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Libor Case Energizes a Wall Street Watchdog

Months after he arrived in Washington in 2009, Gary Gensler knew he had a big case.

Gary Gensler
Getty Images
Gary Gensler

Huddled around his assistant's desk with a colleague, Mr. Gensler, then Wall Street's newest regulator, listened to a taped telephone call of two Barclays employees discussing plans to report false interest rates. When the brief recording ended, Mr. Gensler realized the gravity of the wrongdoing.

"We need to make this case even more of a priority," he told his colleague at the Commodity Futures Trading Commission, Stephen Obie, who already had been investigating Barclays for more than a year.

The Barclays case has now thrust Mr. Gensler—and his once-obscure agency—into the spotlight.

In June, the commission reached a settlement with Barclays in the rate-manipulation case, which produced the largest fine in the agency's nearly 40-year history. The deal is expected to be the first of many, as Mr. Gensler's team leads a global investigation into rate-rigging at more than a dozen big banks.

It is a new role for the agency, the industry's smallest regulator. For years, it was viewed as the Rodney Dangerfield of the regulatory world, with a light touch and little respect.

When the agency first opened the rate investigation in 2008, some banks dismissed the regulator, telling it to narrow the focus to a particular time period or trading desk. Barclays questioned whether the American regulator had the authority to examine a British bank, according to people with knowledge of the matter.

Now, Wall Street is taking the commission more seriously.

Along with the inquiry into rate manipulation, the agency is playing a central part in several prominent investigations, examining the blowup of MF Globaland the multibillion-dollar trading loss at JPMorgan Chase . Mr. Gensler has also aggressively—some say obsessively—pushed the agency to adopt dozens of new rules under the Dodd-Frank law, the financial regulatory overhaul.

"The change is night and day," said Representative Barney Frank, Democrat of Massachusetts, the co-author of the sweeping law that bears his name.

"It was a toothless agency," he said, but when "Gary became chairman, he was very aggressive."

The agency's revival stems from the wave of new regulation. Dodd-Frank , passed in 2010, greatly expanded the responsibility of the agency, stretching its reach to the dark corners of the $300 trillion derivatives market. Before that, the agency oversaw the $40 trillion futures business.

Mr. Gensler has positioned himself as a chief advocate of the law, initially lobbying lawmakers to close loopholes and now overseeing the flurry of rule-making at his agency. After a long career at Goldman Sachs and a stint in the Wall Street-friendly Clinton administration, the job has given Mr. Gensler a shot at redemption.

But Mr. Gensler and his agency have faced a steep learning curve with the bureaucratic and political ways of Washington.

To win support from fellow regulators, Mr. Gensler has agreed to dial back some rules. And while the agency's rule-writing has outpaced other financial regulators, the trading commission has missed multiple deadlines for completing the crackdown on derivatives, a central cause of the 2008 crisis.

Mr. Gensler has also drawn the ire of Congressional Republicans, who say his commission is overstepping its authority. Some bankers have taken aim at the agency, saying its rules threaten profits.

"No one likes their regulator right now, however good they are, and Gary is good," said Eugene Ludwig, head of the Promontory Financial Group and a former bank regulator who knew Mr. Gensler from their days in the Clinton administration.

The new identity of the agency reflects the personal evolution of its leader.

A math whiz who grew up in a working-class Baltimore neighborhood, Mr. Gensler attended the Wharton School at the University of Pennsylvania. After an 18-year career at Goldman Sachs as a mergers and acquisitions banker and later an executive, he joined the Treasury Department.

At the time, the department oversaw the broad deregulation of the same markets Mr. Gensler now oversees. In 2009, some liberal lawmakers stalled Mr. Gensler's nomination to the commission, fearing that he remained a banker at heart.

Mr. Gensler, a father of three daughters, agrees that he has yet to shake his penchant for deal-making. When negotiating over the wording of a rule, he still props up his socked feet on an employee's desk, a habit common to bankers. His efforts now, however, are directed at reforming the industry that once made him millions.

"I think what we're trying to do is bring common-sense rules of the road to this really important marketplace," he said in an interview.

