President-elect Donald Trump wants to repeal banking regulations instituted by Dodd-Frank, and that could create problems for private debt managers whose funds flourished as banks retreated from traditional lending.
Supposing Dodd-Frank gets repealed, the running theory is that banks would reemerge as competition to so-called shadow-banking arms run by asset managers like Blackstone Group or Kohlberg Kravis Roberts.
More competition could pressure returns for investors in private debt funds. Weaker returns lead to smaller fundraises, which leads to reduced fee revenue. This worst-case scenario ends with private debt managers wondering how their golden goose got cooked by a billionaire Republican president.
What’s lost here, including in my own coverage, is the amount of time it takes for grand plans to translate into workable legislation.
It’s not as if Congress can snap its fingers and repeal Dodd-Frank (or do anything, really). Change comes slowly, even with Republicans in control of the White House and both houses of Congress.
Let’s assume Republican congressional leaders attempt full repeal. Powerful Democrats like Sen. Charles Schumer have already pledged to fight any rollback and would likely do so by pulling on the same populist levers that put Trump in the White House. Even if the GOP effort succeeded, it would likely take months, if not years, and victory would come at the expense of significant political capital.
After Trump signs this hypothetical alternative to Dodd-Frank into law, regulators would spend the length of his presidency unwinding or reestablishing alternative rules. The pace of any significant overhaul would be glacial.
Case in point: Six years after its passage, the SEC has yet to adopt clear rules for 19 of the 87 rule-making provisions staked out by Dodd-Frank, according to its website.
Banks would respond in kind, spending millions on lawyers to help them craft leaner compliance programs befitting the new regulatory regime. Last but not least comes the reestablishment of bank-lending platforms, a simple matter of hiring or developing experienced teams and sourcing reliable, replicable deal pipelines.
Then, and only then, would U.S. banks pose a threat to private debt fund returns.
A popular-to-the-point-of-cliche metaphor compares governing to steering an ocean liner. Trump’s presidency, even (especially?) with its bombast and bold promises, won’t be a 180-degree pivot so much as a long, arcing curve in a different direction.
With that kind of lead time, private debt managers should have no problem spotting and preparing for any trouble on the horizon.
Republican presidential nominee Donald Trump speaks during a campaign rally in Cedar Rapids, Iowa, on July 28, 2016. Photo courtesy Reuters/Carlo Allegri