Mixed signals and conflicting ideology has always made for an inconsistent regulatory environment on Wall Street. With the mid-term election landslide by Republicans, who favor less regulation, regulators are likely to be less vigorous in their oversight. What does that mean for individual investors? Probably not good if 2008 taught us anything.
The MSN Money online article below (Nov. 25, 2014) explores the potential for less regulation now that the Republican party controls the House and the Senate.
SAN FRANCISCO (MarketWatch) — If you want a better understanding why the regulatory environment surrounding Wall Street is so erratic and half-measured, look no further than the political divide in Washington. On one side are mostly Republicans who see the post-financial crisis raft of new rules as job and economy killers. On the other are mostly Democrats who see banks and brokerages as predatory. It’s a philosophical difference that’s sent mixed messages and, among other things, held back regulators from bringing criminal charges against individuals, employing tough new rules and, on the flip side, opening up credit to small businesses and individuals.
Nowhere is this contrast more apparent than the dueling committees on Capitol Hill. One, the U.S. Senate Banking Committee is run by a Democratic majority that includes Sens. Sherrod Brown and Elizabeth Warren, from Ohio and Massachusetts, respectively. Together, last year, they introduced a bill that would have returned the Glass-Steagall Act, a Depression-era law that separated traditional deposit-and-loan banking from investment banking and brokerage businesses.
On one side there’s a lawmaking panel that is critical of regulators deemed to be overreaching. On the other is a committee that says regulators aren’t going far enough.
Over in the House, the banking committee’s counterpart is the Financial Services Committee. The majority Republican panel is led by Texas’ Jeb Hensarling, who voted against the bank bailouts and proposed shuttering Fannie Mae and Freddie Mac, which support the U.S. mortgage market by buying home loans from banks and selling them in bonds, in favor of a private sector takeover of the market.
Since May, the Financial Services Committee under Chairman Hensarling has ramped up its attacks on the Consumer Financial Protection Bureau, which the chairman called “unnecessary” and offered protections that Americans “don’t want or need.” That’s a fairly big distinction with the committee’s Senate counterpart. The CFPB is an agency championed and envisioned by Sen. Warren when she had just left her post as Congress’ top bailout examiner.
Meanwhile, over in the Senate, the banking committee last week grilled New York Federal Reserve Bank President William Dudley. Sens. Brown and Warren criticized the Fed for its cozy relationship with Goldman Sachs Group Inc. among other Wall Street institutions. Dudley said the N.Y. Fed was conducting an internal review and had identified potential issues. So, on one side there’s a lawmaking panel that is critical of regulators deemed to be overreaching. On the other: a committee that says regulators aren’t going far enough.
There are a couple of ways to look at this. You could say this partisan and philosophical divide reflects a gridlocked and stalled Congress. Or you could say each of these panels creates an appropriate balance and, in Wall Street parlance, acts as a natural hedge. No reformers go too far. No free-market zealots can unwind needed rules.
A third way to view it, and the way that I do, is that these dueling committees have stalled regulators in their tracks. They know if they’re aggressive — such as the CFPB under Richard Cordray — there will be pushback. If they don’t do enough, they’ll get an earful from Sen. Warren. On a practical level this encourages regulators to play it safe. They make rules with loopholes. They pursue settlements instead of criminal charges. The effect is entirely predictable: mediocrity.
Now that the mid-term elections are shifting the balance of power in Washington, you can see that the self-professed reformers over in the U.S. Senate are going to be taking a back seat. No, they won’t be going away, but it’s going to be much harder to push an agenda. The regulatory community will now have one philosophy to please: a party that believes government and regulators do more harm than good. And the effect of this is entirely predictable too: it’s going to cause regulators to second-guess themselves.
Of course, the president could shift this with a bold executive order or two just as he has on immigration. But this administration has never been inclined to take on Wall Street. Instead, the Oval Office has passed on Wall Street issues in favor of insiders and those born of the status quo: Timothy Geithner, Lawrence Summers, Eric Holder — to name a few. That’s a shame because only thing worse than mediocrity is a lack of interest.