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Split Congress could mean more gridlock on Capitol Hill

By KEVIN DRAWBAUGH
November 3, 2010

(REUTERS/Rebecca Cook)

Republicans grabbed the steering wheel of the U.S. House of Representatives on Tuesday, but weren’t expected to get out of the driveway when it comes to restraining Wall Street reforms and fixing housing finance.

A political standoff lies ahead for two years on key banking and housing issues as election returns showed Democrats losing control of the House, but retaining a narrow majority in the U.S. Senate, as widely expected.

President Barack Obama’s veto and Democratic Senate power will likely block any attempts by Republicans to roll back the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act that Obama signed into law in July.

Similarly, there was little expectation of a comprehensive fix for the broken U.S. mortgage market before the 2012 presidential election. Lawmakers are expected to blame each other for the mess in numerous public hearings, however.

“I believe we are looking at legislative gridlock,” said Chris Dolan, an assistant professor of political science at Lebanon Valley College.

Gridlock will reduce regulatory uncertainty for the financial markets by preventing new legislative initiatives, but it could have a darker side, as well, analysts said.

If the economy runs into serious trouble again, a stalemate on Capitol Hill could restrict the government’s ability to intervene decisively to maintain stability.

“When you need Congress to act quickly, this kind of divide is going to complicate that,” said Jaret Seiberg, a policy analyst at the Washington Research Group, an advisory firm.

Still, Seiberg said, Republican gains in Congress are broadly good news for banks because they “frustrate those who want to see further expansions of the government’s authority … The ability of this administration to get major new programs done was already limited. This just seals the deals.”

With conservative Tea Party activists coming to power, Republicans could push for confrontation on financial reform, possibly by trying to strangle Dodd-Frank with Congress’ purse strings. Depriving regulators of funding needed to implement the law would be one way to undermine it, aides said.

But even on this front, only incremental changes will be attainable and mostly at the administrative level where Dodd-Frank is already being implemented, analysts said.

“While we would not categorize large banks as ‘losers’ we do not expect that they will benefit from a change in control of Congress as much as some investors might expect,” said Brian Gardner, analyst at investment firm Keefe, Bruyette & Woods.

Copyright © 2010 Reuters

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