What Obama's Victory Means for Financial Services

Tuesday’s sweeping Democratic victory and historic win for Barack Obama will have important consequences for a financial services industry wracked by deep crisis.

Obama will have little time for a honeymoon as he confronts critical and immediate problems with freeing up credit and bolstering credit in America’s sagging financial markets. Obama’s background suggests he may approach problems in a more circumspect way than his Republican opponents suggested during the campaign. But more regulation of finance is a sure bet.

Some highlights:

• Look for a restructuring of the financial regulatory bureaucracy and more aggressive regulation. Plans could include a new form of “super” regulatory agency perhaps with international connections. Customers will see stronger protections against abusive and predatory lending practices.
• Obama will have to act quickly on finding a new point person to handle the financial crisis. Out will be Henry Paulson as Secretary of the Treasury. Possible replacements include New York Fed president Timothy Geithner, New Jersey Governor Jon Corzine, Jamie Dimon, CEO of JP Morgan Chase, and possibly Sheila Blair, a Republican who heads the Federal Deposit Insurance Corporation.
• The new administration will have to figure out what to do with independent regulatory agencies such as the Securities & Exchange Commission and the Commodity Futures Trading Commission which might be merged. Out will be SEC Chairman Christopher Cox, giving Democrats their first majority on the SEC in eight years.
• Rocket science securities instruments will undergo an overhaul. Private equity will come under much greater scrutiny as will derivatives such as collateralized debt obligations (CDOs) and credit default swaps. Hedge funds will face new regulation and will lose more of their glamour. Look for more transparency in financial reporting, proxy access, and shareholder democracy at financial institutions.
• Mortgage lending will be watched much more strictly. One possibility is that the Obama Administration will push the recent example of J.P. Morgan, which is using its bailout money to write down and restructure troubled debt.
• “Say on pay” and scrutiny of other executive compensation issues will get a bright spotlight. Bonus and parachutes relating to executives of firms in the bailout will become potentially toxic material.
• Obama will get a boost since Democrats have expanded their control of Congress. They’ll still run the Senate although they fell short of the 60 seats in the Senate needed to prevent filibuster blockage by the GOP. As of Wednesday morning, the Democrats stood to add 21 seats to their 235-seat majority.  The overall impact may be not that extensive, since Democrats already control key committees overseeing finance. Barney Frank heads the House Financial Services Committee and Christopher Dodd chairs the Senate Banking, Housing and Urban Affairs Committee. 
• Obamanomics will become clearer. Early indications are that his philosophy actually contains variants of the free market ideals evolved at the University of Chicago, where Obama taught law. He is a disciple of so-called “behaviorist” economics which merges “the insights of psychology to the rigor of economics.” While not as strict as Milton Friedman free market views, this view posits giving economic “nudges” to change bad behavior or encourage good ones.

From any point of view, we’ll be seeing a sea change.