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Ending Dodd-Frank

On at least one key point covered during his opening keynote at Private Equity International's CFOs & COOs Forum held in late January, in New York, Alan Greenspan was preaching to the converted. Dodd-Frank, the 2010 federal act designed to reform Wall Street and protect the US economy from financial disaster, was a misguided and damaging piece of lawmaking that needed throwing out, the iconic former Fed chairman declared.

Lest there be any doubt, “it was the worst economic policy since Nixon's wage and price controls”, the 90-year-old said, referring to the 37th US president's doomed gamble of 1971 to bring down inflation.

Prior to Greenspan taking the stage, no fewer than 85 percent of the 500-odd private equity practitioners in the room had voted in an electronic poll that Dodd-Frank should indeed be dismantled. 

Greenspan, for his part, was with them all the way on the issue.

He told the crowd that the free-market enthusiast in him would go as far as eliminating regulation of financial intermediaries altogether, relying instead on risk capital requirements of 20 percent or higher to focus managers on curbing their animal spirits to prevent excess. If this led to a reduction in lending, he added, then surely it would only prohibit the irresponsibly risky transactions that shouldn't have been underwritten in the first place.

However, Greenspan being Greenspan and displaying the same real-world pragmatism he also embodied during his 19 years at the helm of the US central bank, he went on to acknowledge that no such arrangement would ever pass muster politically. In fact, of team Trump's ability to deliver a root-and-branch overhaul of Dodd-Frank, he spoke with great scepticism: “The administration will try to take it apart and perhaps will take half of it down, but I don't think that's enough.”

In much the same vein, many of the CFOs and COOs present also attached a low probability to the idea that Trump's regulatory refurbishment would actually result in something transformational. “It will be really hard to fully reform regulation,” one speaker said, while a second described the prospect of a comprehensive dismantling of Dodd-Frank as “unrealistic” – comments reflecting the rather fatalistic view that bureaucratic institutions, once created and endowed with legally enshrined powers, tend to find ways of securing their own survival.

So instead of the government demolishing Dodd-Frank altogether, American private equity practitioners are resting their hopes merely on some favourable tweaks to the existing framework, a lighter enforcement touch than what the SEC and its sister agencies became known for during the outgoing Obama administration, and also a careful handling of the most relevant elements of the US tax code.

With regards to the latter, there are growing fears that under the new regime the deductibility of interest payments on corporate debt will be abolished, and that the rules around taxing carried interest might change as well. As of yet, there is simply no knowing how these and a thousand other US policy issues are going to play out.

Only two things look certain: firstly, the private equity industry will have to hold its breath until it finds out how the rules that govern it will actually change; and secondly, on the question of how much scope there is for radical reform, Greenspan for one isn't holding his breath.