WASHINGTON – It may be the regulatory bodies, rather than the financial reform bill itself, which will be most affected when newly powerful Republicans begin their work in the next Congress.
In the game of financial regulation, some experts say, the groups controlling the future of the financial world may need to deal with their own financial futures first.
With the GOP winning the House and making gains in the Senate in this week’s elections, experts see a radically changed political climate than when the Dodd-Frank bill was enacted in July.
Both the Commodity Futures Trading Commission and the Securities and Exchange Commission have worked vigorously to draft proposals on sorting out details in the reform bill, staunchly advocating for overhauls in the system. But analysts wonder if the “hard line” approach of the regulators will be changed as business-friendly Republicans return to power.
“I think he [CFTC Chairman Gary Gensler] is in a somewhat delicate situation. Given the fact that Congress is going to control the budget, and the CFTC has to get a lot more money to do what they need to do. Congress has some leverage,” said Craig Pirrong, a professor of finance at the University of Houston and a well-known derivative expert. “That will leave the commission to act less aggressively than they have.”
What the financial regulation isn’t clear on are the smaller details, which include rules such as the definition of a swap dealer, how swap execution facilities will work and how much discretion will be granted to clearinghouses. Many of the sections that dictate rules on derivatives allow the CFTC and the SEC to create rules, give guidance and put them into effect, with the shape of change not yet clear.
One major point of contention has been how much authority these regulators have to control the enforcement of the reform. With Congress is in charge of the funding regulators need to do their work, Wall Street firms and lobbyists may have extra leverage over reform, said Mitchell Petersen, a professor of finance at the Kellogg School of Management.
“In some sense, regulators are in a little worse position than before,” Petersen said. “They need somebody to have their backs. There’s huge pressure to do something. I’m very cynical in this environment where we try to string someone up in the public square. Financial regulation is subtle. It’s a tradeoff between now and the future.”
Regulators are charged with fixing problems quickly and having to show results. As a result, Peterson asserts, there is potential for large corporations that don’t get what they want to argue that regulators are doing a bad job, the actions are too costly and the measures are ineffective.
“The benefits are longer and diffuse while the costs are concentrated,” he said.
Congress returns to Capitol Hill on Nov. 15 for a lame duck session. The new Congress will be sworn in on Jan. 3.
Wall Street may be affected in either that lame duck session or as the Republicans begin to sort out priorities for the next two years. Especially tricky will be balancing businesses’ needs against American voter anger at firms they see as responsible for the financial meltdown.
In that regard, the power change could mean even more ambiguity as the GOP positions for the 2012 elections.
Without stability, some argue that companies can’t make informed decisions. But it’s this exact uncertainty that others think will be beneficial in the long run.
“I think that in the Dodd-Frank horizon, I ‘m more optimistic than I would have been if the election happened differently,” Pirrong said. “I think there was a serious risk making some very bad mistakes, and though I think that risk has gone down, it has not gone away.”