Despite the internal complaining, the financial sector has actually had it pretty easy under President Obama since the Great Recession/Credit Crisis. The landmark Dodd-Frank Wall Street Reform and Consumer Protection Act (known as the Dodd-Frank Act), under many guises, wasn’t harsh enough. There hasn’t been much malice directed towards Wall Street’s biggest banks or financial institutions, so for the majority of financial stocks, it’s been business as usual.
And that’s been reflected in their performance. The sector proxy – the Financial Select Sector SPDR Fund (XLF) – is up a staggering 98% in just five years.
However, the good times in the financial sector may be ending. And no, we aren’t talking about another banking crisis. In this case, the threat is coming from the upcoming presidential election.
Both Hillary Clinton and her Republican rival Donald Trump have expressed their views about Wall Street. And in the case of Hillary Clinton, the view is that Wall Street is still a very dangerous place for Middle America. For investors in the financial sector, a Clinton Presidency could signal wide sweeping changes to the sector and, ultimately, craft a different a very difficult operating environment.
Boosting Dodd-Frank to the Nth Degree
One of the major criticisms of Hillary Clinton is that she is too close to Wall Street, either through her funding efforts or her paid speeches at investment banks. However, looking at her policies, Clinton could be Wall Street’s biggest nightmare. The overall gist of her plans focus on increasing regulation of the financial sector in order to protect ‘Main Street’ America, which includes adding additional provisions to the landmark Dodd-Frank Act, as well as imposing other regulations designed to weaken Wall Street before another crisis happens. In the end, a Hillary presidency would be a huge headache for almost all matter related to financial stocks.
The heart of Clinton’s policy proposals include enforcing and adding to the Dodd-Frank Act. The major piece of financial legislation essentially forced U.S. banks to reduce their reliance on debt for funding. However, the reform bill’s real strength comes from its stop gates on various activities. These pieces of the bill prevent a bank from doing certain kinds of trading or lending, and holding certain assets with one of the biggest being the Volcker Rule.
The Volcker Rule prohibits taxpayer-backed banks from making big bets with their own or their depositor’s money. This removes proprietary trading from the equation. Clinton has vowed to make trading using federally insured deposits a thing of the past by closing loopholes in the Volcker Rule. That could be bad news for some of the biggest investment banks. Both J.P. Morgan (JPM ) and Citigroup (C ) have historically made huge profits through proprietary trading transactions. While they have slowed their efforts since the rule’s implementation, they still continue to trade on behalf of clients (market making) and the bank’s own account. .Clinton’s policies could derail those efforts even further.
Also on Clinton’s hit list could be some of the big banks, such as Bank of America (BAC ). Clinton has already proposed reinstating derivatives “swaps push out” rules and mortgage trading. BAC is a huge player in both of those areas.
And if that wasn’t enough to scare investors in institutions like JPM or Wells Fargo (WFC ), Clinton also wants to cement the ability issued under the Dodd-Frank Act to break up financial firms perceived to be “too big to fail” when they pose a systematic risk to the economy.
Commodities & Derivatives Brokers
Also on Clinton’s hit list has been risky derivatives trading. For years now, the Commodities Futures Trading Commission has received basically nothing in its budget to fight abuses or to enforce many of the policies of the Dodd-Frank or any other piece of legislation. That’s a problem since it’s the main agency designed to regulate banks and other financial firms in terms of derivatives and commodity trading. Clinton’s plan would allow them the oversight to battle shady commodity and derivatives dealings.
This could be a big problem for Goldman Sachs (GS ). Clinton has already proposed reinstating derivatives “swaps push out” rules and limits to commodity investing by non-participants or investors who don’t actually need/use them for their products. GS has continued to be a major player in the derivatives and commodities markets.
As expected Clinton doesn’t take too kindly to either hedge funds or their managers. Many of her plans involve taking on the shadow banking system and the use of dark pools – the favorite stomping grounds of some hedge funds. Clinton has also looked into reducing high-frequency trading through the use of higher taxes. A new ultra-short-term gains tax would be designed to limit the gains and, ultimately, the amount of HFT trading.
While many of the biggest banks dabble in HFT, Virtu Financial Inc (VIRT ) is the main publicly traded specialist. The firm already delayed its IPO once because of pending legislation and scrutiny of it operations. VIRT could significantly suffer under Clinton’s plans.
Finally, Clinton has vowed to continue to protect consumers via the Consumer Financial Protection Bureau (CFPB). The CFPB has continued to come under fire from various lobbyist groups as it’s the main source of protection for consumers against the financial industry. Under Clinton, the CFPB could see a larger budget and more powers to take on the bad guys. This could impact student loan lenders such as Discover Financial (DFS ), auto lenders like Capital One (COF ), and payday loan specialists like EZCORP Inc (EZPW).
The Bottom Line
To say that Clinton is soft on Wall Street is a major misnomer. Under a Hillary presidency, the financial sector could see some major changes that could severely impact their profits and current businesses. Heck, it could even cause them to break up.