Washington won’t now witness the wholesale transformation a Mitt Romney Republican administration would have triggered. So by winning a second term, how much change will a second Barack Obama Democratic administration bring to the Beltway machines of financial regulation?
Few ever believed Republican presidential candidate Romney would have been able to fulfil his campaign promise to completely repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act. However, it was clear a Romney White House would have done its best to curb the power of the landmark legislation aimed at increasing the country’s financial stability.
Yet a second Obama term also brings with it a certain amount of change. Many may see that change as the closing doors of opportunity while others make take heart from the greater regulatory certainty it offers.
Some Beltway insiders believe regulators may take a break from the frantic law-making of the last couple of months because without the threat of administration upheaval, they now feel they have more time.
“Over the past few months, we saw the Commodity Futures Trading Commission (CFTC) rush to put in place as much as it could before the election. Now there may not be that sense of urgency, so the agencies may take a breather,” said Mark A Calabria, director of financial regulation studies at DC-based independent think tank the Cato Institute.
This could mean change will be less dramatic and more certain. Calabria said Democrats have spent the last two years defending Dodd-Frank and but for such a defensive posture, by now we would have already seen more firm changes and technical corrections.
According to law firm Davis-Polk’s Dodd-Frank Progress Report, as of November 1, 237 Dodd-Frank rulemaking requirement deadlines have passed. Of these deadlines, 144 (61%) have been missed and 93 (39%) have been met with finalised rules. Just over a third 133 of the 398 total required rulemakings have been finalised, while 132 (33.2%) rulemaking requirements have not yet been proposed.
“A second Obama term – and the retiring of House Financial Services Committee ranking member Barney Frank (D-Mass) – lets the Democrats move from a defensive stance on Dodd-Frank to a period of confident implementation,” said Calabria, indicating final rulemaking could increase somewhat in speed and frequency.
While believing Dodd-Frank is harmful to the industry, Calabria does not necessarily buy into the conventional wisdom that led financial services to back Romney over Obama.
“I’m no fan of Dodd-Frank but one thing can be said of a second Obama term; it kills any chance of breaking up the big banks,” he said, explaining that Romney’s mantra of replace and repeal would have opened the door to new ways of sustaining financial stability. “As long as regulators are spending their time working out what market making is, rather than having conversations about wholesale changes to the financial system, then any potential Glass-Steagall revival is dead.”
K Street lobbyists are now positioning themselves for another four years of a Democratic White House. Securities Industry and Financial Markets Association president and CEO Tim Ryan said with the election now over, it was vital regulators and the industry return to the continued implementation of Dodd-Frank and addressing the fiscal cliff.
Who occupies the new seats of power will also determine the outcome of a number of regulatory questions. Top of mind, Treasury secretary Tim Geithner has made no secret of his intention to leave. In all likelihood he will have to stick around in the beltway until the fiscal cliff is resolved. And any successor will have to be approved by the notoriously slow Senate.
Likely frontrunners for Geithner’s job are Erskine Bowles, co-chair of the National Commission on Fiscal Responsibility and Reform (a.k.a the Simpson-Bowles Commission), or Jacob “Jack” Lew, current chief of staff to President Barack Obama.
Bowles has been instrumental in developing policies to improve the medium term fiscal situation and achieve fiscal sustainability long term, while Lew was a onetime aide to former US House Speaker Tip O’Neill and was director of the pivotal Office of Management and Budget for both Obama and former President Bill Clinton. Lew also experienced the other side of the fence as chief operating officer of Citigroup’s Alternative Investments prop trading outfit.
In recent months, Larry Fink, chairman and chief executive of BlackRock, has oft been touted as a prospective Treasury secretary, largely because Geithner’s calendar indicates the two have met at least 49 times in the 18 months to June 2012. But many say this more likely is a better indication of where Geithner may potentially end up, rather than Fink leaving Blackrock, the company he founded which has become the world’s largest fund manager.
Unlike Fink, Lew and Bowles, CFTC commissioner Gary Gensler has not been mentioned as much in mainstream speculation in relation to Geithner’s replacement. But Gensler’s pedigree as a clear-minded CFTC chairman who has stood up to special interests, despite formerly being a partner at Goldman Sachs, makes him a strong pick. As one of the key figures implementing Dodd-Frank, Gensler understands intimately how derivatives can undermine markets. He’s also familiar with 1500 Pennsylvania Avenue, having worked at the Treasury Building in the 1990s as Under Secretary of the Treasury.
Gensler has steadfastly implemented the Obama administration’s ideas for financial reform as best he possibly could, even as Congress has denied him the resources which he believes the CFTC requires.
Cato’s Calabria said the budget-focussed Bowles or Lews were a better bet for the next secretary, than financial markets experts like Fink or Roger Altman, co-founder and executive chairman of investment firm Evercore Partners.
“The president doesn’t want to be defined by Dodd-Frank. He wants to balance the budget,” said Calabria, adding such a Treasury secretary would be less involved with financial regulation than has been Geithner. “For instance, Bowles doesn’t have the same commitment to ‘too big to fail’. He might not be hostile to Wall Street but he would be less accommodating.”
And with Democrats maintaining a majority in the Senate, it is likely they will now elect Massachusetts freshman Elizabeth Warren (D) to the Senate Banking Committee. The Harvard Law School professor helped implement the Dodd-Frank Consumer Financial Protection Bureau and after the financial crisis of 2008, was chair of the Congressional Oversight Panel, which oversaw the Troubled Asset Relief Program (TARP). Commentators say while Warren brings a lot of experience to the table, she also brings a reputation as a campaigner against Wall Street.
From back room to courtroom
While once Wall Street lobbied for change in the back room for change, President Obama’s reforms are now being confronted in the courtroom by unhappy capital market participants and infrastructure providers.
Last week derivatives exchange operator, CME Group, filed suit against the CFTC over the agency’s requirement that financial firms report to swap data repositories (SDRs) information about the trades they process. SDRs in turn must release information to federal regulators to monitor the market.
The CME’s lawsuit “threatens to dismantle and disrupt the entire regulatory regime statutorily mandated by the Dodd-Frank Act in order to preserve CME’s exclusive access to data that it acquires through its role as a derivatives clearing organisation,” DTCC general counsel Larry E Thompson said in a letter to the CFTC this week.
For many, the CME suit harkens a major shift in how unhappy market participants have dramatically switched strategies for engaging regulators in this second Obama term. With Dodd-Frank now all but sown up, they no longer expect to be able to influence regulators by lobbying efforts and will become ever more litigious.