Love (Financially Speaking) in the Time of Trump

by Dechert LLP
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This commentary is not customarily about politics, although those with a subtle cast of mind might get an inkling of some my personal views from my always dry and balanced language.  However, right now, it’s hard not to think explicitly about politics and the new Trump administration.

Wow!

I had spent zero time thinking about a Trump administration before last Wednesday morning and now we’re playing catch up and we either have vastly too little or vastly too much data on which to develop a view.  We’ve got the blather of the campaign, and not a negative reflection on Mr. Trump, but we all know what campaign talk regularly amounts to.  We have the Republican platform, we have the musings of his various surrogates and the dumpster destined meanderings of the chattering class.

However, the year is turning, plans need to be made and as we have often said before, the absence of view is actually a view and generally a bad one.  So we thought we would get our thoughts together about what this new administration means for commercial real estate capital formation.

At the moment, here’s what I think:

  • Wall Street and the banking community didn’t win the election, a populist did, and a populist that explicitly ran on a promise to take care of the folks and contrasted the folks with the evil doing of the global corporalist/political cabal (his words, not mine). That, among other things, means the big banks.  Yes, there is talk about rolling back the regulatory state alongside the populist narrative and frankly a lot of it amounts to an incompatible jumble of yin and yang.  It strikes me that there is no such thing as a populist deregulator, but then again, it never struck me that there would be something such as a President Trump, so, there you go.
  • While I can conceive of a Republican administration, focusing on rolling back things such as Dodd-Frank and the excesses resulting from that unthoughtful piece of legislation passed in the crucible of the late unpleasantness, this is not that administration. Yes, there will be some regulatory rollback, but it will focus on places where our federal government generally annoys the folks; that’s healthcare, that may be trade policy, that may be the dictates of the Education Department, the Environmental Protection Agency and the other social policing functions that our government has embraced.  But it really doesn’t sound like banking and finance and capital formation.
  • Dodd-Frank is going to get trimmed. Notwithstanding everything I just said, and notwithstanding the potential inconsistency about trimming Dodd-Frank while at the same time maintaining some level of interest in reinstating Glass-Steagall, there has been too many explicit promises about Dodd-Frank and there is too much of the Republican establishment in the House and Senate that is panting over a repeal not to do something.  I think we are likely to see the small banking community benefited.  We are likely to see a rollback of the SIFI regulation which is something of a dog whistle issue for much of the business establishment.  We will see some attention paid to the Consumer Financial Protection Bureau, but I have a hard time seeing a real rollback of the Volcker restrictions on proprietary trading or investment by our banking community.  Regretfully, I have a hard time seeing a rollback of the Risk Retention Rule which is becoming so intrusive into our marketplace.  Reversing Volcker just flies in the face of the energy around Glass-Steagall and the populist meme which is at the heart (heart?) of Trumpism.  And by the time the doyens of the House and Senate get around to thinking about Dodd-Frank, the market will have accommodated the current rules, capital formation will have survived and large swaths of the financial community will be very, very invested in risk retention and the other infrastructure of Dodd-Frank.  No compelling brief here for repeal.  So let’s get used to it folks, it’s going to be here for a while.
  • Except for signature headline-grabbing ideas, I often wondered during the campaign how different Mrs. Clinton and Mr. Trump were on fundamental issues of the role of the state. I don’t think Mr. Trump is a small government guy.  I think Mr. Trump shares a lot of elite views on the power of the state to do good.  I really, really doubt whether the Code of Federal Regulations will shrink a page over the next 4 years.
