TRP Financial Services Report

While Republicans rejoiced and Democrats lamented the results of Tuesday’s election, both sides appeared to concur that once again, the electorate was sending a message that they want Washington to work.   Not surprisingly, immediately both sides were talking about ways to work together, which almost immediately followed by commentators explaining why this couldn’t happen.  (See, Example 1, Example 2,  Example 3, Example 4) 

While we don’t like to be contrarian, it does appear that this time things could be different.  This will be the first time that the Republicans are in complete control of the Congress, at least in name, during the Obama administration.  Further, the combination of the 2016 map, as equally unfavorable to the GOP as 2014’s was to the Dems, and the small majority that soon to be Leader McConnell has to work with means that if anything is going to move it will ultimately need to be bipartisan.  While some on the right have argued that Republican should dare Obama to veto everything, that strategy would likely backfire because of the need for Democratic votes to override any vetoes, and, as Senator-elect Cory Gardner has noted, there are powerful political reasons for the GOP to show it can govern.  The veto strategy doesn’t fit into that box. 

Our prediction is that both sides will start off in 2015 by looking to show where they can find common ground – with trade, infrastructure policy and regulatory relief under the guise of pragmatic D0dd-Frank reforms as three areas that will garner attention.  Essentially, Congress should model the Kansas City Royals' small ball approach that gets wins by making singles and stealing a base or two, not by swinging for the fences.  Sure the Royals didn’t win the World Series, but they got further than they’ve been in a long time. 
 

Near Term 

• The House has released its schedule for the next two weeks, with this week solely dealing with organization and consideration of suspension bills.  Then during the week of November 17th, the House will likely consider additional suspension bills as well as three bills — H.R. 1422, the EPA Science Advisory Board Reform Act; H.R. 4012, the Secret Science Reform Act; and H.R. 4795, the Promoting New Manufacturing Act – that will each be brought up under a rule.
• The Senate is expected to conduct its leadership elections next week.  In addition, the upper chamber is expected to devote some time on Judicial Nominations before possibly moving toward consideration of the Child Care and Development Block Grant Act of 2013.  The schedule for the week of November 17^th has yet to be finalized, but it is possible that Leader Reid will use the week to try to move the combined Internet Freedom Tax Act / Internet Sales Tax Act known as MITFA. 
• Commence the game of musical chairs:

The shift in power in the Senate, along with a series of retirements brings new faces to the top of the dais.  As often taking place following an election, the Republican term limit rules create turnover and tensions as members scramble to obtain or retain power.

Senate Banking:   The conventional wisdom is that Senator Richard Shelby (R-AL) will assume the Chairmanship since he will be forced to relinquish the top spot on the Senate Appropriations Committee when Senator Cochran (R-MS) will exercise his remaining two years of Chairman.  If for some highly unlikely reason Cochran defers, than Shelby could stay at Appropriations allowing current Banking Committee Ranking Member Crapo (R-ID) to assume the Chairmanship, but it appears that would be the only way that Shelby doesn’t take over the Committee.  Assuming that Shelby does take the Chair, it is worth noting that he will only have two years to serve as that Chair, and he is likely to put forward an agenda containing Republican goals (i.e., tweaking Dodd-Frank, reforming CFPB, JOBS Act 2.0, increased oversight of the Regulators) but will likely focus on the moving practical legislation that has bipartisan support.  Should Shelby want to focus on imposing new restrictions on big banks he could find a partner in his likely Ranking Member, Sherrod Brown (D-OH).  Although rumors continue to swirl around K Street that either Bob Menendez or (D-NJ) or Jack Reed (D-RI) could exercise seniority to claim seat, they are expected to retain the top Democratic position on Foreign Affairs and Armed Services respectively.

Committee ratios will not be set until the last two Senate races are determined, so it is unclear how many new members will be added to the Committee.  Democrats currently have two seats to fill (Johnson retired, Hagan lost) while Republicans also lost two members (Johanns and Coburn) to retirement.   

Senate Finance:  The leadership of the Senate Finance Committee is simply expected to switch even though current Judiciary Committee Ranking Member Grassley (R-IA) still has time left on his six years.  However, a widely reported “Gentleman’s Agreement” between Grassley and Orrin Hatch (R-UT) means that Hatch will serve as Chairman of Finance while Grassley chairs the Judiciary Committee.  Had Grassley exerted his option at Finance, Hatch, who was termed out of Judiciary, would have been left without a Chairmanship.  Current Chairman Ron Wyden (D-OR) is expected to transition to Ranking Member.  Like other Committees, the roster will dependent on the final ratios and it is possible that Democrats will need to drop two seats.  While one of those can be absorbed by not replacing Senator Rockefeller (who retired), it is possible that  Senator Mark Warner (D-VA), who was only able to declare victory on Friday, may ultimately be dropped, as he was the most recent addition to the Committee. 

While Senator Hatch has expressed an interest in advancing comprehensive tax reform next year, the Committee is also expected to deal with the financing component of the Highway Trust Fund legislation that currently expires at the end of May.  Depending on how the lame duck shakes out, the Committee could also take up the Internet Freedom Tax Act, the Marketplace Fairness Act and a tax extenders package next year. 

