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Making Cheating Easier on Wall Street: CTFC Budget Cuts

David Callahan

A basic reason that people break rules is that they believe they can get away with it. And you're more likely to think that you can cheat without consequence if you know that watchdogs won't bark, much less bite.

This observation doesn't just jive intuitively with our understanding of human nature, it also squares with lived reality. Fewer police means more crime. No drug testing in baseball means an epidemic of steroid use. Rare audits mean more tax cheating. And so on.

Wall Street, of course, is the mother of all case studies of how lax oversight leads to more cheating. Here, in the world of big money, the incentives for bad behavior are astronomically high -- especially given how huge fortunes can be made before the market imposes any punishments for cheating (a corrective that libertarians believe, wrongly, can deter most wrongdoing).

You'd think that this simple truth would be fresh in people's minds, with the U.S. still grappling with the aftermath of a financial crisis that was brought on, in part, by widespread cheating by banks, mortgage brokers, and various other players.

Apparently not.

This week Congress decided to give the Commodity Futures Trading Commission, a key Wall Street watchdog which polices the derivatives market, a third less money than the Obama Administration had requested. That means that the CFTC will not only have a hard enough time doing its current job, but will find it difficult to implement the Dodd-Frank law. That's exactly the point, of course: Republicans hate Dodd-Frank and want to neuter this legislation. Since they can't repeal it, the next best thing is to defund efforts to implement the law.

This attack on the CFTC comes, ironically, even as we are being reminded about why we need watchdogs on Wall Street. Some $600 million in customer money is still missing at MF Global and the CFTC is in charge of getting to the bottom of this mystery. And the MF Global meltdown may not have happened at all if the CFTC had been a tougher, more powerful regulator.

The MF Global bankruptcy is tiny compared to past financial disasters. But it's worth noting that the amount of money that its customers may end up losing, just from the missing cash alone, is roughly three times larger than the entire annual budget of the CFTC.