Still plenty to play for on the Dodd-Frank bill

By Gillian Tett

Published: October 28 2010 16:10 | Last updated: October 28 2010 17:17

 Could the Republicans throw sand into the wheels of financial reform in America? That is the $64bn question provoking feverish debate in the financial community on Wall Street and elsewhere.

 Next week America will hold its crucial mid-term elections and opinion polls suggest that the Republicans will make significant gains, grabbing control of the House of Representatives and possibly the Senate, too.

 Now, in theory it should not be possible for anybody to significantly change the Dodd-Frank bill. After all, a few months ago it was signed into law by President Barack Obama. And, as the Obama administration is fond of pointing out, once a bill has been signed it cannot be easily, or lightly, undone.

 But in practice, the financial community thinks there is still plenty to play for; and, perhaps, to pay for. As Larry Summers, Obama’s chief economic adviser pointed out at a recent Financial Times conference, the financial industry has been spending heavily on lobbying in recent months – notwithstanding the fact that Dodd-Frank has already passed.

 Indeed, according to Summers, the financial sector is funding an average of four lobbyists, to the tune of $1m or so, for every member of the House (including those who have nothing to do with finance).

 Moreover, the financial sector, including hedge funds, has made significant donations into Republican party coffers in recent weeks. Presumably, they are hoping that this will produce some form of return? In answering this, the crucial issue at stake is what happens next to the Dodd-Frank bill.

 Under the terms of the bill, dozens of committees have been established by regulatory agencies such as the Commodity Futures Trading Commission and the Securities and Exchange Commission and so on, which are scheduled to turn the bill into draft tangible, detailed rules during the next year.

 In theory, the fact that this process has now passed into bureaucratic hands should make this stage of rule-making less immune to political pressure.

 In practice, however, it may not quite work out like this. If the Republicans assume leadership of the key finance-linked committees in the House (and perhaps the Senate) in the coming months, the political climate that the bureaucrats are operating may well switch. At the very worst, this might trigger hysterical infighting or gridlock around financial reform. One crucial early flashpoint will centre on the requests made by the regulatory agencies for more funds, something that the Obama administration considers to be crucial to enable these agencies to hire more staff; but which some Republicans loathe, along with some bankers.

 However, many Republicans are reluctant to be seen to be too obviously allied with the banks, or be doing anything too overtly dysfunctional. So a more likely scenario is that the tone of the bureaucrats may start to subtly shift. Most notably, if Republican politicians start vilifying Big Government, they are likely to call for less intrusion in financial markets. There may, in short, be less incentive for regulators to take excessively prescriptive steps.

 A subtle shift in tone could matter, since the impact of the bill could be shaped enormously by very subtle details. Think, for a moment, about the language. On paper, the Dodd-Frank bill appears to offer a vision of significant change: banks will need to spin off proprietary trading, away from client activity, unless they can show that their trading involves hedging or long term investments. They will need to put standardised over-the-counter derivatives onto a clearing house, and pledge not to engage in conflicts of interest.

 But what is crucial – and fascinating – is that words such as “standardised”, “hedging”, “long-term investments”, “proprietary trading” or “conflicts of interest” have not yet been defined. And those are just five terms which I know to be controversial; there are numerous others too.

 How those regulatory committees eventually define these words could end up being hugely important. If “standardised” is defined narrowly, for example, then only a small part of the OTC world will ever need to move on to clearing houses; conversely, if “proprietary” is defined in a limited way, then many banks will find ways to carry on pursuing their core activities, without running foul of the new rules. In essence that would be a win for the banks.

 Either way, the devil is still in the details; and those details are so subtle and complex that they will only be understood by a small handful of specialist lawyers, many of which are working for the banks. Right now, it is still pretty unclear what the eventual impact of the Dodd-Frank bill on the industry will actually be. Little wonder, then, that some of the smartest bankers on Wall Street quietly think there is still a fair amount to play, and pay for both before and after November 2.

gillian.tett@ft.com

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