The voters have spoken, the commercials are off the air and, in a sign of fiscal prudence, the Romney campaign has had its credit cards canceled (moments after the election was called, in fact). After a $6 billion election, the White House, the Senate and the House of Representatives will have the same parties in charge.
So what happens now?
It’s clearly a mistake to consider this a status quo—while wrangling over who has a mandate will likely intensify, every election brings change, and so will this one. The banking industry would be wise to keep its eye on three specific aspects.
Warren and Peace: Incoming Senator Elizabeth Warren of Massachusetts made attacks on the financial services industry a centerpiece of her campaign, and earlier championed the creation of the Consumer Financial Protection Bureau (CFPB). She was previously considered so toxic that, despite strong liberal support , she wasn’t even nominated to head the agency. Her candidacy was strongly opposed by leading segments of the industry, and even the U.S. Chamber of Commerce, all of whom contributed to her opponent. She won, and won handily. The buzz now is over her next move—will she take the traditional path, working her way up the Senate hierarchy, or will she declare war on Wall Street?
Adding to the intrigue is the speculation that she’s positioning herself for a run at the White House in 2016, just like another new senator, this one from Illinois, did in 2008. Warren has a long history of blending academia with activism from positions of power, and if she takes a confrontational role she will be a formidable adversary. First clue: Will she seek, and get, a spot on the Senate Banking Committee?
Taking Offense Over Regulations: Conventional wisdom holds that an expanded Democratic presence in the Senate and House of Representatives will be emboldened to push for more regulations. However, the real action might on the defensive side. Senate Republicans and Democrats continue to fight over the level of power granted to the CFPB; it has a more centralized structure than either the Securities and Exchange Commission or the Federal Deposit Insurance Corporation, which is anathema to free-market conservatives. In fact, even the legislation that spawned the CFPB, the Dodd–Frank Wall Street Reform and Consumer Protection Act, has been scaled back, and Democrats are determined to give it more teeth.
As with all sweeping legislation, the devil is in the details—whether Dodd-Frank is throttling the free market or simply being ignored by predatory corporations depends largely on who’s doing the talking. The reality is that rather than impose new regulations, the battle will be over how strongly existing regulations are enforced. One particular source of friction will be the House Financial Services Committee—retiring member Rep. Barney Frank (D-MA) has bemoaned the relative lack of action from this body, and that’s probably going to change in the next term.
An Appointment with Activism: For the next few weeks, at least, there will be a parlor game over who gets what job. Keep an eye on the CFPB: current director Richard Cordray only got the role through a recess appointment, a controversial move by any measure, and he has it only until the end of 2013. How active will be now, and who will succeed him? The re-election of the president all but ensures that it won’t be a free-market Republican, but that’s about all we know. There are going to be major changes to both the Senate and House banking committees; whoever gets those plum assignments will be handed the keys to a lot of power.
Perhaps most importantly, while much of the focus will be on who replaces Hillary Clinton at the State Department, another critical appointment will be at the Treasury. There hasn’t been much talk about who, if anyone, will succeed current Secretary (and former president of the New York Fed) Tim Geithner, but whoever it is will be vital to the future of this industry.
Bottom line: Every election induces hand-wringing on the losing side and fears of the country headed for destruction. Judging by what prominent conservatives have been saying, that’s what’s happening now. But let’s face it, this kind of thinking is always silly, regardless of which side is doing it.
Prominent segments of the banking industry vociferously (and financially) opposed President Obama, and he won anyway. Even with Wall Street money lined up against her, Sen.-elect Warren amassed a huge war chest and racked up an eight-point win. Their vision prevailed, and that’s how democracy works. But that’s the point—it’s an election, not Armageddon.
The Wall Street bailouts so deplored by conservatives were in fact proposed and enacted by a Treasury Secretary in a Republican administration (who, incidentally, previously ran Goldman Sachs). Executives who publicly opposed government intervention took billions in taxpayer money anyway, and the relative success of the Troubled Asset Relief Program (TARP) continues to be debated. On the flip side, the $2 billion loss at JPMorgan Chase earlier this year happened during the tenure of a Democrat-supporting CEO running an institution with government assistance. This is exactly the kind of occurrence the Obama administration’s reforms were supposed to end. This is why most attacks on the financial services industry take aim at excess and abuse, not at standard operating procedures; it’s just that some in our industry have trouble distinguishing between the two.
The best regulation by far is self-regulation. If the public in general and regulatory agencies in particular are convinced we’re taking care of ourselves, they won’t want to take care of us, one way or the other. And that will get everyone’s vote.