What Republican Congress Likely Means for Capital Markets Policy
Throughout autumn, legislative staff have had their eyes on what would happen the first Tuesday of November. Would control change in the Senate? If so, how much? Would that change the agenda in the House, or at least the way legislation has been approached over the past year?
We’ve been asking these questions in nearly every congressional office we’ve visited since September, be they in the Senate or the House, Republican or Democrat. From those queries and in light of Tuesday’s midterm election results, we’ve made some predictions on what to expect in the Congress ahead.
First on the personnel side, leadership elections for committees and subcommittees will occur on Wednesday, 12 November, with the Republicans taking two to three seats from current Democratic members. There was some early talk about Financial Services Committee (FSC) Chair Jeb Hensarling (R-Texas) challenging John Boehner (R-Ohio) for the House Speaker’s gavel. While those utterings fell by the wayside, there remains a question as to whether Scott Garrett (R-NJ) will continue to chair the Capital Markets and Government Sponsored Enterprises subcommittee of the House FSC. Many see that happening, though it would require that Rep. Garrett receive an exemption from party term limits that would normally require him to hand over the reins of the subcommittee. If that weren’t to happen, however, it would start a musical chairs-type shuffle in the committee, with current Housing and Insurance Subcommittee Chair Rep. Randy Neugebauer, a republican from Abilene, Texas, moving to chair Capital Markets and someone filling his seat on Housing and Insurance.
Evolving Legislative Agenda
On the agenda side, from what we can tell, the focus in the House and the Financial Services Committee will remain substantially unchanged. One obvious point of interest is mortgage market reform, given the work the subcommittee and Chairman Hensarling put into the issue over the past two years. Known as the PATH Act, the legislation passed in the committee on a party-line vote, only to fail on the House floor, largely because most Republican members, while nominally supportive, saw the risks of registering a vote on the floor as too high for a proposal that didn’t stand a chance of passing the Senate. In this scenario, PATH likely will get reintroduced early in the new Congress, and await what the Senate might do on the matter.
Beyond PATH, there were a number of small, technical issues introduced and passed on a bi-partisan basis late in the last Congress. These will likely receive reintroduction as a package early in the new Congress in an attempt to convey a willingness and ability of both sides to govern.
What isn’t expected is a wholesale gutting of Dodd-Frank. On the one hand, the shifting and changing that a complete re-do on financial market regulation would entail would create more problems than benefits for the industry. Moreover, much of the bill remains seen as needed on both sides of the aisle. That isn’t to say that there won’t be significant efforts to change the bill. Remember that it passed on a purely partisan basis in 2010 with no Republican support. Much of that antagonism is directed toward the Consumer Financial Protection Bureau, and specifically at its lack of congressional oversight due to its statutory funding source — Federal Reserve profits. Other partisan targets may include, to a lesser degree, resolution authority for failed big banks and the imposition of Basel capital requirements on small banks.
Market structure issues will retain their high-profile status, in part because they are that rarest of issue that defies traditional partisan lines. Most of the focus to date has been on equity markets, though increasingly attention is being shifted toward the corporate and municipal debt markets. Members on both sides of the aisle generally agree that such matters are best left to the Securities and Exchange Commission (SEC), though Rep. Mike Grimm (R-NY), who is not on the committee, introduced legislation this past year to deal with these matters. SEC Commissioner Daniel M. Gallagher is seen as another supporter of a legislative route to market structure reform. It would certainly be a boon for market structure lawyers.
It is in the Senate, though, where the biggest changes will come as a consequence of the midterm elections. The Republicans took control here as they did in the House in the 2010 elections. Their current four-seat majority (one race hasn’t been called, another will go to a run-off election in December, and a third is likely to go to a recount) won’t be enough for the majority party to survive any cloture votes — votes to end debate on legislation, thus foregoing the possibility of a filibuster — but it would enable them to set the agenda through chairmanship of the various committees. Sen. Richard Shelby (R-AL) is expected to resume his chairmanship of the Senate Banking Committee; he was chairman before the Republicans lost control of the Senate in 2006. Shelby is seen as supporting reform for Fannie Mae and Freddie Mac as a way to end the current status quo, though his community bank focus could make bigger banks targets of committee legislation. On the Democrats’ side, current Banking Committee Chair Sen. Tim Johnson (D-SD) is retiring from the Senate. That leaves Sen. Sherrod Brown of Ohio as his likely replacement at the head of the committee. Sen. Brown was not a supporter of the Johnson-Crapo mortgage reform package from the last Congress, and few appear to know what he wants in the way of mortgage market reform, or even if he wants it at all. What we have gleaned from our meetings with the senator’s staff is that there is an interest in the structural issues related to big banks.
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