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Wall Street and Washington: A new love affair

Flanked by Blackstone CEO Stephen Schwarzman and General Motors CEO Mary Barra, President Donald Trump holds a strategy and policy forum with chief executives of major U.S. companies at the White House in Washington, February 3, 2017.
Kevin Lamarque | Reuters
Flanked by Blackstone CEO Stephen Schwarzman and General Motors CEO Mary Barra, President Donald Trump holds a strategy and policy forum with chief executives of major U.S. companies at the White House in Washington, February 3, 2017.

Repealing Obamacare. Reforming the tax system. Spending big on infrastructure.

One by one, President Trump's campaign promises seem to be less likely — or at least won't happen on the timetable he anticipated. So, why are so many chief executives and investors still seemingly bullish about a Trumpian economy?

The answer they consistently provide: regulations. Or the promise to get rid of them.

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But it is actually something else, something that seems vastly underappreciated, that is staring us right in the face: The people whom Mr. Trump has appointed to positions of power can wield significant influence over how business is conducted in America. And in many cases, they can do so unilaterally, without the approval of Congress.

The presidency of Donald J. Trump — the wealthiest businessman to occupy the White House in recent memory — has ushered in a new paradigm, one in which business and government are married in a way never seen before. And the people whom Mr. Trump has appointed come from the most senior ranks of business, bringing with them a frame of reference that is almost strictly about profit and economic growth.

It isn't often said aloud, but the aristocracy that Mr. Trump has put in place may be more important than any rule written on paper.

And while there are significant questions about whether their experience in business will translate in Washington — and to the Regular Joe who supported Mr. Trump — their focus on issues that relate to the economy and their reverence for increasing G.D.P. have lifted the spirits in corner offices across America. Whether the topic is trade, infrastructure or taxes, to the C.E.O. set, Mr. Trump speaks their language.

"We are absolutely destroying these horrible regulations that have been placed on your heads," Mr. Trump declared on Tuesday in Washington to a group of chief executives representing companies like Citigroup, MasterCard and JetBlue.

Yes, there are C.E.O.s who are not on board with Mr. Trump's agenda. His penchant for tweeting at all hours and shaming people who disagree with him have, at least for now, silenced them. (Many critics, given the options, have decided that the best course of action is to hope for the best.)

That hope is tied to Mr. Trump and his team — and their power to remove certain regulations and to slow down or thwart the implementation of others. The results could be beneficial to executives in any number of industries: banking, energy, media, technology.

In a remarkably blunt and telling memo to its clients, the law firm Wachtell, Lipton, Rosen & Katz suggested that Mr. Trump's appointment of people overseeing the banking sector could have a more meaningful effect than legislative changes.

"Taken together, the senior policy makers at the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau have been far more impactful on the regulatory environment than Dodd-Frank," the memo said. "Dodd-Frank's impact is often overstated."

The law firm encouraged Mr. Trump to appoint people who have the goal of "countering the prevailing regulatory philosophy," meaning they oppose the approach taken under President Barack Obama.

Even if Mr. Trump's team doesn't try to change regulations (and they already have, in industries like energy and telecommunications), they may show little interest in enforcing existing regulations, which, in and of itself, could have a significant impact on the way business is run.

And if Mr. Trump, the businessman-president, is a novelty, so, too, is the makeup of his cabinet. Never before have the most senior roles in government been played by so many billionaires (and near-billionaires) with such extensive experience running companies. His cabinet, kitchen cabinet and just about every cabinet in and around the White House is filled with people from the private sector. A good number of them have long track records of fighting against the departments they now represent.

This mind meld of Wall Street and Washington represents a shift that may be even greater than when President Reagan, Mr. Trump's often-cited role model, entered office.

The list of industry captains now running the government is long and well documented. It includes a cadre of former Goldman Sachs bankers, like Steven Mnuchin, the Treasury secretary; Gary D. Cohn, Mr. Trump's top economic adviser; and Stephen K. Bannon, the president's chief strategist. Rex W. Tillerson, the secretary of state, is the former chief executive of ExxonMobil. Even more junior roles are being filled by former colleagues from the very same companies.

Critics have long contended that many of these appointees are conflicted, given their previous work. Some people argue that whatever legislative efforts they pursue will be aimed at enriching themselves or their friends.

That may turn out to be true — or not. But here is an explanation that's hard to dispute: The people Mr. Trump has surrounded himself with have a particular worldview based on their experiences. If you grow up somewhere or work at a particular institution for any length of time, you assimilate and take on the values and opinions of the people around you.

It all goes back to a Truman-era maxim known as Miles' Law, coined by Rufus E. Miles Jr., a career administrator who worked in the Bureau of the Budget: "Where you stand depends on where you sit."

Of course, one of the big questions is how much a president, absent legislation, can sway an economy simply by rolling back regulations.

If you look at the precedent set by Mr. Obama, the answer is "a lot." His White House announced during his last year in office that it had helped save $28 billion by removing regulations, starting in 2011. And much of it was done with the stroke of a pen.

Wall Street is bullish on the approach.

"Regulatory reform that does not require legislative approval faces a lower hurdle than tax reform and would also provide a boost to S.&P. 500 earnings," Goldman Sachs recently wrote in a note to its clients.

Reforms, the note said, "will likely come through changes to existing rules as well as the interpretation and application of outstanding regulation."

The bank, which has seen its own stock rise since the election, suggests that "about $200 billion of excess capital could be deployed in 2018 as a result of changes in regulatory capital requirements."

Capital requirements are largely governed by the Federal Reserve, meaning they could be adjusted without congressional approval. And the Fed is in transition: Wednesday was the last day in office of Daniel K. Tarullo, a Federal Reserve Board member who crafted some of the strictest banking rules post-crisis and led the annual stress tests that bankers loathe. He was a thorn in the side of many bankers, who complained that he was too difficult.

Mr. Tarullo's replacement is expected to be a Wall Street insider who will be significantly less strict and may look to lower capital requirements and conduct its stress tests differently.

Still, while regulations (or their removal) can clearly have a big influence on the economics of a particular industry or company, the fundamental economic trend lines are much harder to shift.

Peter Boockvar, an analyst at the Lindsay Group, an economic advisory firm in Washington, said that confidence among home builders, for example, is high — which should be a sign the economic outlook is bright.

But there are other headwinds, too. In the home construction sector, for instance, "builders continue to face a number of challenges, including rising material prices, higher mortgage rates, and shortages of lots and labor," Mr. Boockvar wrote in an email, citing a report from the National Association of Home Builders.

His assessment mirrors the cautious optimism with which the business world is viewing the Trump presidency. On one hand, "it's great to see this level of confidence," Mr. Boockvar said, referring to the home builders. But he added, "I'm not trying to be a Debbie Downer here, but just wanted you not to get too carried away."