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 hard on 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.

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