Tea Party Has Wall Street Grudgingly Married to Democrats

NEW YORK (TheStreet) -- Investors around the world are weighing the implications of a Republican-engineered standstill on raising the U.S. Treasury's borrowing power, and it wouldn't be surprising if major financial market dealers on Wall Street are in the process of re-thinking their political allegiances.

Will America's largest banks, hamstrung by a new regulatory era imparted by the Obama administration, be forced to taper their support of the Republican party and embrace a Democratic caucus that has been accused of vilifying the financial services industry?

If the U.S. government's credibility survives the latest bout of budget brinkmanship with a last minute deal to raise the federal debt limit, financial heavyweights such as Goldman Sachs (GS), JPMorgan  (JPM), Bank of America  (BAC) and Citigroup  (C) may conclude it is in their self-interest to stand behind an often adversarial Democratic party in upcoming mid-term and presidential elections.

Such a scenario, while counterintuitive, would actually be in line with recent trends in the political largess of Wall Street's most powerful players.

The last time major financial intermediaries were staring down an abyss of total collapse -- the 2008 financial crisis -- their lobbying budgets and employee contributions tilted decidedly toward the Democratic party and presidential candidate Barack Obama, who was running on a platform that counted financial regulation as a centerpiece issue.

There was a clear rationale at the time. While Obama and his Democratic colleagues made no secret of their intent to drive regulatory stakes through the heart of Wall Street's proprietary and derivative trading desks, at least there was a hope that those lawmakers could propel the industry from the brink of collapse. The alternative, after all, was a Republican party that voted down the first iteration of then-Treasury Secretary Hank Paulson's Troubled Asset Relief Program just days after the collapse of investment bank Lehman Brothers.

As weeks dragged on between the failure of Lehman Brothers and the eventual implementation of TARP, which included the support of a only small minority of Republican legislators, many lawmakers in the party took to the House and Senate floor to advocate balancing the federal budget and letting banks fail as an alternative to the extraordinary measures eventually taken by the Treasury and the Federal Reserve

Would a Republican ticket headlined by John McCain and Sarah Palin have the political will to get banks out of the crisis and the economy out of a free-fall? Political giving by banks and their employees indicates a decided "no" vote. Wall Street political spending went roughly 60% toward the Democratic party in the 2008 election.

The economy and banks eventually recovered and as expected, a Democratic majority took on Wall Street with strict legislation such as the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. In the 2010 mid-term and the 2012 election cycles, it is also no surprise Wall Street money moved back behind the Republican ticket, especially as a fiscally moderate ex-private equity heavyweight, Mitt Romney, headlined the party's ticket.

But nearly a year after Romney's decisive defeat in the 2012 presidential elections, the Republican party has moved far to the right. Junior lawmakers like Sen. Ted Cruz (Texas, R) and Sen. Mike Lee (Utah, R) are now torch bearers for a strain in the party that is willing to shut the federal government and put the U.S. Treasury on the verge of default as a means to negotiate a de-implementation of the Affordable Healthcare Act (ACA), otherwise known as "Obamacare."

Given signs of a deal on Wednesday, it seems that a default has been resolved for the near-term. Similar manufactured crises may re-emerge given the short-term accord that is emerging. Meanwhile issues such as tax and immigration reform, and a federal budget, appear to be legislation that is beyond the capacity of Washington.

Still, one wonders how big of a scare the debt limit was for Wall Street.

In recent days, firms such as Citigroup and Fidelity openly said they wouldn't hold Treasury debt due in coming weeks. Vocal CEOs such as Lloyd Blankfein of Goldman Sachs and Jamie Dimon of JPMorgan made trips to Washington to impress upon lawmakers that a default would be a calamity on par or worse than the 2008 crisis.

How close did the debt ceiling standoff come to metastasizing into a full-blown financial crisis?

Stock markets and bond markets proved resilient through a longer-than-expected standoff, as did overnight credit markets. Treasury Bill yields surged slightly, but prices remained near par and default protection on U.S. government debt remains priced to bear minimal risk. Banks, however, may have seen red flags internally given their Treasury holdings and counterparty ties. To be a fly on the wall at liquidity and enterprise risk management meetings on Wall Street this week may have shown an emerging panic.

If so, it wouldn't be surprising to see a pendulum of support swing decidedly toward a more organized and governable Democratic party. With heavy financing from libertarian billionaires like the Koch Brothers, it is also unclear whether Tea Party Republicans would even care.

"I don't think there's any way for Wall Street to punish the 25 to 50 hard core House Republicans. It's not like [Reps. Steve] Stockman and Tim Huelskamp are doing a lot of Goldman Sachs events. I don't think Justin Amash cares if Bank of America gives to him or not," a Republican staffer was quoted as saying to Politico.

It would also be interesting to see a splintering of support among financial heavyweights. Major banks appear to face the biggest risks of a U.S. debt default, while private equity firms and hedge funds would likely have a better time navigating a potential crisis. Those industries, meanwhile, have the most to lose by the legislation of a Democratic majority.

The private equity industry, in aggregate, employs over 20% of U.S. workers and is facing the economic realities of Obamacare and a relatively high corporate tax rate in the U.S. Those funds also continue to benefit from a "carried interest" tax treatment that lowers their overall rates rates compared to the ordinary income tax.

It is no surprise Tea Party Republicans with a de-regulatory bent like Sen Marco Rubio (Florida, R) have been spotted with PE luminaries such as Steve Schwarzman of The Blackstone Group (BX).

The debt ceiling crisis may be over for now, however investors may soon begin to see evidence of a financial impact. There also could be a political reckoning.

-- Written by Antoine Gara in New York.

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