Wall Street, the heart of American capitalism, has always been heavily involved in the political arena and for obvious reasons. Politicians dictate through regulatory measures the marginal profitability of businesses. Regulation, while vitally important, purportedly costs American business billions of dollars every year. According to a study conducted by Xiying Zhang, assistant Professor of Accounting at the University of Minnesota, the Sarbanes-Oxley Act alone "wiped US$1.4 trillion off the value of the stock market." Regardless of how accurate that may be, Wall Street seems to benefit from presidents whose policies are more "laissez-faire" than others.
Historical Financial Regulation
Of course, a brief synopsis of American regulatory history is necessary in order to lend gravity to the issues at stake. In 1933, the Glass-Steagall Act effectively separated the functions of an investment bank, commercial bank and insurance company. The Act also created the Federal Deposit Insurance Corporation (FDIC) and limited speculation within the banking system. However, the Gramm-Leach-Bliley Act in 1999 reversed the regulatory measures imposed by Glass-Steagall. Much of the 2008 financial crisis has been attributed to the repeal of Glass-Steagall, as banks originated fraudulent loans and once again sold them to their customers in the form of securities. As a result, the regulatory cycle has shifted back toward a more stringent period in recent times.
Meet the Candidates: Barack Obama and Joe Biden
In his first term as U.S. President, Barack Obama earned himself a highly pro-regulatory track record. Under his watch, the Dodd-Frank Act transformed the Financial Services industry, instituting reforms on bank's capital holdings, transparency and lending procedures. According to BusinessWeek, "The eight largest U.S. banks stand to lose between $22 billion and $34 billion in annual revenue as a result of Dodd-Frank."
While certain aspects of the Dodd-Frank act were absolutely necessary, such as increased regulation of the collateralized-debt obligation (CDO) market, others seem to have stunted the industry's profitability. For example, the Volcker Rule has restricted the ability of banks to engage in risky, yet highly profitable trades. Although an exception was granted for hedging strategies, banks will be hard-pressed to generate similar levels of return on investment. Of course, these measures are to ensure consumer safety and are, for the most part, necessary. Wall Street, however, is understandably hesitant to sacrifice profit for the purposes of client protection.
Meet the Candidates: Mitt Romney and Paul Ryan
Mitt Romney, the Republican Party nominee for president, has the Wall Street pedigree; in his distinguished private equity career, he served as CEO of Bain Capital for 15 years. As such, Romney understands the important role that regulation plays in determining the economic conditions under which business operates. Talking points for the Romney campaign have been the continuation of carried interest taxation at the capital gains rate (15%) as well as the repeal of Dodd-Frank. Wall Street has rallied to Romney for these traits, but skeptics contend that Romney's appeal is largely derived from Obama's anti-Wall Street sentiments.
Ironically, the biggest story of the Romney campaign may not be Mitt Romney himself, but Paul Ryan. The Chairman of the House Budget Committee and Wisconsin Congressman, Ryan was chosen by Mitt Romney as his running mate to jumpstart his presidential campaign. Paul Ryan's economic philosophy is strongly influenced by Ayn Rand, a free-market enthusiast, explaining his well-publicized desire to reform the Dodd-Frank Act. As a result, the Congressman's views have won him Wall Street's favor as well.
The Bottom Line
On a basic level, the primary function of the banking system is to provide credit and hold deposits. However, banks simultaneously operate with the goal of maximizing shareholder value. These two goals are often mutually exclusive; when banks become heavily involved in risk-on investment activities with proprietary resources, they indirectly endanger their creditors and depositors. There is, indeed, a fine line between healthy regulation and suffocating regulation. It remains to be seen just how the public, and Wall Street, will view the policies of November's election winner.