11/01/2013 11:58 am ET Updated Nov 01, 2013

Wall St. Watchdog Too Broke To Do Any Watching (Thanks To Austerity)


Austerity isn't just hurting the U.S. economy: It's also starving Wall Street's watchdogs.

The Commodity Futures Trading Commission has decided not to press charges against two traders in the "London Whale" case partly because it is so strapped for cash, its former chief enforcement officer, David Meister, told the Wall Street Journal. The CFTC is also slowing down investigations and laying off staff as a result of its funding crunch.

"We will do everything we can… but we have limited staff and limited resources," Meister, who stepped down this week, told the WSJ. "Ultimately, it comes down to the math."

House Republicans, as you may know, have made it pretty hard for the CFTC to do its job lately. They've repeatedly rejected requests for more CFTC funding and most recently turned down a raise for the agency to $315 million from $195 million. Of course, the agency's budget was already squeezed by the automatic spending cuts of the sequestration.

Republicans seem to think that the CFTC's budget, up from just $111 million five years ago, is more than enough. But as Bloomberg Businessweek pointed out on Friday, the markets under the CFTC's jurisdiction have gotten more than ten times bigger. (And as the WSJ notes, CFTC fines have paid for the agency's $195 million annual budget many times over.)

During the government shutdown, which was caused by House Republicans, the CFTC was unable to watch markets for several weeks. And as the government shutdown began, the CFTC was handed a critical new task, based on the Dodd-Frank financial-reform law, of watching the $600 trillion -- that's "trillion," with a "t" -- market for swaps. These derivatives were at the heart of the financial meltdown in 2008. The CFTC was already struggling to keep an eye on the $37 trillion -- again, "trillion," with a "t" -- futures market.

Just last week the agency said it will have to furlough its workers for 14 days during the current fiscal year, simply to make ends meet.

"In handing the swaps market to the CFTC, Congress gave its biggest, hardest regulatory task to one of the smaller agencies in Washington," Bloomberg Businessweek's Matthew Phillips wrote.

There are at least some mitigating circumstances when it comes to those "London Whale" cases. The two former JPMorgan Chase traders the CFTC wanted to charge, Julien Grout and Javier Martin-Artajo, have already been charged in criminal and civil court by federal prosecutors and the Securities and Exchange Commission. Both are accused of covering up the massive losses racked up by JPMorgan's chief investment office last year on credit-derivatives trades. Both have repeatedly denied the accusations.

Despite limited funds, the CFTC has been a remarkably aggressive regulator, especially in the three years of Meister's term as enforcement chief, when it filed nearly 300 enforcement actions, roughly double the amount of the previous three years. It took the lead on cracking down on manipulation of the London Interbank Offered Rate, a key short-term interest rate that is apparently just manipulated constantly by every major bank in the world, raising $1.8 billion so far in fines.

It also got JPMorgan to pay $100 million in fines in the "London Whale" case, making use of a brand-new law, much-hated by Wall Street, against market manipulation.

But the agency's enforcement was down by a fifth in the latest fiscal year, according to the WSJ, largely due to budget constraints. And it has the same staffing level it had in 2002, when financial markets were much smaller and much less complex.

Now Meister is leaving, and he will soon be followed by CFTC chief Gary Gensler, who has been a surprisingly tough regulator in his four years at the helm. The CFTC's paltry funding makes recruiting replacements for them even tougher than usual. Hopefully there are plenty of smart, civic-minded people out there who like a challenge. The problem is that the challenge may be impossible.



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