Goldman Alum Who's Trying to Fix Wall Street

Growing up in Baltimore in the 1960s, Gary Gensler learned about business and politics and how they are related. His father owned vending machines, and Gary would accompany him to bars in rough neighborhoods as he poured coins into a nickel-counting machine in his car. Businessmen such as Sam Gensler needed—and attracted—politicians. The former wanted to stop ever-rising taxes on cigarettes; the latter wanted loyalty and support. The elder Gensler would go to Annapolis to lobby the legislature and return home with hair-raising tales of the scene. "It wasn't pretty," Gary recalls. But it was thrilling to hear about the dance of political power and profit, the tango at the heart of American life.

And so it's not surprising that Gary Gensler has been in that dance—but at a far higher level—since he was 21. A former partner at (where else?) Goldman Sachs, he later served in Bill Clinton's Treasury Department. In 2008 he joined scores of other Goldman partners and alums in giving nearly $1 million to the Obama campaign, and he is one of a raft of Goldmanites to have joined the new administration. Now, as chair of the obscure Commodity Futures Trading Commission, he is arguably the key player in the drive to bring order and sunlight to the murky casino that is Wall Street. If the financial-reform bill in Congress passes—and it looks like it will—the CFTC will acquire vast new powers. It will oversee markets in derivatives and swaps that, on paper, are worth hundreds of trillions of dollars and that generate some $25 billion a year in profits for big companies such as Goldman Sachs. It's only a slight exaggeration to say that the central question about whether reform will work is this: can we trust this guy?

I went to his office in a drab Washington building to get a sense. A marathoner and mountain climber, Gensler, 52, is a slight and wiry fellow with the wide, unblinking gaze of a gecko. He is known in New York and Washington as a tough customer. As a top mergers-and-acquisitions banker at Goldman in the 1980s, his job was to outbid and undercut CEOs and boards of directors desperate to hang on to their jobs. "He can get in your face and doesn't back down," a fellow investment banker told me. After M&A, he switched to trading and finance—now the most dominant and riskiest moneymaker for the biggest firms. He made a lot of nickels. "It's a remarkable thing when you get a partnership at Goldman," he says. "It's like hitting the lottery. And then I was hitting the lottery every year."

And when he'd made enough, he saw a chance for public service. Goldman chief Robert Rubin joined the Clinton administration in 1993, and Gensler followed in 1997. Then and now, Gensler says his knowledge of how the game is played is what makes him a good choice to be its referee. "I believe in regulation. I also remember how to structure deals and interest rate swaps. I bring all of that. And I bring a keen understanding of the fact that Wall Street's interests are not Main Street's." I asked Gensler if he had such a dim view of Wall Street when he was busy making a lot of money there. "Yeah," he conceded. "But I wasn't in this job. And I have evolved." We had better hope so. Gensler now sounds all the right notes about the need for regulation, but as a Treasury deputy he was mostly known for strongly opposing government oversight of over-the-counter financial derivatives—the very instruments that later caused the Great Recession. Gensler admits that he and others at the Treasury were wrong. "We all should have done more to protect the American public," he says.

Since he left government in 2001, Gensler has been busy at the task of evolving. He was a key private adviser on the construction of the Sarbanes-Oxley law, which placed sweeping new recordkeeping rules on corporations in the aftermath of the Enron scandal. He wrote a book warning investors away from actively traded mutual funds—even though his identical-twin brother is in charge of one. Now, working with Sen. Blanche Lincoln, he has been the principal advocate of a measure to force OTC derivatives to be traded on public exchanges—not privately, and off the books—and to require those who deal in them to keep large cash reserves on hand. Those measures alone could cost the big banks and trading houses up to $12 billion a year. Facing a liberal challenger in the Democratic primary in Arkansas, Lincoln has gotten even more aggressive, and now wants to deny Federal Reserve funds to any bank that deals in swaps—which would effectively shut banks out of that business.

That wasn't his idea, Gensler told me. He has evolved, but only so much.