On at least one point in his keynote speech at Private Equity International’s CFOs & COOs Forum in New York, former Federal Reserve chairman Alan Greenspan was preaching to the converted. Dodd-Frank, the 2010 Act designed to reform Wall Street and protect the US economy from financial disaster, was a misguided and damaging piece of lawmaking that needed to be thrown out, he declared.
“It was the worst economic policy since Nixon’s wage and price controls,” the 90-year-old said, referring to the late president’s doomed gamble of 1971 to bring down inflation.
Before Greenspan took the stage, no fewer than 85 percent of the 500-odd private equity practitioners in the room had voted that Dodd-Frank should indeed be dismantled. Whatever hopes and expectations that audience had for President Trump, most of them wholeheartedly shared the billionaire’s disdain for the US’s regulatory status quo.
And Greenspan was with them all the way.
He told delegates the free-market enthusiast in him would go as far as eliminating regulation of financial intermediaries, relying instead on risk capital requirements of 20 percent or higher to prevent fund managers getting carried away. If this led to a reduction in lending, he added, then surely it would only prohibit the transactions that shouldn’t have been underwritten in the first place.
However, displaying the same real-world pragmatism he embodied during his 19 years in charge of the US central bank, Greenspan acknowledged such an arrangement would never make it past the political hurdles. In fact, he was sceptical that a root-and-branch overhaul of Dodd-Frank was possible: “The administration will try to take it apart and perhaps will take half of it down, but I don’t think that’s enough.”
Many of the chief financial officers and chief operating officers present were similarly sceptical that Trump’s refurbishment of the rules would result in a transformation. “It will be really hard to fully reform regulation,” one speaker said, while a second described a comprehensive dismantling of Dodd-Frank as “unrealistic”.
So instead of the government demolishing Dodd-Frank altogether, American private equity practitioners are resting their hopes on some favourable tweaks of the existing framework, a lighter touch from the regulators when it comes to enforcement and careful handling of the most relevant elements of the US tax code.
There are growing fears that under the new administration, the deductibility of interest payments on corporate debt will be abolished, and the rules around taxing carried interest might change too. For now, there is simply no knowing how these and a thousand other US policy issues are going to play out.
Only two things look certain: private equity will have to wait on tenterhooks to see how it will be affected, while Greenspan won’t be holding his breath for a radical rethink.