Tomorrow, President Obama appropriately pivots from nuclear terrorism to financial regulatory reform. The President set a deadline date for this bill to come to the floor and be finished by Memorial Day.
Unlike health care, there are areas of agreement between Democrats and Republicans that would lead one to believe that this aggressive timeline may be met. However, this is now a populist driven event with the Main St. vs Wall St. theme applied to the legislation with the subsequent negative effect on the bill. As Politico puts it, “Unions, consumer groups, party activists and liberals on Capitol Hill see regulatory reform as a win-win issue: They get either a strong bill or a strong campaign argument for the midterm elections.”
Given the recent mega success by the Democrats on health care, one would expect them to press their advantage on FRR. Clearly, tying Republicans to being the “Party of No” and friends of the fat cats on Wall Street is an excellent strategy.
Yesterday on CNBC, Senator Judd Gregg warned against this sentiment by warning of the populist momentum in financial reform.
He said that the Senate needs to be careful not to over regulate market as it could harm U.S. competitiveness.
Remember, the “flip-a-switch” nature of the financial institutions: many firms can simply turn off their domestic operations and restart them in another country that doesn’t have the same rules.
As an example, Gregg specifically mentioned having serious reservations about pushing all derivatives onto an exchange. (*Watch the full interview here.)
It’s important to note that the Agriculture Committee will now be writing this section of the FRR bill and their language will be integrated into the bill. U.S. Senate Agriculture Chairwoman Blanch Lincoln said that they are close to releasing a draft outlining a proposal for OTC derivatives. Sen. Gregg and Sen. Reed from the banking committee have also been writing language on this section as well. Gregg and Reed appear to agree on provisions requiring dealers and major counterparties to place their swaps on clearinghouses and exchanges which guarantee the trades. Sen. Lincoln said her bill won’t seek to force all routine swaps to be put through central clearinghouses as she understands/sympathizes with companies who would see a significant increase in hedging costs due to the forced exchange mechanism.
"The upfront 'cash' required to 'margin' cleared swaps could be significant for end users - taking billions of dollars of capital out of our economy. I am very sympathetic to their argument. The last thing that we need to do while we rebuild our economy is freeze up credit or make risk management too costly," she said. Unlike the vitriolic discussions on health care, Lincoln’s comments underscore a depth of knowledge on the subject and a way forward for bi-partisan support.
This won’t be pretty with Too-Big-Too-Fail, the Volcker Rule, the Consumer Financial Protection Agency, and ILCs (industrial loan companies) all points of contention. There will be likely a series of amendments covering a range of topics for each side to bolster their appeal to votes come the fall like a 50% one time tax on bonuses over $400k for TARP recipients to a cap on interest rates for credit cards.
The FRR legislation will likely be re-writing the US rules for finance and have significant impacts on US institutions. While the bill has the goal of correcting regulatory blind spots and issues like reducing government bailouts, the companies involved will likely be negatively impacted along with job losses from companies moving operations out of the US. From here to Memorial Day, we’ll have strong newsflow on FRR that will contribute to my anticipated negative mood shift for equities.
Andrew B. BuschDirector,