Market Update: GOP Wins Bode Well for Treasurers

November 03, 2010

With the Republicans taking control of the House and gaining seats in the Senate, treasurers can expect some relief.

Issues on Horizon - BinocsThe Republicans have taken the House and given the Senate a bit of haircut by taking back a few seats. And while there will likely be no wholesale changes on issues affecting MNCs, corporate treasurers can expect some favorable adjustments in legislation regarding derivatives, banks and taxes.

To be sure, corporations were already faring pretty well under the old regime. Aside from some bashing by Washington, US business was never in the glare of the regulatory spotlight after the crisis like banks were; and they largely dodged many of the bullets. Details were still to be worked out, but companies already were in line to get some exemptions from central clearing their swaps. And bankers were already adjusting to some of the realities of Dodd-Frank and Basel III; and the picture was a little uncertain regarding taxes – from corporate deferrals to whether HIA 2.0 was possible.

Nonetheless a Republican takeover bodes well.

Derivatives
Republican Representative Ed Royce from California said a priority will be derivatives exemptions for corporations. Mr. Royce, who is a member of the House Financial Services Committee, told Bloomberg news that without the exemptions thousands of businesses, “will find it more expensive to legitimately hedge market risk.” Therefore the committee “must ensure businesses that had nothing to do with the crisis are not unnecessarily punished.” Barney Frank, now the outgoing chairman of Financial Services Committee, said the current language needed a “technical fix,” to establish which firms would be required to post margin or capital for transactions that were going through central clearing. Meanwhile some Republicans, most notably Rep. Spencer Bachus, expected to be the next Financial Services chair, want to rewrite the rules altogether.

The House Financial Services Committee also controls the cash. At a time when the CFTC and other rule makers want to hire more people to help write the hundreds of new rules, having the “power of the purse” is critical. Look for a slow go in the rule-writing process.

Banks
Over the past few months, banks have been trying to figure out what all the rules and regs would mean to their bottom line – in a nutshell, it probably means a smaller one. For treasury, the concern has been the availability of credit from those banks that have been told to among other things, hold more capital and liquidity in reserve, apply fair value hedging to their loans, and just generally stop doing whatever it is they were doing that week that was angering Congress. In response to the pressure, banks have been a bit cagier when it comes to doing business with big business. They want more business in return for loans or services they provide and want more strategic partnerships (see related story here)

But a Republican takeover of the House might ease some of these pressures. Banks also might get some good news on derivatives front as well. Several banks have been prominent participants at SEC and CFTC meetings on Dodd-Frank rule writing already; a Republican House that has their back isn’t a bad thing.

Taxes
With Republicans now controlling the House, there will be much more debate on tax provisions that are favorable to businesses. International tax issues will be at the core of the debate, according to a post-election advisory from law firm Alston+Bird.

“In the Democratic-controlled Congress, business taxpayers have been seen as a source of revenue, and there has also been a desire to foster tax policies that ‘bring jobs home to the US,’ even though ultimately this may result in an adverse effect on US competiveness,” Alston+Bird said. However, with a Republican majority, “concerns from businesses that view US tax laws as an impediment to repatriation of foreign earnings and a disincentive to invest in the United States are likely to receive more support. A key issue will be whether the trend in the Democratic Congress to use tax provisions aimed at multinational companies as revenue raisers outside the context of tax reform will continue. In general, revenue raising proposals, such as the provisions relating to carried interests, are likely to receive more scrutiny under Republican majority.”

Of course there are still dangers from a lame duck congress, and further hits to business and banks could be forthcoming before the year is out. But overall, some of the uncertainty on the big issues has dissipated.

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