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Dennis M. Kelleher

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Another Wall Street Win & Main Street Loss

Posted: 11/15/11 04:58 PM ET

The details are still under wraps, but it is being reported that a House-Senate conference committee is cutting the administration's $308 million budget request for the Commodities Futures Trading Commission (CFTC) by one-third, to $205.3 million, which is merely level funding. Of course, the CFTC's responsibilities under the new Dodd Frank regulatory reform law aren't level. In fact, massive new responsibilities were assigned to the CFTC to bring transparency, oversight and accountability to the $600 trillion derivatives markets, which were at the center of the 2008 Wall Street meltdown.

That's not a typo. The derivatives market is $600 trillion big and much of that market is controlled by just 4 Wall Street megabanks: JP Morgan Chase, Citigroup, Bank of America and Goldman Sachs (according to the Office of the Comptroller of the Currency). Who is the watchdog for those derivatives? The CFTC has responsibility for most of them and it is getting a budget of only $205 million.

With a level-funded budget of $205 million, there is simply no way the CFTC can do their old job, never mind all their new financial reform responsibilities. They will not be able to hire the people or buy the technology that they need to keep up with Wall Street, never mind actually keep watch over them to try to prevent another financial catastrophe.

That's good news for Wall Street because not funding the CFTC is like taking the police off the streets in a high-crime area, which is what Wall Street is. Risky trading in dark markets is highly profitable to Wall Street and very expensive for every other person in America. They got billions in bonuses, and we got the bill for trillions of dollars to clean up their mess. The only way to prevent them for doing that again is to make sure that the CFTC has the funds to do their job.

Everyone's heard of AIG and CDS (credit default swaps) as well as subprime mortgages and CDOs (collateralized debt obligations). Those are only a few of the derivatives sold in dark markets by the Wall Street gamblers leading up to and causing the financial crisis in 2008. The CFTC has been working overtime to pass new rules to bring these derivatives out of the shadows and onto exchanges, clearing houses and other transparent venues where they can be regulated.

It has been arduous, but the CFTC Chairman, commissioners and staff have worked overtime to get the job done while besieged by Wall Street's army of lobbyists, lawyers, PR-spinners, allies and front groups, not to mention political and ideological fellow-travelers and purchased academics. Better Markets hasn't always agreed with what the CFTC has done, but they (and their fellow-regulators) are the front-line defense in stopping the next financial crisis.

This is their reward? It is shameful.

And, this doesn't just relate to the financial crisis of 2008. The recent blow up of the commodities trading house MF Global shows just how important it is that the CFTC have a big enough budget to monitor the derivatives markets. MF Global blew itself up by making leveraged bets of 40 to 1 on European sovereign debt. As long as it doesn't do systemic damage, no one should really care if a financial company or two blows itself up gambling recklessly, except more than $600 million in MF Global's customer money is missing. That is starting to have systemic implications because MF Global is now in bankruptcy with a trustee and almost everything is now frozen, which is starting to ripple through the derivatives markets.

As the CFTC and other regulators are working overtime to find the missing $600 million in customer money, the Congress cuts the CFTC's budget to less than one-third of the money that is missing from just one commodity operator. That is literally asking for another crisis: when no one is watching gamblers, they tend not to follow the rules. Not a lot of crime next to a police station, but the further away from the station you get the higher the crime. This isn't a mystery. It's predictable and that's what is going to happen in the financial markets.

The costs of the 2008 financial crisis were massive and are still being felt throughout the country with 25 million or so Americans either unemployed or underemployed as well as tens of millions more suffering from historically high home foreclosures, all with no end in sight. That doesn't even include the trillions of taxpayer money that was spent, lent, invested, borrowed, pledged and otherwise used to prop up the financial system in 2008 to prevent it from collapsing and taking our entire economy down with it.

The Dodd-Frank regulatory reform act was intended to try to prevent that from happening again, but that depends entirely upon regulatory agencies like the CFTC being fully funded and putting their cops on the Wall Street beat. No cops, lots of crime. Not complicated. Cutting those budgets and preventing them from doing their jobs all but guarantees another crisis. The only question is when, not if, and then the question will be how big a bill will they stick the taxpayers with next time.