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10:43 AM
Matt Samelson
Matt Samelson
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Will Dodd-Frank Be DOA With GOP Congress? Don’t Bet on It

Dodd-Frank, and particularly the Volcker Rule, are just as much alive as they day the Act was signed into law and we expect it will have some "teeth" in efforts to curtail systemic risk.

Matt Samelson
Speculation continues to swirl around the Dodd-Frank Financial Reform Act passed last June. The Act promises comprehensive financial reform in banking and the capital markets, stringent limitations on deposit-taking institutions' abilities to conduct proprietary trading, and greater transparency in the over-the-counter derivatives markets. In all, the legislation promises to introduce a range of financial oversight and control not seen since the implementation of the Securities Exchange Act of 1934.

However, the recent political upset in which the Democrats turned over control of Congress to the Republicans has fed discussions that Dodd-Frank will, at least, be a non-event and, at most, will be completely mitigated by Republicans in the early part of the New Year.

On the surface, the Republicans are certainly poised for action. Incoming Banking Committee Chairman Spencer Bachus (R-Alabama) has been grandstanding since early November, setting forth colorful, if somewhat unsupported, views on the impact the Volcker Rule is likely to have on the financial system. In a November 4 Wall Street Journal article, the congressman "warned" Treasury Secretary Timothy Geithner that a "too rigid" an interpretation of the Volcker Rule - which restricts banks from engaging in proprietary trading - by regulators would "hurt shareholders" and "force banks to shutter less profitable lines of business."

Alarmist as this may sound, we don't really follow his logic and we don't see how it is likely to bring about any substantial change to the impact the law will likely have on the financial services industry. In fact, we reached out repeatedly to the reporter who penned the original article to ask if the congressman had substantiated his positions in any way. Surprisingly, she did not reply. That suggests to us that there likely was no substantiation.

Regardless of political views, the facts remain that the passage of Dodd-Frank was done on the Democratic watch. Furthermore, the leadership of key regulatory agencies, including the Securities and Exchange Commission and the Commodities Futures Trading Commission, are Democratic appointees. Formulation and implementation of specific rules are likely to continue in the vein of the Democratic agenda, which is to stem systemic risk, increase financial oversight, and expand consumer protection.

Also interesting on the topic of Dodd-Frank and Volcker is the seemingly indefensible contra-arguments put forth both during the legislative process and afterward. Most assertions put forth by anti-regulation sentiments focused on the cost of implementation and the somewhat weaker argument of how passage of the legislation would result in driving jobs overseas. In our experience, the "cost" argument is almost always the one used when nothing else makes sense.

Cost is great for this purpose, because any expense spent on controls naturally detracts from profitability. We're not sure about the jobs argument. Perhaps proponents of this line of reasoning believe that displaced proprietary traders and operations personnel will migrate to proprietary activities at non-U.S. institutions overseas. But to date, many have defected to hedge funds, not going much farther than Connecticut.

Matt Samelson is a Principal at Woodbine Associates, Inc. focusing on strategic, business, regulatory, market structure and technology issues that impact firms active in and supporting the global equity markets. He brings to the firm a wealth of experience in U.S. and ... View Full Bio
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