The Day Dodd-Frank Stood Still

By Bob Gross 10/2/2013 10:48 a.m.

As the United States federal government faces its first shutdown since 1995 -1996, the standoff between the Obama administration and Republicans may have more far-reaching implications than what is currently being reported. In fact, data suggests that the proverbial Pandora’s Box of unscrupulous and illegal behavior in American  financial markets might have just been opened with the near-closure of a little-known U.S. regulatory agency by the current government shutdown.

The shutdown coincides with a last-ditch lobbying campaign of the Commodity Futures Trading Commission (CFTC) by the derivatives industry to delay the mandated new rules of Dodd-Frank that were scheduled to go into effect on October 2, 2013.  The new rules would have made the swaps market more transparent, as well as to prevent a repeat of the 2008 financial crisis when the market was thrown into chaos.

According to reports on CNN and Bloomberg, the CFTC will be hobbled by the government shutdown. Out of the six hundred-eighty people employed at the CFTC, six hundred forty-three people would be furloughed due to the shutdown. This ends up leaving the CFTC with a skeleton staff of thirty-seven people that would conduct the agency’s daily business.

Thirty-seven people simply aren’t enough staff to keep the lid on Pandora’s box closed, much less, implement the new rules created by the section of Dodd-Frank regulating derivatives. As the headline of an article in Bloomberg Businessweek suggested, it’s a Madoff moment in the making.

This isn’t merely my idiosyncratic musing.  In describing the ramifications of a government shutdown, CFTC Commissioner Bart Chilton himself said, “[G]overnment regulators will be handcuffed in our ability to go after crooks who are trying to evade our oversight and protection of markets.”  He added, “The dark markets that Dodd-Frank brought into the light of day will go dark again.  The lights will go out.  Given the huge growth in the derivatives industry and our new oversight of swaps, CFTC’s market oversight functions are more important than ever.”

Given this lack of government oversight, many investors in the market may become the victims of manipulation and insider trading practices. What is also concerning is the fact that some Capitol Hill staffers and lawmakers might use the shutdown to bypass the already weak reforms of  the 2012 STOCK Act, championed by Rep. Tim Walz of Minnesota.

The 2012 Stock Act prevents lawmakers and staffers from using information garnered from their positions on Capitol Hill in order to gain an unfair advantage on the stock and commodities markets. However, if no one is around to monitor and ensure that these practices aren’t occurring, save for a few stressed CFTC employees and the computer programs recording transactions, then we may be looking at a possible outbreak of business breaking bad–and the politicians who love them as well.

Was this recipe for mischief accidental?  As Francis Urquhart, the protagonist  of the British version of “House of Cards”, was apt say, “I couldn’t possibly respond to that.”

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