As Congress debated Dodd-Frank, Mr. Gensler was a ubiquitous presence on Capitol Hill, pressuring lawmakers to beef up the details. The day the law became final, he stayed past 4 a.m. with Blanche Lincoln, then a senator from Arkansas, putting the finishing touches on several provisions.

Gary Gensler, Chairman of the US Commodity Futures Trading Commission.
Saul Loeb | AFP | Getty Images
Gary Gensler, Chairman of the US Commodity Futures Trading Commission.

"I told him that Dodd-Frank was his baby because he labored with it for at least nine months," said Michael Dunn, a former CFTC commissioner who works at Patton Boggs.

With the intensity of a longtime banker, Mr. Gensler has pushed his staff to finish the rules promptly. He is an avid reader of the "Dodd-Frank Progress Report," from the law firm Davis Polk & Wardwell, a publication that tracks rule-writing. Once, when he mistakenly thought the publication failed to count a CFTC rule, Mr. Gensler phoned a lawyer at the firm to request a correction.

A marathon runner and mountain climber, his fixation with speed has made him a brusque taskmaster at times.

Last year, when a small earthquake forced the agency to evacuate its offices, Mr. Gensler arranged a staff meeting at a cafe in the building's lobby. The employees, he said, could not afford to lose an afternoon of work.

Despite his demanding pace, colleagues say he is quick to compromise. When Scott O'Malia, a Republican commissioner of the agency, urged Mr. Gensler to tweak a complex derivatives rule, they convened the so-called Meiwah summit, referring to the Chinese restaurant in Washington where they completed a deal.

Mr. Gensler has also built relationships with other agencies, as they collaborate on Dodd-Frank. Mr. Gensler was a mock senator when Mary L. Schapiro, the head of the Securities and Exchange Commission, prepared for her confirmation hearing. Ms. Schapiro once baked cupcakes for Mr. Gensler's birthday.

"Together we can make this the most successful partnership in government," she wrote in his copy of the Dodd-Frank law.

Even so, some industry players paint Mr. Gensler as a stubborn negotiator with a knack for haranguing Wall Street. He was a co-author of a book, "The Great Mutual Fund Trap," that criticized the industry in which his twin brother, Robert, works.

And after two Wall Street trade groups sued the agency over a rule curbing speculative trading, Mr. Gensler took a harsh tone with one executive who came to the commission to lobby on the issue. "You sued us, so it's clear what you think about the rule," he said, dismissing the executive's concerns, said a person briefed on the meeting.

Bristling at the sometimes-abrasive approach, Republican lawmakers have fought to freeze or depress the commission's $205 million budget.

While the figure is a fraction of other regulatory budgets, lawmakers and lobbyists say Mr. Gensler could cut costs by tempering his ambitions.

"I wonder if Mr. Gensler is more focused on building a personal legacy and expanding his agency's powers than making the economy stronger and safer," said Steven Lofchie, a partner at the law firm Cadwalader, Wickersham & Taft.

Others, however, have praised Mr. Gensler for marshaling resources and stepping up the agency's game. Mr. Gensler has sharply increased his staff to more than 700 employees. He also hired a former federal prosecutor, David Meister, as the head of enforcement.

The agency, which has previously had big cases against energy companies, brought a record number of enforcement actions last year, notably against Wall Street firms.

"We've come into our own as a regulator to be reckoned with, out there doing our best to protect investors and consumers every day," said Bart Chilton, a Democratic commissioner.

The rate-rigging case is the commission's biggest investigation yet. The case centers on how banks set a key benchmark, the London interbank offered rate, or Libor , which affects the cost of borrowing for consumers and corporations.

The investigation heated up after Mr. Gensler heard the Barclays recording. As the examination broadened, the agency assigned additional employees to the case, nearly 15 enforcement lawyers, up from three.

Mr. Gensler also championed measures to prevent Barclays from repeating its mistakes. The new controls forced the bank to report rates based on actual transactions when possible and to prevent conflicts of interest.

After more than four years of investigating, the agency filed its action against the bank on June 27. For Mr. Gensler, it was a bittersweet day. While it was the biggest moment in his regulatory career, it also was the sixth anniversary of his wife's death from breast cancer.

Publicly, he has focused on the win. "It's about the integrity of the market," Mr. Gensler said. "This agency stood up for the public and said that rates have to be based on honest figures."

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