Though the Dodd-Frank Wall Street Reform and Consumer Protection Act began its life when President Obama signed it into law in July 2010, the bill will owe much of its ultimate ideological shape to whoever wins the White House on November 6. The massive 848-page bill has already given way to roughly 9,000 pages of rules and regulations — but that finalized language addresses only a third of the bill’s 398 rulemaking requirements. The rest of the bill has been met with rule proposals or, as yet, nothing at all.
Dodd-Frank tackles derivatives market regulation and mortgage reform, grants greater oversight of Wall Street to various federal agencies and establishes a Bureau of Consumer Financial Protection, among other actions. Governor Mitt Romney has argued that the legislation goes too far and represents a “quantum increase in the scale of the regulatory burden on the American economy.” In the October 3 presidential debate, he said that Dodd-Frank has forced the closure of over 100 small banks and has given major banks more protection than they deserve. He said that some parts of Dodd-Frank — such as the calls for better transparency and for leverage limits — “make all the sense in the world,” but nonetheless vowed that, if elected, he would “repeal it and replace it.”
Experts agree that as president, Romney would not likely have the freedom to repeal Dodd-Frank, given the divided Congress he would almost certainly be working with. But even if Romney were hamstrung on the legislation itself, his administration would likely have ample opportunity to influence the sprawling law. That’s because the next president and the agency heads that he appoints, together with Congress, will be charged with interpreting and putting into place the majority of the rules that remain outstanding.
“If you look at areas where you see the least amount of finalized regulation, it really comes down to some of the key elements that Dodd-Frank tried to address, which is banking regulations, mortgage reforms and dealing with systemic risk,” says Michael Dion, co-head of U.S. equity sector research at UBS. “That’s where it’ll be really interesting to see the outcome of the election and how regulations are implemented.” He adds that the largest proportion of already-finalized Dodd-Frank rules address derivatives. Indeed, of the 90 required rulemakings that touch on derivatives, roughly half have been finalized as of October 1, according to the monthly Dodd-Frank progress report issued by New York–based law firm Davis Polk. By contrast, of the 44 in the banking regulations category, only 4 have reached finalization; in mortgage reform, 4 of 49; and in the area of systemic risk, 3 of 28.
Finalizing the outstanding rules will take time regardless of who’s in the Oval Office next year. The bill’s ideological concretizing will happen in slow motion rather than in a swift about-face, largely because the future president’s power to influence Dodd-Frank will be exercised through the regulatory heads that he appoints.
“Where you’ll really get an impact is with who’s in charge of the various agencies,” says Jaret Seiberg, a senior policy analyst in Guggenheim Partners’ Washington Research Group.
As president, either candidate would be in a position to name a new Treasury secretary, since Tim Geithner plans to step down after the election. The most likely Romney appointees to the position include Rob Portman, a former budget director under president George W. Bush and current senator from Ohio; Robert Zoellick, the former World Bank president, nominated to the position by George W. Bush; and R. Glenn Hubbard, the Dean of the Columbia University Graduate School of Business, according to a source close to the situation. Likely to be tapped in the event of an Obama win are Jacob Lew, the White House chief of staff, and Erskine Bowles, co-chairman of Obama’s deficit reduction commission and former chief of staff under president Bill Clinton.
An important SEC vacancy is also likely to be left gaping soon after the election, with Mary Schapiro expected to step down from her role as SEC chairman. Romney’s most likely appointee to the position would be SEC member Daniel Gallagher, says the source, and Mary Miller, Treasury undersecretary for domestic finance, could rise to chairman if Obama is reelected.
Federal Reserve Board chairman Ben Bernanke’s term ends on January 31, 2014, and Romney has said he wouldn’t reappoint him. Mooted Romney replacements include Hubbard again, Stanford professor John Taylor, and Martin Feldstein, Harvard University economics professor and former chief economics adviser to president Ronald Reagan.
Some speculate that if Romney wins, comptroller of the currency Thomas Curry would choose to step down—thought he wouldn’t have to, which would also give Romney an opportunity to name the head of that position.
Investors would do well to pay close attention to these agency-head appointments, says Candida Wolff, Citigroup’s executive vice president for global government affairs and former lobbyist for George W. Bush. “They’re the ones dictating this, since I’m not sure I see a whole lot in the way of legislative changes that’ll undo Dodd-Frank under any scenario.”
The agency heads will be overseeing Dodd-Frank’s “philosophy of implementation, speed of implementation and enforcement,” says Wolff. She predicts that Dodd-Frank implementation led by a second-term President Obama would be primarily focused on the safety and soundness of the financial system — leading to stricter interpretations of industry regulations — whereas a Romney-led implementation would stick more closely to a cost-benefit analysis of the rules.
One of the Dodd-Frank creations whose fate hinges most directly on which of these two philosophies prevails is the Volcker Rule, whose main aim is to restrict banks from engaging in proprietary trading. Experts point to this provision as one whose final wording is likely to depend largely on the party in power, with Republicans aiming to ease its impact on banks, and Democrats more likely to polish up and work with its current, more restrictive wording.
But Citigroup’s Wolff says it may not come to that.
“I think you’re going to see a decent level of activity with respect to regulations that can get finalized post-election through December 31,” she says. “I think there’s an assumption that Volcker will be out by December 31.”
Another factor that could keep the possible final Dodd-Frank outcomes from being too terribly different, says head of Davis Polk’s financial institutions group Randall Guynn, is, paradoxically, resistance from the banks themselves.
“Even if Romney came in and said, ‘I want to just wipe all this stuff out,’ a lot of my clients would say, ‘You know, that would’ve been great two years ago, but we’ve now built up all this infrastructure and having to change it all again would actually be much more disruptive and costly than just going ahead,’” Guynn says. “My guess is there would be pressure to say, ‘Let’s live with this. We wouldn’t have asked for this in the first place, but now that it’s here, it’s probably better just to leave it alone.’”
A lobbyist at a major Wall Street bank, who asked not to be named due to his proximity to the situation, agrees with Guynn for the most part, adding that it’s hard to make a straightforward statement about how banks would respond to discrete changes in the expansive legislation. Overall, the lobbyist says, banks’ reactions to changes will depend most directly on the cost of abiding by new rules.
