Tuesday’s election results rang the death knell for a divided Congress. Republicans have earned clear majorities in both the House and Senate for the first time in twenty years. How this will affect economic policy, tax reform and market regulation is the subject of considerable interest and no small measure of speculation in the hedge fund community.
Four top-of-mind issues include Dodd-Frank, tax policy, energy, and healthcare. Let’s take a brief look at each.
Those anticipating new allies in rolling-back any of Dodd-Frank’s onerous regulations may want to curb their enthusiasm. Soon-to-be Senate Majority Leader Mitch McConnell recently declared, “The big guys are doing just fine under Dodd-Frank.”
Republican Senator Richard Shelby, waiting in the wings to chair the Senate Banking Committee has been described as “no friend of Wall Street” and is on record as having cast a nay vote for Dodd-Frank. However, equally telling, was Shelby’s nay vote on the 1999 Gramm-Leach-Bliley law. This legislation would have eliminated the boundary between commercial and investment banking.
Corporate tax reform is on the table as “doable” for the second time in the Obama administration’s history. Lest anyone get overly excited, this issue was also cited after the 2010 mid-terms as an issue on which the administration and the GOP might find common ground. It did not happen then and there is no reason to believe it will happen now.
Republicans prefer a comprehensive tax reform bill, not a bill that addresses one aspect of the troubled tax policy. This increases the likelihood that nothing will happen with tax reform.
Approval for the Keystone XL pipeline is the holy grail of energy related legislation for the GOP. The pipeline has considerable public support and, as a result, could sway a sufficient number of Democrats to vote in the affirmative … but will it be enough to override a Presidential veto?
A repeal of the Patient Affordable Care and Protection Act, a/k/a Obamacare, has already passed the house. Conceivably it could pass the Senate. However, portions of the legislation enjoy broad support, making full repeal an unlikely goal for the 114th Congress. Moreover, Republicans know full well that President Obama would never sign it. The GOP strategy will likely be one of nibbling away at unpopular and dysfunctional portions of legislation; for example, the medical device tax.
The Impact for Hedge Funds
Presidential veto power severely dampens the possibilities for any significant legislative headway beyond what was discussed here. Any successful remedial efforts to Dodd-Frank will inure to the benefit of community and regional banks, offering no regulatory relief to hedge funds or Wall Street interests. Corporate tax reform is unlikely and comprehensive tax reform will lay dormant until 2016.
On the energy front, the Keystone XL pipeline has substantial momentum for approval even if that means over-riding a presidential veto. Obamacare will absorb a few punches, but in the main, survive substantially intact.
Hedge Fund Jobs Outlook
Republicans will be unable to push through any legislation that has significant potential to enhance job opportunities in the hedge fund industry. Organic growth will continue to be the principal driver for job opportunities through the first half of 2015.