As Financial Reformer, Dodd, Again, Dogged by Appearance of Conflict

March 23, 2010— -- As the debate over financial reform heats up, some new questions are being raised over potential conflicts of interest surrounding Senate Banking Committee Chairman Chris Dodd, D-Conn. -- specifically whether his wife's ties to a major futures exchange, the CME Group, might undermine the reform process. The CME is seen as benefiting from new derivatives rules.

"Jackie Clegg Dodd is a major decision-maker at the CME," said Dave Levinthal, communications director for the Center for Responsive Politics in Washington, D.C. "And the CME stands to greatly benefit from the Dodd legislation. Given that, whether there is an actual conflict is beside the point – the mere perception is enough to warrant further scrutiny."

A veteran financial policy expert going back to her days as deputy head of the Export-Import Bank of the United States, Clegg-Dodd currently sits on the CME's board of directors and owns shares in the company. Her derivatives world directorship spans back nearly a decade to when she joined the board of the Chicago Board of Trade prior to that exchange merging with the CME in 2007.

Clegg-Dodd declined to comment. A CME spokesman e-mailed a written statement: "The CME Group has in place a conflict of interest policy that applies to its board members ... our board follows the policy, and conflicts of interests are raised, discussed and directors recuse themselves from the vote as appropriate."

'Looks Bad'

A senior CME source, speaking on condition of anonymity, insisted Clegg-Dodd has deliberately recused herself from all matters relating to credit default swaps. The CME spokesman could not comment on whether that has been the case.

Meanwhile, Democrats on the Senate Banking Committee Monday passed a financial regulatory reform bill on to the full Senate where it will likely be taken on next month. A House version has already passed.

Financial Reform and Sen. Chris Dodd

The possible conflict of interest, raised over the weekend by a Los Angeles Times columnist citing an earlier Reuters article, has no bearing on Dodd's efforts to reform derivatives markets, said Dodd's spokeswoman, Kirstin Brost.

"[Jackie's] work on the CME board does not affect Chairman Dodd's work on the committee and vice versa," Brost said. "She does not lobby Congress and has employed an ethics attorney since entering the private sector who reviews all her boards to protect against conflicts of interest."

"Clearly it looks bad, even if there isn't anything going on," said Mark Calabria, director of financial regulation studies at the Cato Institute. Calabria was a staffer on the Senate Banking Committee when it was chaired by Sen. Richard Shelby, R-Ala. "There are a lot of rules and restrictions pertaining to money and politicians. But when it comes to political wives, well, that's a different story. I was shocked at some of what I saw on the Hill, frankly."

Scrutiny of congressional spouses rose to new levels in 2001 after Enron melted down, when it turned out that Wendy Gramm, wife of then-Senate Banking Committee Chairman Phil Gramm, was on the Enron board. Gramm had helped write legislation that allowed Enron's aggressive expansion into energy trading markets without regulatory oversight.

Last year, Clegg-Dodd's role as a director of a Bermuda-based company controlled by AIG sparked some controversy for her husband.

Additionally, Dodd was plagued during the height of the financial crisis by revaltions of an alleged sweetheart mortgage loan from the troubled lender Countrywide Financial. An ethics investigation exonerated Dodd, although his popularity in his home state suffered a major blow. Earlier this year, Dodd announced he would not seek re-election in Connecticut.

Dodd's wife's ties to the CME and the derivatives world would seem tangential on the one hand. However, the CME viewed financial reform legislation as important enough to spend more than $2 million lobbying Congress in 2009, according to the Center for Responsive Politics' database, OpenSecrets.org.

Sen. Chris Dodd: Conflict of Interest?

Among the many components of Dodd's proposed financial reform legislation is a measure that would attempt to bring transparency to the mostly-opaque world of credit derivatives -- viewed as an important step in curbing systemic risk and a blow to the Wall Street banks which control the multi-trillion-dollar credit derivatives market.

But here's how the new law could benefit the CME. If passed, it would require big banks which create and deal instruments such as credit default swaps – among the most controversial forms of credit derivatives – to centrally clear such transactions with an exchange-owned clearinghouse such as the CME.

Currently, banks operate an "over-the-counter" market, unregulated, and not centrally cleared. Centralized clearing is supposed to provide greater transparency so that the market can function more efficiently -- and it would also give regulators the data to better monitor goings-on in the market.

But mandated clearing is also seen as an opportunity for the CME. In fact, the giant Chicago-based derivatives exchange has already gone ahead and created an electronic platform specifically for clearing CDS transactions.

"There is no question the proposed legislation benefits the clearinghouses, including the CME," said Kevin McPartland, a senior analyst with New York-based TABB Group. "Right now only a small percentage of credit derivatives clear on an exchange-owned clearinghouse. That would change with this law."

The CME's executive chairman, Terry Duffy, testified last year that forced credit derivatives clearing in the bank-controlled "over-the-counter" market, while seemingly a boon for the CME, would actually have a detrimental effect on the market. Instead of submitting to a more transparent market, he said, participants would likely do their business outside the U.S.

"We are strong proponents of the benefits of central counter party clearing as an effective means to collect and provide timely information to prudential and supervisory regulators and to greatly reduce systemic risk imposed on the financial system by unregulated bilateral OTC transactions," Duffy told a congressional committee last year.

"If the OTC dealers do not embrace clearing, they can easily transact in another jurisdiction, avoid the obligations imposed by the draft bill and cause significant damage to a valuable domestic industry. We urge the committee to shape its bill in recognition of the reality of markets that operate in a global economy."

Clegg-Dodd is said to take extreme pains to avoid any conflict of interest between her husband's work and hers, according to an article published last year in the Hartford Courant. She's turned down board seats that pay more but could entangle her in issues her husband works on and hired an ethics lawyer to screen out corporations that might have business before her husband, the Courant article said.