Fall is in the Washington air after a very long, hot summer.  But also—and more significantly—so is a major realignment of political power.  It is certain that the Democrats will lose their decisive control of both the House of Representatives and the Senate in the November elections.  It is highly likely that the Republicans will seize control of the House of Representatives, which will fundamentally change Washington’s political dynamics.  The optimists would say that the return of divided government will bring out the best of both parties as they will be forced to work together for the common good.  Let us hope so.  In reality, however, the political and legislative gridlock may become even more pronounced in the next (112th) Congress. 

Very little should be expected of the 111th Congress in its final months, even if there is a lame duck session following the November congressional elections.  Lame ducks—and there may be quite a few—are well known for their lack of cooperative spirit.  Again, it will be argued that this is not all bad, that this Congress has been too activist and has overstepped its bounds on health insurance and financial restructuring reform.  But if the Congress is unable to reach agreement on tax policy in 2010, our nation will suffer.  Legislation is needed to prevent the wholesale expiration of the Bush tax cuts—one example that hasn't received much media attention.  The estate tax is at zero for 2010.  Come January 1, 2011, it will revert back to the pre-Bush level—an exemption of only $1 million per individual, plus a punitive tax of 55% on estates with amounts over this level.  Neither party’s leadership supports allowing this to happen, but this is no guarantee that they will be able to work things out.  The forces in the Republican party demanding the permanent elimination of the so-called death tax are strong, but so are the forces in the Democratic party opposed to vast fortunes being passed on to heirs tax free.  There is a middle ground—the political leadership just hasn't been able to find it.  The result has been mounting chaos in rational estate planning and an adverse impact on our struggling economy.
 
Major realignments of political power have a very human face.  The congressional leadership that the financial services industry has worked with and grown to love (or hate) will change dramatically.  Senate Banking Chairman Chris Dodd (D-Connecticut) is retiring.  House Financial Services Chairman Barney Frank (D-Massachusetts) will lose his chairmanship if the Republicans capture the House.  The highly respected second ranking Republican on Senate Banking, Robert Bennett of Utah, lost to a Tea Party candidate in the primary and will not be returning.  Even if the Democrats retain control of the Senate by a sharply reduced margin, major uncertainties bedevil leadership succession in Senate Banking.  Senator Tim Johnson (D-South Dakota), who is in line to succeed Chairman Dodd, has not fully recovered physically from a brain trauma that has affected his speech.  Given their seniority, Senators Jack Reed (D-Rhode Island) and Charles Schumer (D-New York) are logically in the hunt, and/or could function as the de facto committee chairman.  But regardless, it would be awkward.
 
Anticipating that their party may capture control of the House and depose Barney Frank as House Financial Services chairman, a power struggle is already underway in the Republican ranks to choose Frank’s successor.  Under the Republican control scenario, it is far from a given that Spencer Bachus of Alabama, the committee’s ranking Republican, would be selected by the 112th Congress’ new speaker of the House, John Boehner of Ohio, to lead the committee.  Mike Castle of Delaware, the next ranking Republican on the committee, is running for the Senate.  It is within the realm of possibility that Speaker Boehner could reach far down into the committee's Republican ranks to choose the new chairman, bypassing more senior stalwarts like Ron Paul of Texas.  Better a young gun than Ron Paul—the best interests of the Republican Party and our nation would not be served by having a House Financial Services chairman whose well-publicized mantra is “end the Fed.”  
 
The bottom line is that there will be enormous flux in the top congressional leaders with responsibility for the financial services industry.  This comes at the very time when the regulators will be all-consumed with writing the massive new regulations implementing the Dodd-Frank legislation.  Fortunately, Fed Chairman Ben Bernanke, who dodged the bullet of a major restructuring and weakening of the Fed as Dodd-Frank was considered, has more than three solid years left in his second four-year term.  And highly respected and influential FDIC Chairman Sheila Bair, whose agency won impressive new powers in Dodd-Frank, has two years left in her term. Both are Republicans.  Two years also remain in the term of Bair’s able vice chairman, Marty Gruenberg.
 
The 112th Congress’ powers that be in the House Financial Services and Senate Banking committees will, of course, work hard to influence the financial regulatory agencies as they exercise their massive but often vague Dodd-Frank rule writing responsibilities.  Clearly, if the Republicans capture both the House and Senate, their impact on the regulators will be greater. The Republicans have also been closer to the Wall Street lobby, which opposed the legislation and continues to work to weaken it in the rule-writing process.  John Boehner, a former member of the then-House Banking Committee, didn't build any bridges to President Obama's top economic team by calling for the ouster of Treasury Secretary Tim Geithner and top White House economic and financial policy aide Larry Summers. This Boehner initiative is a divisive marker in the sand for those who still have the illusion of a less partisan approach to our future financial policy.
 
Last but not least, another major leadership transition is in the works that will impact the financial sector.  The ABA's Ed Yingling announced his retirement shortly before the Congress signed off on Dodd-Frank.  His replacement could be named as early as the upcoming ABA convention.  The ABA faces serious bridge-building with the administration, among others, in the months ahead.