Wall Street prepares to face the musicNovember 7, 2012: 12:36 PM ET
Much of Dodd-Frank and Obamacare have yet to go into effect long after becoming law. Sorry, Wall Street. With Obama's victory, it's now going to become reality.
By Cyrus Sanati
FORTUNE -- As political pundits and ideologues downplay the significance of President Obama's victory last night, Wall Street is scrambling to assess what four more years of Democratic rule could mean for the markets and the nation's massive fiscal problems. While it is true that the balance of power hasn't changed – the House of Representatives remains solidly Republican while the Democrats continue to control the Senate – there are still some firm advantages for the Democrats with this win, which some on Wall Street had hoped to avoid with a Romney presidency. Even if nothing new passes during the next four years, President Obama's presence will be felt as strongly as it was in his first term.
It is easy to dismiss President Obama's reelection as simply a vote for more gridlock. Without full control of Congress, many see this as a hollow victory as the Democrats lack all the necessary legislative parts to steamroll a liberal agenda. It is highly likely that President Obama will fail to deliver on some, if not all, of his big campaign promises. From raising taxes on the top 2% to reforming entitlement spending, it is highly unlikely that anything transformative will make it through a Republican-led House of Representatives.
In the past, Democrats and Republicans somehow managed to hash out compromise on critical issues facing the country. President Reagan was able to overhaul the corporate tax code in 1986 with the help of a fiercely liberal Democratic-led Congress. President Clinton was able to pass major reforms in entitlement spending while working with a fiercely conservative Republican-led Congress.
But that's no longer the case. In the last four years, Republicans went to great lengths to block anything drafted by this President, even if it was consistent with Republican ideals. Indeed, the President was only able to pass significant legislation in his first two years in office when the Democrats controlled Congress. The big stimulus, as well the overhaul of Wall Street (Dodd-Frank) and the health care system (Obamacare) all made it through before the critical mid-term elections of 2010, after which the Democrats lost control of the House and had their majority in the Senate whittled down.
One just has to look back on the fate of those Republicans who crossed party lines to understand why compromising doesn't pay. In the case of Dodd-Frank, two of the three Republicans senators who voted with the Democrats -- Senator Olympia Snowe of Maine and Scott Brown of Massachusetts -- were replaced by Democrats last night. Snowe retired and Brown lost his seat to Wall Street's bête noire, Elizabeth Warren. Senator Susan Collins of Maine remains in power, but she wasn't facing reelection last night.
Of the three House Republicans that supported Dodd-Frank, only one still remains in office, the vehemently anti-war Rep. Walter Jones of North Carolina. Rep. Mike Castle of Delaware gave up his seat to run for US senate in 2010 but was shockingly beaten in the Republican primary by Tea-Party darling Christine "I'm not a witch" O'Donnell, who then went on to become a political laughingstock, costing the Republicans a major Senate seat. Rep. Joseph Cao of Louisiana, the nation's first Vietnamese member of Congress, was defeated in 2010 after he was labeled the most liberal Republican in Congress by the National Journal.
So it is clear that going rogue in today's Republican Party is pretty much a death wish, especially when it comes to legislation involving Wall Street. Unless the Republican leadership gives up the "party of 'No'" label and starts compromising, it is highly unlikely that we will see any new major legislative bills like an Obamacare or a Dodd-Frank even come up for discussion (at least in the next two years).
Nevertheless, President Obama is not powerless. His reelection is still meaningful, as it will allow him to make sure that Dodd-Frank and Obamacare are both implemented to his satisfaction. Believe it or not, much of Dodd-Frank has yet to go into force two-and-a-half years after becoming law. The Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) have slowed the critical rule-making process down to give Wall Street adequate time to comment and prepare for implementation. In the meantime, they have both been fighting lawsuits filed by conservative groups that are bent on watering down the bill. If Romney had won the presidency, he would have certainly replaced the heads of both agencies with conservatives whose only mission would have been to slowly vote down critical parts of the bill. And there are plenty of critical parts still up for implementation, most notably, those rules governing derivatives.
Gary Gensler, the head of the CFTC, and Mary Schapiro, of the SEC, have both supported the President's agenda wholeheartedly and have fought off attacks from the more conservative members of their respective commissions. They will continue to do so if they choose to stay on in their respective roles. If they leave (Gensler is one name being tossed around to succeed Treasury Secretary Geithner), then President Obama have the power to appoint like-minded commission heads who will make sure that Dodd-Frank is implemented in a sound manner. President Obama wants to protect his legacy, so it is in his interest to make sure Dodd-Frank doesn't become a dud.
But while Wall Street may lament President Obama's reelection when it comes to Dodd-Frank, they aren't totally getting shafted here. After all, the President reappointed Ben Bernanke to run the Federal Reserve, who has kept in place an extremely liberal (in a good way for Wall Street) monetary policy. This has allowed the country to fight off deflation while also giving a nice boost to the markets. It should be noted that when Obama took office in January 2009 the Dow was trading around 8,000 – it's now trading around 13,000 – a 5000 point difference. Obama is likely to keep the Fed Chairman when his term is up, but if Bernanke chooses to leave on his own, he will most likely appoint Bernanke's ideological clone, Janet Yellen, to take up the position. Romney said on the campaign trail he would have fired Bernanke if he won the presidency and replace him with a more conservative Fed chairman – Wall Street wouldn't have liked that at all.
But the president's power goes beyond just controlling the nation's bureaucrats. Through "executive order" the President can unilaterally take this country into war if he wanted to (well, technically only for 60 days before needing congressional authority, but that is still some major power). Obama's cool head has helped to ease market fears of tensions in the Middle East, especially those involving Iran. A Romney presidency would have introduced an air of uncertainty, something the energy markets don't need right now.
So even with a sclerotic Congress blocking his path, the President still wields some considerable power. The Republicans are going to do a lot of soul searching in the next few weeks to figure out how it was possible that they not only lost the presidency but also every majorly contested Senate seat last night. The last four years have been a no-compromise zone in Washington. With the "fiscal cliff" rapidly approaching, Republicans need to reassess their policy or else they risk going into the next election trying to explain why they allowed both a huge tax increase and a huge cuts in defense spending under their watch.
To avoid that fate the Republicans need to make some serious changes and go to the White House willing to do a deal. President Obama doesn't have to move here – and it is that inaction that truly shows the extent of his power.