  • While I don’t expect major legislative change, I am much more hopeful about an improved relationship with the regulatory community. Depending upon the political leadership at the top of the SEC and the prudential regulators, I would expect a more engaged and open relationship with the regulators.  I am hopeful that this might result in us receiving some guidance from the regulators on the risk retention rules and the other annoyingly vague yet important banking regulations that we have to deal with, so perhaps we won’t have to continue to flounder around in the dark.  Perhaps even, if I can be so bold or perhaps so jejunely optimistic, we might get technical corrections to help with the notion of qualified mortgages and, can I say, yes, perhaps even the single asset single borrower (SASB) structure?  Such speculation gives me chills.  But before I get carried away, remember that the regulatory apparatchiki sitting below our elected leaders is not going to swap out on January 20.  They’re not going to put a new Trump sim card in their brain.  The views, perceptions and biases of these people who make and implement the rules are not going to change overnight, and perhaps not quickly.  So while I think we may see a different relationship with the regulatory state, I’m not expecting it on January 21.
  • Trump ran against the Fed, but now the Fed may be his friend. It’s a very unusual president who doesn’t love a dove.  We are not looking at major changes in monetary policy my friends.  If the markets quiver over the next month, the long awaited December rate hike may yet evanesce and right now it looks to me that the chances of the yield curve shifting further upward versus staying roughly in the current range are balanced.  The president-elect is promising infrastructure spending and on that he may have the Democrats on board.  He is promising tax reductions (not so much re Democrats).  He is promising increases in defense expenditures.  He is promising affordable healthcare.  He is promising tax credits and goodies for childcare.  He’s promising a lot and it will cost a lot.  How do you square that circle?  Keep your borrowing costs down.
  • Will we be coming together to get big things done? Are we on the cusp of halcyon days of practical, balanced, humble yet effective government?  There’s been a shocking amount of happy talk recently.  But I don’t really see epochal changes on the horizon.  We still have serious structural problems, we have a grumpy electorate, we still have divisive politics and precious few politicians willing to stake their re-election life in the political middle.  Typically, when we see one party control all three branches of the representative government, they seem to fritter away a lot of opportunities and internecine warfare and boy oh boy is the stage set for internecine warfare among the R’s.  That being said, the R’s are poised to pick up an even larger majority of the Senate in 2018, as 25 Democratic senators (many of them moderate) will be up for election, creating incentives for compromises to be struck before the clock strikes midnight.
  • Infrastructure may be the bright spot in this commentary. Yes, we all get we really need it.  Our streets look like Mosul.  Our airports look like little bits of the third world and I swear to God all the Amtrak trains have square wheels.  Yeah, we really need it.  That’s going to cost a lot of money.   How’s that going to paid for?  Taxes going to go up?  Don’t think so.  Ah, credit.  See my comment above regarding the Fed.  That’s your answer.
  • Speaking of taxes, one glaring difference between the candidates was on tax policy. Could we just fix the corporate tax mess and leave the more emotive issues of individual taxation aside?  Maybe, as with infrastructure, there’s a place for our elected representatives to get together to get the tax code a little less bad.  Maybe they will at least bring the $2 trillion home that has been stuck overseas because of the crazy US unitary tax policy.  Again, this is a place where Republicans and Democrats and Mr. Trump may all be able to get together.

So, the past is perhaps not prologue, but I don’t see wrenching, end of history type changes coming to the banking and financial sector.  Is Dodd-Frank going away?  I really doubt it.  Will the regulatory burden on our major financial institutions be materially diminished?  Again, I rather doubt it, but we can always hope.  Might life get better for the Jimmy Stewart banks?  Probably, but really who cares?  Will risk retention go away?  I don’t think so – make that, I am pretty sure not.

And finally, a shout out to Marty Schuh, who leads CREFC’s legislative and regulatory policy work.  He told me (and anyone else who would listen) back in the spring that Mr. Trump would win the Republican nomination.  He told me that the Brexit leavers would prevail.  And then he told me that Mr. Trump would win the election.  Even when things looked remarkably dim for the Trump campaign, he was steadfast in his views.  Genius.  So maybe we just ask him what’s going to happen next.  Marty?

And now back to work, deals need to get done, business plans for 2017 need to be inked, but in many respects, the game may change in material and consequential ways.  If you think you know what’s going to happen next, my guess is you’re wrong.  It’s going to be a wild ride.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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