How the Bank Lobby Loosened U.S. Reins on Derivatives

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The July 3 meeting in Lew's conference room with a view of the White House grew tense, according to three people briefed on it. Gensler argued his plan was vital if the U.S. hoped to seize meaningful authority over financial instruments that helped push the global economy to the brink in 2008, taking down American International Group Inc. (AIG) and Lehman Brothers Holdings Inc. and igniting the worst recession since the 1930s.

Lew insisted that Gensler coordinate better with the Securities and Exchange Commission, whose new chairman, Mary Jo White, was also present. Gensler, who was deep into negotiations with his European counterparts, was surprised by Lew's demand. He'd been hearing the same request from lobbyists seeking to slow the process, and he told the Treasury chief it felt like his adversary bankers were in the room, the people said.

Gensler subsequently apologized to Lew for the outburst. He also softened his demands, cutting a deal with the European Union a week later. Gensler, chairman of a historically obscure agency called the Commodity Futures Trading Commission, had again pushed an idea to the brink until forced to settle.

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Pride of authorship helps explain why Gensler fought so hard. It's been a closely held secret that he was the invisible hand behind Dodd-Frank's derivatives section. His biggest coup was to slip carefully crafted language into the law that the banks didn't initially realize could give the CFTC authority over their foreign branches.

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In the end, Gensler also sacrificed his ambition, creating so many political enemies in Congress and the industry that his chances for a second term as chairman are dim.