By Robert Schmidt
(c) 2010 Bloomberg News
Tuesday, September 14, 2010; 12:47 AM
Wall Street is preparing for a Republican surge in Congress that could help it block proposed taxes on banks and investments, blunt new financial regulations and regain some of the lobbying firepower it lost during the financial crisis.
What bankers won't be looking for, lobbyists said, is a repeal -- or any major changes -- to the Dodd-Frank bill, the most sweeping rewrite of financial regulation since the 1930s. While the law is widely criticized by the industry, Republican gains in the November election won't be large enough to override a veto by President Barack Obama.
Financial firms, which for most of this year have been shifting political contributions to Republicans, say they'll push Congress to restrain federal agencies that are filling in the details of the law, writing rules in areas including capital standards and a ban on proprietary trading. Banks would prefer to have Republicans overseeing the regulators, lobbyists said.
A Republican takeover would mean the banking industry "will have an active voice on the Hill, trying to influence the direction of regulatory agencies," said Travis Plunkett, legislative director at the Consumer Federation of America, noting that only three House Republicans voted for Dodd-Frank. "The oversight process, grilling agency officials, that's a big deal that shouldn't be underestimated."
More than a dozen lobbyists, lawyers and officials at large banks, hedge funds and Wall Street trade associations discussed in interviews the shape of the banking industry's legislative agenda. They spoke on condition of anonymity because their firms haven't authorized them to speak publicly before the election.
Other issues high on financial firms' legislative agenda include heading off attempts to regulate high-frequency stock trading and pushing for trade agreements, deficit reduction and revamping Fannie Mae and Freddie Mac -- all areas where financial companies say their interests are more aligned with Republicans.
Most executives said the industry would welcome a divided government, because that would make it difficult to pass any new financial laws. Polls show that Republicans are within striking distance of taking over the House, where they need a gain of 39 seats, and are drawing closer in the Senate, where they need 10 more seats.
While House Minority Leader John Boehner of Ohio said in July that he favored a repeal of Dodd-Frank, bank executives don't see that as a realistic option.
If Republicans take over the House, banks will try to stop the push for a tax or fee on the biggest financial companies -- which has been threatened by Democrats to help pay for the $700 billion bailout, implementing the regulatory law and other initiatives.
Hedge and private equity funds also hope to derail the Democrats' plan to raise taxes on investment profits known as carried interest. General partners at the funds can now qualify for capital gains tax treatment on their pay derived from investment profits, which is lower than the income tax rate.
The Obama administration includes the carried-interest tax in its 2011 budget proposal, and economists at the congressional Joint Committee on Taxation estimate it will bring in $13.5 billion over the next decade.
Should Congress be unable to decide the future of former president George W. Bush's tax cuts this year, a Republican- controlled Ways and Means Committee may be more receptive to arguments from the financial industry to preserve lower tax rates, including those on dividends and capital gains, for the highest earners.
Republican lawmakers already have been focused on high- frequency trading, an issue important to hedge-fund managers who make money using computers to buy and sell thousands of shares in milliseconds and brokerage firms that execute the trades.
The practice, which accounts for more than 50 percent of daily stock trading, has drawn criticism from investors and Democratic members of Congress who question whether it contributed to the May 6 market plunge when $862 billion was erased from the value of U.S. equities in less than 20 minutes.
Spencer Bachus of Alabama and Jeb Hensarling of Texas, Republican members of the House Financial Services Committee, wrote on Aug. 24 to Securities and Exchange Commission Chairman Mary Schapiro, advising her to get a better understanding of what caused the crash before "assigning blame to algorithmic or high-frequency trading firms."
Virginia's Eric Cantor, the second-ranked House Republican, has urged Schapiro to make sure she has empirical evidence to support new regulations.
The Republican agenda could also give new life to free- trade agreements with Colombia, Panama and South Korea, which have languished amid opposition from unions, said Sage Eastman, spokesman for Representative Dave Camp of Michigan, the top Republican on the Ways and Means committee. Marisol Garibay, spokeswoman for Republicans on the House Financial Services Committee, said Republicans would push to decide the fate of Fannie Mae and Freddie Mac, the mortgage finance companies in government conservatorship.
The new Consumer Financial Protection Bureau, to be housed at the Federal Reserve, may draw great interest from lawmakers, analysts said. While it has the ability to fund itself, and won't be subject to congressional pressure on its budget, the agency will have to write a slew of new rules in areas ranging from credit cards to mortgages.
Overall, Republican oversight will "certainly complicate the rule-writing process and it could slow it down in particular areas," said Kevin Petrasic, a former official at the Office of Thrift Supervision who now is an attorney at Paul, Hastings, Janofsky & Walker in Washington.
While strong profits have returned to Wall Street during Obama's stewardship of the economy, the bankers' shift toward Republicans was reflected in campaign contributions this year. David Hirschmann, president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said that bankers and the business community feel demonized by the administration.
"For two and a half years, it's been tar and feather," Hirschmann said. "They are just hoping for an environment where the impact on the broader economy is at least considered" in setting policy.
In June, the month when Congress was putting final touches on the Dodd-Frank regulatory law, employees in the securities and investment industry gave 68 percent of their donations to Republicans, according to research from the nonprofit Center for Responsive Politics.
Contrast that with 2008, when employees of securities and investment firms contributed $14.9 million to Barack Obama's presidential campaign, more than any other industry and $6.2 million more than they contributed to Republican John McCain. Obama's five biggest corporate sources of money included employees of Goldman Sachs Group Inc., Citigroup Inc. and JPMorgan Chase & Co., the center said.
Now political action committees at almost all the big banks have rebalanced. Goldman Sachs's PAC has so far given 51 percent to Democrats for the 2009-2010 election cycle, down from 64 percent in 2007-2008. Morgan Stanley cut contributions to Democrats from 54 to 47 percent, Bank of America Corp. from 53 percent to 44 percent and Citigroup from 53 percent to 50 percent. JPMorgan's PAC is the only one to increase support for Democrats, from 47 percent in 2007-08 to 49 percent so far in this cycle.
"It's clear that if Republicans are handed back the keys, it's going to be big Wall Street banks that are going to be driving the car," said Hari Sevugan, a spokesman for the Democratic National Committee.