mean what do you mean by dark
markets.
CHILTON: These are things called the over-the-counter markets, OTC markets. And what they are are
agreements between two parties to trade a futures-like contrast. And when I say a futures-like
contract, I'm talking about I will pay you a certain amount for crude oil or silver or
soybeans in six months, and you agree to that product. These traits are going on all the
time, hundreds and hundreds of trillions of dollars, and they impact the price that consumers
pay, from everything from milk to mortgages.
JAY: Hedge bets or derivatives bets? Which one are you talking about?
CHILTON: These are bets on derivatives that are supposed to be a hedge against a business
risk. So if I'm a large commercial dealer, say I'm an airline, I have an interest in
how much my energy cost is going to be. I want to hedge that risk for the outcome that
maybe fuel prices will be higher. And so I will enter into an agreement that will mitigate
my risk. That's what these markets are used for, both the regulated markets and these
OTC markets. The problem has been is that the OTC markets so outweigh in size that all
of this supply and demand, all of these different equations are taking place over here, they
are impacting the regulated markets. And it's the regulated markets that are the price drivers
for consumers. And that's what we've got to remember, what impacts consumers.
JAY: And the unregulated dark market, a lot of those bets have nothing to do with ever
taking delivery. It's just pure bets, it's just pure gambling, right?
CHILTON: A lot of folks in these markets are speculators. Now, there's nothing wrong with
speculators. If you don't have speculators in markets, quite frankly, you don't have
a market. The question is: is there an appropriate role for speculation? And what the law requires
is that we guard against excessive speculation. And so we are charged with putting some sort
of limit on how much an individual speculator may control of a market, and we're working
*** that. We're supposed to have that rule done in July also. We haven't managed
to skin that cat yet, although I've been pushing on it. But hopefully we're going to have that
done in the next several months. So, for example, one trader can't have 20, 30 percent of the
crude oil market or of the silver market [crosstalk]
JAY: This is what they're calling position limits?
CHILTON: That's correct, yes. And we've seen these high percentages in markets in the last
several years. And it can definitely contort prices and, again, impact consumers.
JAY: Now, we talked off camera, but let me ask you on camera. Part of this excessive
trading, you divide it into two categories. You had "massive passes" and what you called
"cheetahs". Explain what that is and how it's affecting the markets, and then people's,
as you say, said, milk and oil.
CHILTON: Well, in general these markets have worked very well over the years. There wasn't
any large company that went under in 2007 or 2008 because of their futures position
on the regulated exchanges. It's this OTC dark market that was a problem, with credit
default swaps and these bets upon bets. So for us the job is to put some sort of limits
in place that guard against the excessive speculation. And there's two areas, one, as
you say, the massive passives. This is a new investment class of trader. These folks shifted
from the equities, from securities and stocks, they went into the futures markets, and they
are betting, say, crude oil will be more not in the next couple of weeks, not at the end
of the summer driving season, but maybe in 2013 or 2050. And these are massive funds--pension
funds, exchange-traded funds, hedge funds--massive--and they're fairly price insensitive, because
while they may not like the price of oil going down today or tomorrow or next week, their
real bet is much longer-term. That's a different type of speculator in the market. Usually
speculators are in and out of the market based upon sophisticated trading information.
JAY: Well, before we go to the second group, this first group that's betting, say, that,
for the sake of argument, aluminum in 2013 is going to be worth this much, and they're
going to buy this long-term hedge on that, is part of the problem that we know that companies
like Glencore and Goldman Sachs are buying massive warehouses and they're storing, hoarding
aluminum, so you get, you know, a very self-fulfilling bet, because you can manipulate the market?
And so how much is that happening, and is there anything that can be done about it by
your commission?
CHILTON: We can do something about that type of circumstance, the theoretical circumstance
that you raise. A matter of fact, we had a case earlier this year. A company called Arcadia
we believe tried to do that. And not that we just believe it; we're prosecuting them
for that.
JAY: And this is important to point out. This is the first prosecution in how long?
CHILTON: We've only had one successful prosecution of manipulation in 35 years. We prosecuted
other times, but--and sometimes we come up with a settlement or some favorable outcome,
but we've only successfully prosecuted one. So this Arcadia thing is a big deal, in that
we think that they manipulated the physical market and made money between the physical
market and the futures market. And so this is something we need to watch out for all
the time.
JAY: Explain how it works.
CHILTON: How it worked in Arcadia is they bought long futures--so they bet that the
price of crude oil was going to go up. Then they bought a lot of the physical market,
therefore decreasing the supply and driving prices up. And they made money when prices
went up. Then they dumped the--they bought short positions in crude oil, dumped the physical,
and made money when the price went down. And they did this several times. And as a result,
we're prosecuting them.
JAY: And I don't know if you can put a number on it, but is this something that you think
is going on a lot?
CHILTON: I think it happens more than folks realize. I think that we need to do a better
job as an agency of looking at that physical holding, along with the futures positions.
I think for too long we've sort of been bureaucrats and said, it's not our job, and had blinders
on. If we're not looking at the physical in combine with their futures position, I don't
think we're doing our job adequately to protect consumers.
JAY: If I understand it correctly, you have 600 people working for you.
CHILTON: Yeah.
JAY: When you--the size of the dark economy that you're going to bring in and regulate
is how much?
CHILTON: It's something like one per trillion. Yeah. It's $600 trillion. It may be a little
bit less than that. The Securities and Exchange Commission will get some of those. But we're
going to have hundreds of trillions of dollars of trading to oversee, Paul [crosstalk]
JAY: How many people--to really fulfill your legal obligation under Dodd-Frank, how many
people do you think you need?
CHILTON: Roughly 1,000 people when we get up and running is what we need. But, you know,
the people that voted against this Dodd-Frank Law, the law to put sideboards on this regulation,
some of those very same people are trying to de-fund us on Capitol Hill so we won't
be able to do the job that actually Congress told us to do. So that's a big concern of
mine. You know, it's one thing for us to put the regulations in place, but if we don't
have the people power and the technology to back it up, it's really just words on a page.
JAY: So how dangerous a moment are we in, then, if in fact this unregulated sector helped
trigger this global collapse?
CHILTON: We're at a hair-trigger point where, if we can go one way or another, we can sort
of go along and potentially have economic calamities, or we can step up to the plate
and look at this market in a way that Congress has told us to do and we know caused problems
for the economy. We're still digging our way out of these problems and the massive, hideous
bailout that we had. So it's really--we're at a hair trigger on which way we go now,
and it's really going to depend on funding, I think. So, you know, in Washington everybody
always wants more money, and, you know, we've got to be cautious about that, but in this
instance we are looking at preventing fraud, abuse, manipulation that impacts the price
that people pay for just about everything they purchase. I think that's a pretty important
priority for the nation.
JAY: Okay. In the next segment of our interview, let's drill into a little more of what has
caused the rise in the price of oil and the price of food. Please join us for the next
segment of our interview with Bart Chilton on The Real News Network.