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How do you spell relief on Wall Street? SEC gridlock

November 27, 2012: 11:54 AM ET

With Mary Schapiro's departure and Elisse Walter's appointment as chairman, the SEC is now balanced, which means Dodd-Frank reforms will remain unresolved for the time being.

By Cyrus Sanati

elisse-walter-sec

New SEC head Elisse Walter

FORTUNE -- The departure of Mary Schapiro as head of the Securities and Exchange Commission is bad news for Dodd-Frank, but great news for Wall Street – at least in the short term. President Obama's choice of SEC commissioner Elisse Walter as Schapiro's successor creates a hopelessly deadlocked Commission at a time when key parts of the financial regulatory overhaul require action from the agency to become law. The President will need to use some valuable political capital in order to put the SEC commission back together again if he ever hopes to see some of the more controversial parts of Dodd-Frank ever go into force.

It wasn't much of a shock to Wall Street that Schapiro was stepping down from her post as head of the SEC. Without skipping a beat, the administration announced that Elisse Walter, one of the four SEC commissioners, would succeed Schapiro as head of the agency. Walter's appointment to the big chair is seen as temporary, and it is easy to see why by looking at her resume: it reads like a junior clone of Schapiro.

Pretty much a life-long financial bureaucrat, Walter has made the rounds at all the big market regulators - from the Commodity Futures Trading Commission, where she served as general counsel to the agency, to the Financial Industry Regulatory Authority, where she served as a senior executive vice president of the agency's regulatory policy program. Her time at all those posts happens to coincide with periods when Schapiro was heading them.

Given Walter's subordinate roles throughout her career, it is doubtful that the administration would want her to lead the agency at this critical juncture for any extended period of time. Indeed, she reportedly isn't interested either, as she plans to leave the SEC when her four-year term as commissioner expires in November of 2013.

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Being a virtual clone, Walter is expected to follow the same course as her former boss, with no major changes or deviations expected. But while she will carry the torch for the administration, she probably won't be able to do much of anything while she is in power. That's because the ruling five-member Commission has suddenly gone from having three left-leaning Commissioners and two right-leaning Commissioners to just four Commissioners, two right and two left. The seat made vacant from Schapiro's departure will remain empty until the Senate confirms her replacement.

With the Commission now balanced, it will be virtually impossible for Walter to push through the administration's agenda, most notably, the implementation of all the rules still left to be sorted out that are part of the Dodd-Frank financial regulatory bill. Turning the massive bill into rules has been a tough slog for the Commission as they have faced strong opposition from Wall Street. The most controversial aspects of the overhaul, like the Volcker Rule, which would limit a bank's ability to trade and invest its own capital, to the so-called title seven reforms, which overhaul the multi-trillion dollar derivatives market, remain locked in regulatory limbo.

That's great news for Wall Street as it delays implementation of some of the more profit-killing parts of Dodd-Frank -- a delay that many on the Street wish will become the new status quo. The large broker dealers that stand to lose billions of dollars once derivative reform takes place will undoubtedly try to ensure that the two conservatives on the Commission block any attempts to push through title seven. The same goes with the Volcker Rule.

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It is now up to the President to fill that empty seat by appointing another left-leaning Commissioner. He also needs to find a new chairman – someone who can hopefully bridge the gap between Wall Street and Washington, preferably before Walter's term ends next November. But while the Democrats control the Senate, Republicans can filibuster political appointees – indefinitely.

The Republicans have already been successful in slashing the SEC's budget -- now they can bring all rulemaking to a screeching halt. Both the President and the Republicans will need to come to an agreement as to who will ultimately run the SEC if there is any hope of restoring the rule making process. There have been a number of names floated about, from Gary Gensler, the ex-Goldmanite (GS) who now heads the CFTC, to (oddly) Sallie Krawcheck, the former head of Citigroup's (C) wealth management division. Gensler would probably side with the administration regarding Dodd Frank, especially when it comes to derivative reform, so he's probably out. Krawcheck is a total wild card who could swing either way – that instability can be worrying.

Negotiations to avoid the so-called fiscal cliff will most likely divert attention away from this issue for the next month at least, leaving the SEC deadlocked. Wall Street can therefore take it easy this December – but not too easy.  The SEC chairmanship might ultimately be used as a negotiating chip by either side to get what they want. Wall Street could end up winning big here or being thrown right back on the same track.

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