House Financial Services:  Although Rep. Frank Lucas (R-OK) the term limited chairman of the House Agriculture Committee has indicated that he may challenge current Financial Services Chairman Jeb Hensarling, the general expectation is that Hensarling will retain his Chairmanship for the 114th Congress.  Likewise, Hensarling, long rumored to challenge Speaker Boehner for the Speakership is expected to pass on this challenge.  On the Democratic side, current Ranking Member Maxine Waters is expected to rain her position at the top of the dais.  With these two continuing their “love feast” little is expected to change in the Committee’s agenda, which will remained focus on amending elements of Dodd-Frank, pushing for significant changes to the CFPB, pushing the SEC to implement the JOBS Act, and potentially pushing a JOBS Act 2.0.  During the lame duck the Committee will also be involved in negotiating a TRIA extension, with reports surfacing that Chairman Hensarling is attempting to secure a short-term (6 month) extension in order to start from scratch next year. 

House Ways and Means: The conventional wisdom is that Representative Paul Ryan (R-WI) is likely to win the race for Chairmanship of the powerful tax writing committee, though he will have to beat back a challenge from Congressman Kevin Brady (R-TX), a more senior member of the panel.  On the Democratic side, Sander Levin (D-MI) is expected to continue to helm the Ranking Member spot, though more junior members such as Jim McDermott (D-WA) or Richard Neal (D-MA) could make a play for the position.  Similar to their tax writing counterparts in Senate Finance, the Ways and Means Committee is expected to take up tax reform, and may use outgoing Chairman David Camp’s reform proposal as a starting point.  However, we should anticipate substantial changes and deviations from that draft whenever the Committee floats its own proposal.
 

For a comprehensive overview of the lame duck, please check out Thorn Run’s Election Update and Analysis.  In terms of timing, it currently looks like both the House and the Senate have effectively divided the lame duck into two segments.  Segment one commences this week and runs until November 21^st.  Congress will then adjourn for the Thanksgiving week, before returning the week of December 1^st.  The House is still set to adjourn for the year on December 11^th, while the Senate has indicated that they are preparing to stay in until the 19^th.  As is often the case with lame duck schedules, change is possible and probably likely.

Given the incredibly pressed schedule, competing interests and a sense by many on the Republican side that they should simply punt many of these items until 2015 when they can begin work with their majorities it seems unlikely that anything other than a spending bill and then one or two of the other big ticket items – if even that many –will be enacted into law before the end of the year.     

While there seems to be a consensus to begin to clear the decks and pass  an omnibus spending bill to fund the government through September 30, 2015, some on the far right don’t agree.  The decision to pass a full omnibus instead of a short term continuing resolution (CR) will just be one of the tea leaves in the lame duck that Congress watchers will be reading.  Similarly, it will be very interesting to see how the lame duck Congress chooses to dispose of the expiring tax provisions known as extenders.  Leader Reid and Finance Committee Chairman Wyden have been pushing for the bill that was approved by the Finance Committee earlier and which contains a two year extension.  With House Republicans expected to balk at that idea, it would seem the only way extenders can be done is if someone like incoming Chair Paul Ryan, or Republican leadership is able to convince enough members of the Conference to swallow the bitter pill in order to keep the dream of comprehensive reform alive.

The other “must pass” bill many in the financial services industry are watching is legislation to extend the Terrorism Risk Insurance Act, known as TRIA.        Like many of the other bills that “need” to be extended before the end of the year, conservative Republicans opposed to TRIA are trying to simply pass a short term extension going to March or June of 2015.  However, with the Senate having already passed a seven year extension of the bill 93-4, House conservatives are going to have a hard time persuading their moderate members off of something that looks more like the House version before the end of the year. 
 

While we believe that the environment in 2015 will be ripe for pragmatic Dodd-Frank Fixes, we fully expect a full plate of items on the Banking Committee agendas.  The big question, both for the Committees and for Congress writ large is whether members want to pass message bills or work to achieve the doable.  If the later, issues that could see attention would include a Volcker modification, some types of CFPB reform (but not anything that substantively alters the Bureau’s funding mechanism or structure), a modification to the SIFI thresholds as well as some type of pushback on the FSOC. 

Additionally, if Congress is serious about moving a Transportation Reauthorization, that will eat up some of the Senate Banking, Housing and Urban Affairs Committee’s bandwidth.  Another area that could consume both of the committees time, though it is less likely to result in legislation, would be GSE Reform.  Additionally, we wouldn’t be surprised if there were hearings on mobile payments as well as an effort to push forward a JOBS Act 2.0 bill.

The gorilla in the room for next year, as it has been for the past two years, is tax reform.  As discussed above, we believe that how the Congress deals with the extenders in the lame duck will provide great insight into whether there will be a real chance to take on tax reform in 2015 – though realistically the window for getting reform done next year closes around September.  With Democrats anticipating holding onto the White House and taking the Senate back following the 2016 elections, it would seem as if they lack real incentive to engage in real discussions about tax reform before then.    

On Thursday, November 13th at 11:00am in 538 Dirksen, the Senate Banking Committee will hold a nominations hearing on Ms. Lourdes Maria Castro Ramirez, of California, to be an Assistant Secretary of Housing and Urban Development; and Ms. Therese W. McMillan, of California, to be Federal Transit Administrator, U.S. Department of Transportation.

On Thursday, November 13^th at 10:00am in Room 2128 Rayburn, the House Financial Services Committee will hold a hearing entitled, “Terrorist Financing and the Islamic State.”