The results of last week’s U.S. elections have clearly left many pundits and investors in a state of shock after months of polling showed former Secretary of State Hillary Clinton was well-positioned to defeat President-elect Donald Trump. Despite bipartisan consensus that Trump’s controversial and unconventional campaign tactics would hinder his party on Election Day, the electorate’s support carried the Republican ticket to victory. The Trump administration will now commence in January with a congressional majority, which is expected to be led by House Speaker Paul Ryan (R-Wis.) and Senate Majority Leader Mitch McConnell (R-Ky.). This governing apparatus carries with it a number of emerging implications for the capital markets and financial sector, including:
Uncertainty at SEC, CFPB and other key regulatory agencies
Although a Clinton presidency would have guaranteed sustained spikes in examinations and enforcement actions, the Trump campaign never shared a detailed financial regulation agenda. “Investors around the world don’t know Trump and they don’t know what to expect from him. This is maximum uncertainty,” said David Kotok, chief investment officer at Cumberland Advisors.
There is strong reason to believe, however, that the populist wave ushering Trump into office will actually compel the new administration to retain aggressive oversight of investment managers and large financial institutions. Despite a pledge to freeze the implementation of new rules at regulatory agencies, the president-elect did close out the final week of his campaign with an aggressive and prominent anti-Wall Street ad.
Specific to pending matters at regulatory agencies, the SEC’s proposed derivatives rule exemplifies a major initiative that may be stalled now that a Republican president will nominate the agency’s next chair and two new commissioners. The timing of prospective enforcement actions may also either accelerate in the final months of 2016 or be paused indefinitely under new leadership.
A bullet dodged on Capitol Hill
After months of speculation that progressive Sen. Sherrod Brown (D-Ohio) would take over as chairman of the Senate Banking Committee, the financial sector and investors dodged a bullet with Republicans remaining in control of Congress. Sen. Richard Shelby (R-Ala.) will relinquish his chairmanship and hand the gavel to Sen. Mike Crapo (R-Idaho), while Rep. Jeb Hensarling (R-Texas) will continue to lead the House Financial Services Committee. This environment will support substantive debates around a Dodd-Frank rollback, GSE reform and closing the carried-interest loophole.
One issue that the incoming Congress is unlikely to take up is the proposed financial transaction tax that frequently came up during the Democratic primary debates. According to Modern Markets Initiative CEO Bill Harts, “[w]e have no reason to believe President-elect Trump is in favor of anything but the cost-effective, efficient markets we have in America today. We don’t need to make our markets great again. They’re already great.”
A window to reevaluate Dodd-Frank
The fact that many systemically important financial institutions have spent billions of dollars to comply with the Dodd-Frank Act has surprisingly tempered an industry push for outright repeal. This is one reason the Trump campaign began to hedge its position in recent months with statements about “changing” or “scaling back” the law. Expect any near-term rollbacks of financial industry reforms to be narrowly focused on specific rules that hinder mid-size banks and retail-focused institutions overseen by the CFPB.
Carried interest in the crosshairs
When speaking about how alternative asset managers are taxed, the president-elect has stated that “the hedge fund guys are getting away with murder.” He reiterated this point during a major economic address in Detroit and at a key juncture of the second presidential debate in St. Louis. Given the bipartisan opposition to the tax deduction and overall populist mandate hitting the Beltway, expect Congress to look at eliminating the alleged carried interest loophole through standalone legislation or as part of a broader tax reform plan proposed next year.
Free trade and cross-border M&A under fire
Despite a relatively humble acceptance speech that hit on constructive international relations, the Trump administration is sure to block the Trans-Pacific Partnership, a proposed trade agreement supported by many global financial institutions. Look for this brand of protectionism to also hinder inversions and cross-border deals that may lead to domestic job losses.
Cabinet officials and agency appointments loom large
With financial markets already reacting poorly to elections results, the incoming Trump administration will need to act swiftly to project stability and restore investor confidence. Jim Paulson of Wells Capital Management noted that “losses could broaden out for a while […] then people will ask how much things are actually going to change.” To eliminate the specter of disruptive change, the Trump administration needs to place the right people at the Treasury Department, Justice Department and regulatory bodies.
Initial reports indicate Goldman Sachs veteran Steven Mnuchin is being eyed for Treasury secretary, and former New York City Mayor Rudy Giuliani is an early favorite for attorney general. Although both candidates are well-credentialed and known commodities on Wall Street, neither looks to be an emissary of the financial sector. Mnuchin told Bloomberg News in late August there are some good elements of Dodd-Frank, and Giuliani, of course, has a track record of prosecuting Wall Street executives that dates back to the 1980s.
Of course, we anticipate many twists and turns between now and inauguration day in January. That said, the next two months will likely represent the most eventful transition of power in democratic history.
Sean Neary and Greg Marose lead Edelman’s financial communications practice in Washington.
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