Is Wall Street being bamboozled by Romney?September 6, 2012: 11:08 AM ET
The finance industry is overwhelmingly backing Mitt Romney over Barack Obama for president, but it's not clear how a Romney presidency would really benefit Wall Street.
By Cyrus Sanati
FORTUNE -- Wall Street is taking quite a pounding at the Democratic National Convention this week as speakers, like Massachusetts Senate hopeful Elizabeth Warren, fire populist missives so inflammatory it would cause even the most liberal banker to cringe. While the speeches are meant to fire up the Democratic base, they are also likely to induce some financiers to double their contributions to Republicans, namely, Presidential hopeful Mitt Romney.
But is that a safe bet? Much of Wall Street's concerns derive from the passage of the Dodd-Frank financial reform bill, even though some of the most controversial aspects of the bill seem permanently lost in regulatory limbo. Going forward, there remain questions as to what, if anything, a Romney Presidency could truly deliver in the next four years that would be so different from a second term Obama presidency. Given that uncertainty, Wall Street could possibly be better off sticking with the devil they already know.
Wall Streeters have donated heavily to Romney and his Super-PAC "Restore the Future." Billionaire financiers, including hedge fund managers Paul Singer of Elliott Capital, Julian Robertson of Tiger Management, Louis Bacon of Moore Capital and John Paulson of Paulson & Co, have given millions of their own money to ensure a Romney victory.
Conservatives like Singer were always expected to pour tons of money into Republican coffers, but there has been a noticeable shift to the right this election cycle among financial professionals. For example, in 2008, employees at Goldman Sachs gave 75% of their campaign contributions to Democratic candidates, according to data compiled by the Center of Responsive Politics. But this year the numbers have nearly flipped, with 70% of Goldman employees giving their campaign donations to Republicans, with only 30% going to Democrats.
The money Romney raised from Wall Street will go a long way in the next two months as he gets set to pummel the airwaves with anti-Obama adverts in swing states, like Ohio and Florida. But while Wall Street toasts to a Romney victory, there remain questions as to what exactly such a victory would mean for the country, let alone for Wall Street. Sure, the markets are expected to get a small bounce from a Republican victory, but for the bounce to hold, Romney will need to deliver something to investors.
So what will Romney do to repay his friends on Wall Street if elected? That's the multi-million dollar question – one, unfortunately, in which the answer is painfully elusive. Romney has been cryptic as to his views on almost everything Wall Street related, from carried interest to regulatory reform to taxes.
One would think that a former private equity maven would have a definitive position on carried interest, given the millions of dollars in taxes that carried interest tax rules have saved him over the years. In 2007, Romney said he would continue to allow carried interest to be taxed at the lower capital gains tax rate of 15% as opposed to the higher personal income tax rate. Since then, though, his views have gone from definitive to murky. That may be because he doesn't want to seem like some fat cat Wall Street sympathizer, but given his background and wealth, it is hard not to see him that way. Backing something as simple as carried interest would therefore seem like a no brainer, but for Romney, it's now a maybe.
Indeed, there are many subjects dear to Wall Street that Romney either refuses to give a definitive answer to or refuses to discuss in depth. For example, on financial regulatory reform Romney is clear – he will work to repeal Dodd-Frank from day one and replace it with a more "sensible" financial reform package. That's pretty much all he says about that. He doesn't go into any specifics as to what reforms he would put forth in its place or even how he plans on overturning the bill. This is important because Republicans have not put forth an alternative to Dodd-Frank, even though they are in control of the House. That's probably because lawmakers from both parties consider Dodd-Frank to be a done deal. Indeed, Republicans in both the House and the Senate are on record saying that Dodd-Frank isn't going to be repealed. After all, Republicans were heavily involved in crafting the bill as written. In the Senate, one Republican and one Democrat from the Senate Banking Committee were paired off to craft different sections of the bill. Once all the pieces were put together, like bad theater, Republicans sent out press releases denouncing the bill.
Lastly, there is the promise to reform the nation's precarious fiscal system by reversing the growing budget deficit and by paying down the $16 trillion national debt. A strong fiscal system is vital to keeping the U.S. credit rating from tumbling down like it did last summer, something Wall Street wouldn't like to see again as it could delegitimize it as a safe place to do business.
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It is here where Romney promises lots but delivers little. First, he wants to make the Bush-era tax cuts permanent, while at the same time balancing the budget and fully funding the military. For that to occur there would need to be a massive boost in the nation's GDP – like the sort of economic growth seen in China (pre-recession) for many years in the future. Perhaps Romney thinks something as economically transforming like the Internet is about to be invented, something that would boost productivity by leaps and bounds, leading to explosive growth. One would hope such a transformative event was on its way, but it would be like winning the lottery – it would be great, but the chances are slim.
Ultimately, the U.S. will need to grow its way out of this economic malaise and it is unclear how either candidate will facilitate such growth. Wall Street needs this growth to get back in business. After all, one area that Wall Street and its foes can agree on is that a weak economy is in no one's interest. When Americans feel good about the economy they take on more risk and invest more of their money in the market.
President Obama has put forth a number of plans to get the economy going again – most of which are as unrealistic as those proposed by Romney. Nevertheless, it is worth looking at them to see if Obama is really as anti-business and anti-investment as the Republicans claim. First, Obama's plan will leave the Bush era tax cuts mostly in place when they are up for expiry at the end of the year, with only the top tax bracket losing their benefits. That means the top bracket will see their income tax rates go from 35% to 38%, their capital gains tax rate go from 15% to 20% and their dividends tax rate go from 15% back up to their personal tax rate. It would also call for taxing carried interest at normal tax rates, something that makes hedge fund and private equity executives nervous.
If one stops there, it certainly looks like President Obama is trying to stick it to rich folks. But in order to stimulate growth, the Obama plan hands back much of the revenue it reaped from the rich to – corporations! Yes, as seen in his 23-page dictum on taxes, Obama plans on lowering the corporate tax rate from 35% to 28%, while capping the tax rate on manufacturers to 25%. The lost tax revenue from the cut would cost the government $700 billion to $840 billion over the next 10 years. The hope is that the cut will create enough growth to fill that gap and then some – (see internet argument above). Romney says he also wants to cut the corporate tax rate, but by even more than President Obama, down to 25%. But why is Romney stopping there? Why not cut it to 15% or 1%? Heck, tax cuts for everyone!
Could it be that Wall Street is being bamboozled by Romney? After all, he can't seriously make good on all of his promises without a miracle– it's just simple math. President Obama's plan, while it seems harsh on the surface, is a far more realistic starting point to begin talking about real fiscal reform. Tough decisions need to be made all around to get the country back on track. Despite the venom being hurled at Wall Street this week at the DNC, at least the Street has an idea as to what President Obama might do when he is in power. Wall Street can plan for that, eliminating political risk. As for Mitt Romney and what he stands for? That's a bet even Wall Street might find too risky to play.