Getting the Volcker Rule correct is fundamental to ensuring that Dodd-Frank works the way Congress intended. It is at the core of the foundational regulatory changes to the financial system. Will it change the culture? No, not by itself. As I said, we need that culture shift conversation. At the same time, a strong Volcker Rule will help immensely.
One quick mention here about confidence in markets and technology. We all know that crude dropped $3 in a minute on Monday. While I can't tell you exactly what occurred yet, I can say that it wasn't a mistaken fat finger error. I can also tell you that the market was dominated with high frequency traders—the folks I've termed "cheetahs" due to their exceptional speed. The cheetahs are out there 24, 7-365 trying to scoop up micro dollars in milliseconds. They are pretty amazing and I have a lot of respect for them and the technology being used in markets today.
At the same time, I don't think technology is the best thing since sliced bread (and if you recall the importance of symbolism and baking, you'll understand how sliced bread is highly valued). But technology just ain't what it always woulda, shoulda and coulda been. We see many examples where problems have existed. The nat gas market shut down for almost an hour two weeks ago today because of some tech issues. The Tokyo Stock exchange shut down a couple weeks back due to technology problems. I've seen market volatility go nuts: nat gas dropping 8 percent in 15 seconds last year. Silver dropping 12 percent in about as many minutes. One energy trader losing $1 million in one second! We all recall the NASDAQ issue with the Facebook IPO. Knight Capital Group, in August, lost $440 million based on software trading errors. There are many more examples.
All I'm saying is that we need to be careful here. I understand some are making a lot of money using the newest gee whiz technology. Gee it’s really swell. But golly Beav, we need to ensure it actually works.
On technology, I've been trying to hit my own cymbal for a few years on this, although at times it seems like it is those dinky finger cymbals. Those are sort of goofy. My point is this: we need to be careful and I don’t think we have done enough to protect markets and consumers alike. That's why I've called for registration of the cheetahs. Can you believe they aren’t even required to be registered with us? They should also test their programs before they are put in the live production environment, and ensure they have kill switches to turn the cheetah program off should it go feral.
Before I close, let me just briefly say a word or two about funding. I need some little cymbals for this, too. We’ve gone over a whole lot of issues today, and it goes without saying that in order to get all this done, it will require more resources at the CFTC. This is usually not a very popular subject (but that never stops me). Let’s talk user fees.
Riddle me this Batman: if you had to take a guess, what sector of our economy has experienced the most growth since the financial crisis? What would you guess: arts, autos or transportation, sciences, medicine – what do you think? Let me clue you in: it’s the financial industry. Yep, since 2008, the financial services sector of our economy has grown more than any other. There’s something sideways about that. These were the people who caused the crisis, and now they are the biggest beneficiaries.
Some may think that’s a simplistic conclusion, but there’s a compelling logic here, which brings me to user fees: why not require those who use the financial system, and who profit most by it, to pay for governmental oversight of it? In fact, the CFTC is the only federal financial regulator that is not, in some part, funded by user fees. I think the time has come to re-introduce that discussion, and come up with some solid, workable plan to stop using the U.S. Treasury to totally fund our agency, and to cover oversight costs by assessing fees on those who benefit from the industry, and benefit by our oversight of it.
That is a lot, right? Given all of that, we need to think about what is important. I hope we don’t need to call in Rossini and his cymbals from the William Tell Overture to get our attention. The devastation to our financial system should be enough for us to ensure we are vigilant in our efforts at reform, both on the government side and from the corporate side. I also understand that altering business culture and philosophy can be a lengthy, ambiguous and time-consuming process with indeterminate outcomes. That said, what has been in place isn’t working out.
Finally, I understand that this set of circumstances—what has been termed a “crisis of confidence” in our financial sector—isn’t unique to the financial sector. I can see in the mirror just like anyone else. Government is at the top of the list for systems in which people have little or no trust. As I noted earlier, however, the financial sector impacts the entire economy, so it really matters what takes place there. There is a great responsibility to act as good stewards of these businesses because they affect so many other sectors of our economy and so much of our country.
We will see what happens, right? Will folks blow it off? Will they say, “Uh yeah, that’s interesting, now let me get to what I want to talk about.” Or, will they take the time to talk about this subject seriously. We will see.
Furthermore, what will the new messages and memos from the firms say? What will be the tenor from the top? What about the beat of the board? What do they stand for? What are they all about, their mission and or corporate mandate? What do they see when they look in the mirror?
I hope they take a good, long look. Take some time to wonder and ponder about it. Then, get engaged in this important culture shift conversation.