New York may be known for its style, but fiscal fashion is dictated by Washington. And now that the Republicans control the House, Senate and White House, current trends -- such as market reform -- likely will fall out of vogue.
"This is the end of that high-profile debate in this town," says Kim Wallace, chief political analyst for Lehman Brothers in Washington. "The Department of Justice will continue to pursue lawbreakers, but in terms of the general atmosphere, Washington will not continue to train a spotlight on the markets."
Wall Street firms no doubt will be relieved to have that spotlight removed. With the nexus of securities law and enforcement returned to the
Securities and Exchange Commission
(where it belongs), the most pressing matter will be the pick to replace former SEC Chief Harvey Pitt, who resigned on election night.
The past year has been marked by corporate accounting scandals that have decimated companies and roiled the markets. The oft-cited "crisis in confidence" among investors became a concern for Congress, which quickly decided to throw its ill-defined expertise at the ill-defined problem.
The result was the Sarbanes-Oxley Act (named after its primary architects, Sen. Paul Sarbanes, (D., Md.), and Rep. Michael Oxley, (R., Ohio), which addresses issues such as auditor independence, enhanced financial disclosures, conflicts of interest and corporate accountability. The new law also establishes an accounting oversight board for public companies.
Now, though, it's likely that Congress will train its expertise elsewhere.
"The market's pretty good at punishing poorly run companies, and has also instilled a healthy skepticism among investors," says Mat Johnson, a strategist at Thomas Weisel Partners. "I think the new Congress will realize that it's in the best interest of the markets if the regulatory hysteria dwindles."
Republicans are certainly known for their business-and market-friendly policies, and are unlikely to push for any additional regulatory measures. They won't, however, try to renege on any promises that already have been made, or hinder the implementation of Sarbanes-Oxley, Wallace says.
"They won't want to create a backlash that doesn't now exist," Wallace said. He pointed to the recent flare-up over the Bush administration's attempt to cut the $776 million that Sarbanes-Oxley promised the SEC to $568 million. The move caused such an uproar that the administration backed away from the idea; and it's unlikely any other aspects of the act will be toyed with.
"Things that have been agreed to will go forward; scandals will be dealt with," Wallace says. "But going forward, there won't be such a high level of interest in market reform."
There are some corners of the market that still might be ripe for reform and, perhaps more importantly, would give the administration the ability to say it has done its part to restore investor confidence.
"Sarbanes-Oxley was the result of Congress co-opting the issue and pre-empting the administration in action," says Harvard finance professor Samuel Hayes. "The administration now has the chance to put its own stamp on any additional legislation."
Ideally, Hayes says, any further market reform would target the distribution of shares when companies go public. "I'd like to see a proposal that mandates total and immediate transparency in how the shares of an initial public offering are distributed," he said.
There is also the logic that any reform should mandate disclosure of the relationship between the institutions receiving IPO shares, the company that's selling them and the underwriters that are financing the deal.
However, the likelihood of substantive IPO reform isn't especially high, given its status as a backburner issue, unless a steady stream of new revelations about Wall Street shenanigans in this area pushes it to the fore.
Another area for market reform could be the elimination of "account churning" by brokers. That's the highly unethical (but not illegal) practice of unnecessarily buying and selling securities several times over in an effort to incur higher commissions.
Reform that addresses these issues "would find a receptive audience among many Democrats," Hayes says. That means an easier win for Republicans.
Even so, it's unlikely that we'll see even such highly targeted and popular efforts at market reform. Republicans are far more likely to focus on hot-button issues such as a war with Iraq, as well as domestic policies that hit closer to home, such as tax policy.
"It's a big story that the Republicans took Congress," says Christopher Wiegand, an economist at Salomon Smith Barney/Citibank. "But it doesn't have sweeping implications for the economy or the markets."