FM: You have led the FIA through some dramatic changes in the industry. I am going to mention a few, give me your immediate thoughts:
The launch of the S&P 500 futures and the Shad-Johnson accord
JD: That was a great moment for the Futures industry. The agricultural community sat back and beat themselves on the chest saying, ‘products that long served the agricultural industry for the purpose of managing risk are now being discovered by another world. Futures contracts can work extremely well for the equities world as well as energy producers.' At the beginning of the S&P, [it started] a period where all sort of new products in the financial arena became profitable.
Black Monday 1987
JD: I remember the finger pointing. I remember Richard Breeden coming into the SEC in 1989 and blaming the futures markets. He said, ‘This never used to happen, but now we have these wild cowboys trading futures contracts on equity products.’ We couldn’t let this go unanswered, so we explained to the press at the time that the SEC failed to see how important it was that these markets be linked. The upshot of that was the SEC took on a new commissioner who had some knowledge of how the derivatives market worked and Ronald Reagan nominated Mary Schapiro.
The Stotler bankruptcy
JD: Cash Mahlman was the chairman of Stotler, and Cash was devoting all his energy to being chairman of the CBOT. It was a huge problem and other firms learned from that. That was the beginning of a lot of consolidation. A lot of the smaller Chicago firms couldn’t believe that one of their own could be shut down and run out of capital. When I took over the FIA, there were 100 FCMs who were my members. Conservatively, the business has grown 7,000% on my watch, [but] the number of FCMs members has declined from 100 to 34.
JD: We were watching the plane dive towards the Pentagon. We saw the airplane when it was making the turn. We were blocked by a building but could see the mushroom cloud when it hit. It was a scary moment. We did everything we could in the aftermath to maintain communication between the exchanges and the firms. We had conference calls going on every two hour on a 24-hour basis. We helped people find out what other people’s plans were, what they intended to do and what their timing would be for their ability to get back up.
Barings Bank failure
JD: Mary Schapiro was the chair of the CFTC at that time. I remember the knee-jerk reaction was to shut everything down, and fortunately Mary made sure that did not happen. After Barings failed, the margin calls from the Singapore exchange [SIMEX] were viewed with suspicion in some quarters, and a number of large market participants considered ignoring the calls for fear that the money would be used to prop up the exchange. Mary Schapiro got on the phone with the Monetary Authority of Singapore and that allowed her to assure the clearing members that margins would be used for the purposes for which they were intended. Consequently, no default took place. It is often the case that it is the things that did not happen, the things that we prevented from happening, that don’t get the credit they deserve. That was certainly true of Barings and Mary Schapiro’s role in preventing that from becoming a total disaster.
I’ll give you another example. There was a congressman from Iowa named Berkley Bedell who offered a amendment that said if you don’t own cattle, you can’t go short the cattle market. Thanks to our efforts, that failed by one vote. I doubt anyone remembers it now, but we certainly would have rued the day if that had passed.