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Why Wall Street is betting on Republicans to take the Senate

Although Senate banking committee ranking member Sen. Mike Crapo (R-Idaho), left, has expressed interest in taking over if the Republicans win the chamber, Sen. Richard C. Shelby (R-Ala.), right, has emerged as the frontrunner. (J. Scott Applewhite/AP)

Wall Street is pumping more money into Republican campaigns this election cycle, betting that a flip in the Senate could usher in revisions to a key financial reform law.

In past cycles, aside from the last presidential election, securities and investment firms have hedged their bets by donating roughly the same amount to both parties. But this time Wall Street has handed Republicans nearly two-thirds of the $115 million it has contributed to 2014 campaigns, according to the Center for Responsive Politics.

At stake is the chairmanship of the Senate banking committee, a critical gateway for legislation that governs Wall Street. The top seat is up for grabs next year, once the chairman, Sen. Tim Johnson (D-S.D.), retires in December.

Although ranking member Sen. Mike Crapo (R-Idaho) has expressed interest in taking over if the Republicans win the chamber, Sen. Richard C. Shelby (R-Ala.) has emerged as the frontrunner. The Alabama lawmaker, who served as banking committee chair from 2003 to 2007, has been critical of the landmark Dodd-Frank financial reform law that Wall Street views as an albatross. The financial services industry may be banking on Shelby to take up some of the revisions that have been proposed in the Republican-controlled House, including exemptions to the ban on proprietary trading, according to people close to the industry. Shelby did not respond to requests for comment.

The Democratic majority in the Senate has blocked House attempts at sweeping changes to the reform law, agreeing only to a few revisions of a statute addressing insurance regulation. There is palpable concern on Wall Street that Sen. Sherrod Brown (D-Ohio), known for his tough stance on big banks, could take the helm of the committee if his party retains control of the chamber. The liberal Democrat has championed legislation to force big banks to sock away more capital to guard against another economic downturn, a bill the industry excoriated as being too severe.

One bank executive called the prospect of Brown ascending to the top seat "frightening" because the senator has showed no interest in finding common ground with large banks. "You can sit down and reason with him about how the industry is smaller, how larger banks are smaller, but none of it matters at the end of the day," said the bank executive, who like others requested to speak anonymously to share candid views about lawmakers.

But Shelby, for all of his criticism of the regulatory burden Dodd-Frank has imposed on banks, is not exactly a friend of Wall Street. Although he did not back Brown's bill, Shelby has supported higher capital requirements for large banks. And he has argued that Dodd-Frank does not go far enough to end government bailouts of banks.

"He fits that Southern populist mold of being suspicious of big government and suspicious of big finance," said Mark Calabria, director of financial regulation studies at the Cato Institute. "That is going to influence how he approaches this."

Still, Shelby is likely to pursue an agenda that will please the financial industry. He has opposed the structure of the Consumer Financial Protection Bureau, which Republicans have been trying to turn into a five-member commission subject to the congressional appropriations process. Changing the structure of the agency could slow down CFPB's ability to complete new rules for the industry.

But President Obama has said he will veto any bill to replace the director or the funding of the bureau. Analysts, however, suspect Republicans could use the appropriations process as leverage to get the changes they want on the bureau or elsewhere. As chair, Shelby would likely hold more oversight hearings to keep pressure on the CFPB, said Brian Gardner, a policy analyst at Keefe, Bruyette & Woods.

Shelby could only hold the chairmanship for two years under Republican Party rules, so he would have to be strategic about his agenda. And once the 2016 presidential campaign gets under way, very little is likely to get done in Congress.

People familiar with his thinking expect Shelby would revisit housing reform, which died in the Senate after a bill to dismantle Fannie Mae and Freddie Mac failed to win support from key Democrats. Calabria, a former Shelby staffer, said the lawmaker had a critical role in establishing a regulator to oversee the mortgage finance twins in 2008, and overhauling them is important to him.

"He is committed to pushing a bill through," Calabria said. "Shelby is going to try to define a policy, and he's going to take it from there."

A Shelby bill could swing further to the right than the bipartisan legislation introduced by Johnson and Crapo, and align with a more radical bill sponsored by Rep. Jeb Hensarling (R-Tex.) that would largely take the government out of housing finance. If that happened, Shelby would have to fight to win the support of enough Democrats for a successful vote.

No matter who wins control of the Senate, there will be a razor-thin majority that will require compromise. According to the rules of the chamber, at least 60 votes are typically needed for legislation to overcome procedural hurdles.

Against that backdrop, another banker said many of his colleagues are starting to sober up to the reality that "anything that might change for the financial industry would likely be on the margins." He added that the industry is realizing that even if Brown took the helm of the committee, he would have few, if any, opportunities to impose major changes.

While Brown has not softened his position on big banks, he has made some overtures toward the industry. Over the summer, he held a subcommittee hearing on whether some regional banks were large enough to face additional regulations. And Brown joined the effort to revise an amendment in Dodd-Frank that could apply tougher bank capital rules to large insurers.

Although Brown declined to comment for this article, his spokeswoman Meghan Dubyak said the senator's priorities are "standing up for the consumers, taxpayers, community and regional institutions."

Brown may have a formidable challenger in Sen. Charles Schumer (D-N.Y.), who has the seniority but could pass up the opportunity to become chair of the committee to focus on party leadership. Sens. Robert Menendez (D-N.J.) and Jack Reed (D-R.I.) are also likely candidates, but observers say both seem set on holding onto the top seats of the foreign relations and armed services committees, respectively.

"Sherrod Brown is somebody who's focused on how the financial sector can serve the needs of all Americans and not just Wall Street insiders. And that's a very valuable thing," said Marcus Stanley, policy director of Americans for Financial Reform.