Wall Street Faces Subpoenas, More Deregulation From Divided D.C.

(Bloomberg) -- Wall Street, fasten your seat belts.

Now that Democrats have taken control of the House, Representative Maxine Waters is in line to lead the financial services committee, a panel with significant clout over banks, investment firms and their regulators.

She's pledged an aggressive agenda that could trigger unwelcome headlines for the finance industry: holding lenders accountable for abusing consumers, launching fresh investigations into companies such as Wells Fargo & Co. and Equifax Inc., and scrutinizing bank-friendly watchdogs installed by President Donald Trump.

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Yet if Wall Street can endure bouts of turbulence, it will probably stay on the same pleasant flight pattern that has defined much of Trump's first two years in office. That's because Democrats lack the votes in the Senate to get their legislative priorities through Congress, such as repealing the president's tax cuts. Also, Waters can harass the Federal Reserve and other regulators, but she can't stop them from rolling back rules passed after the 2008 financial crisis.

“There will be a lot of YouTube moments, but not a lot of bill-signing moments,” said Richard Hunt, president of the Consumer Bankers Association. “There will be reputational risk, and it will be legislative light.”

If Waters, 80, hopes to notch any policy victories, lobbyists say she will have to focus on less-controversial issues that appeal to moderate Democrats and even some Republicans.

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While it's difficult to see bitterly divided lawmakers forging compromises, lobbyists argue there could be deals struck on overhauling Fannie Mae and Freddie Mac's role in the housing market and making it easier for technology companies to compete with banks in offering financial services.

“She can be a tough dealmaker on Capitol Hill, and it's likely she's going to be looking to make some deals on a number of things,” said Dan Berger, president of the National Association of Federally-Insured Credit Unions.

Representative Patrick McHenry is in line to be the panel's top Republican. The North Carolina congressman has said he and Waters have a good working relationship, and they agree on some issues, including that it should be easier for startup companies to raise money from investors.

In the Senate, Idaho Republican Mike Crapo is poised to remain chairman of the Banking Committee. But if the GOP shakes up the leadership of other panels, he could end up running the Finance Committee, which handles tax policy. If Crapo does move on from banking, Pennsylvania Senator Pat Toomey, a longtime ally to the financial industry, is scheduled to take the gavel.

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One caveat about Waters is that it's ultimately the House's incoming Democratic leaders who will decide the next committee heads. If Representative Nancy Pelosi isn't elected speaker then the odds increase that someone other than Waters will take the reins of the financial services panel.

Here's a look at the financial issues Congress may focus on with Democrats in control of the House and Republicans keeping their majority in the Senate:

Investigations

Wells Fargo tops the list. California's Waters and other Democrats say they want the bank's top management, including Chief Executive Officer Tim Sloan, fired in the wake of multiple scandals that started with the revelation that bank employees opened millions of accounts without customers' consent. Hearings and subpoenas for additional documents are likely.

Equifax is another target of Democrats. Both moderates and progressives agree that the company's response to a 2017 data breach that resulted in the theft of millions of consumers' personal information is worthy of more hearings. Lawmakers will likely propose legislation that would impose tough rules on credit-reporting companies, which could have consequences for Equifax competitors TransUnion and Experian Plc. Such a bill could also impact banks that rely on Equifax's data to issue mortgages and credit cards.

Trump's Finances

Waters has repeatedly called for Trump's impeachment, and would likely use her subpoena power as financial services chair to try to ferret out any financial ties he has to Russia. A focus might be Deutsche Bank AG, which has drawn scrutiny over loans it made to Trump before he became president and the bank's role in helping wealthy Russians illicitly move billions of dollars out of the country.

Housing Overhaul

Waters has said that dealing with Fannie and Freddie, which have been under government control for more than a decade, would top her list of legislative priorities. She hasn't provided specifics on what she might try to do with the companies, which enable banks to issue more mortgages by buying loans from lenders and packaging the debt into bonds. Waters has criticized Republicans for pushing proposals that would limit the government's role in the housing market. She's also focused a lot of energy on making homes more affordable for low-income buyers, including minority borrowers.

Overhauling Fannie and Freddie has proved a tall order, with multiple lawmaker attempts ending in failure. If policy makers do make another push, the Senate might take the lead and the Trump administration would be expected to play a major role.

Dismantling Megabanks

With Democrats in charge of the House, there will likely be renewed calls for breaking up JPMorgan Chase & Co., Citigroup Inc. and other Wall Street giants. Progressives have called for reinstating some version of the Glass-Steagall Act, which kept commercial and investment banking separate for almost seven decades until its 1999 repeal. Waters has proposed legislation that would give regulators new powers to dismantle lenders that have a record of abusing consumers.

While the chances that any bill would get through the Senate are slim, rhetoric attacking big banks and hearings on the topic could rattle Wall Street. At a campaign event earlier this year, Waters told an audience that when she takes the gavel it will be "payback time" for banks and insurance companies.

Scrutinizing Regulators

Waters has promised tough scrutiny of officials appointed by Trump. High on that list is the Consumer Financial Protection Bureau's Mick Mulvaney. Other regulators Waters has criticized include Comptroller of the Currency Joseph Otting and Randal Quarles, the Federal Reserve's vice chairman of supervision. She's likely to demand that they and others testify frequently before the financial services panel to answer questions about their efforts to soften post-crisis rules.

To contact the reporter on this story: Elizabeth Dexheimer in Washington at edexheimer@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Alexis Leondis

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