How the GOP Civil War Will Affect Banks

WASHINGTON — House Majority Leader Eric Cantor's loss to an unknown Tea Party challenger sheds new light on the deep divisions in the Republican Party, which is ultimately likely to have a large impact on the debate over financial policy.

Cantor's surprising upset in the Virginia Republican primary earlier this month puts to rest speculation that the Tea Party is dead. The libertarian strain of the party has often clashed with the more business-friendly wing of the GOP in recent years, creating fresh headaches for banks on issues including housing finance reform, the debt ceiling and government programs like flood insurance.

With Republicans poised to possibly win a majority in the Senate next year, the question becomes whether the various factions within the party can find enough common ground to break the logjam in Congress.

"The current Republican Party is not your grandfather's Republican Party, but for the fact that they all have an R next to their name. We almost have three parties in D.C. in the Democrats, the Republicans and the Tea Party," said Edward Mills, an analyst at FBR Capital Markets. "In a way, there was an unholy alliance formed between the Tea Party and the Republican Party to get a majority in the House and potentially in the Senate — but the bigger question is, can they actually govern?"

Of course, there have always been competing movements within the two dominant political parties, and both Democrats and Republicans are susceptible to populist segments, particularly following the financial crisis. Managing one's own caucus has often been as difficult, if not more so, than working across the aisle.

"There's been an evolution on both sides, whether it's the Tea Party or the Occupy movement," said Aaron Klein, director of the Financial Regulatory Reform Initiative at the Bipartisan Policy Center. "Both have internalized the profound consequences of the financial crisis within their own initial starting points and reactions. Both were born from deep-seated anger over the financial crisis. And both share an antipathy toward the role played by large financial institutions."

Several fights remain this year, including the reauthorization of the terrorism risk insurance program and the Export-Import Bank, that are likely to once again put the conflicting priorities of the party in stark relief.

Extending the Terrorism Risk Insurance Act in particular is considered must-pass legislation for the business community — despite concerns by some conservatives that the government shouldn't be involved in the market, or should at least play a more limited role.

A similar skirmish took place over reforms to the flood insurance program this past spring, with Cantor pushing through changes to the program in conjunction with his Democratic counterparts and the Senate, boxing out other senior lawmakers, including Rep. Jeb Hensarling, R-Texas, chairman of the Financial Services Committee.

The banking chairman, meanwhile, proposed a housing finance reform bill last summer that would have wound down Fannie Mae and Freddie Mac and provided no future government backstop for the mortgage market. The plan passed out of committee with close to full Republican support, but the effort wasn't easy. Cantor refused to bring the bill to the floor over concerns that it lacked the necessary votes and would split the caucus, because so many GOP members have ties to the real estate and homebuilder communities that opposed the legislation.

The debate over "too big to fail," which has played out within the populist strains of both parties, is another issue of concern for some Tea Party lawmakers, who are skeptical of both big government and big business.

"There's been this balance in the business community between having a House with a Republican majority that is fighting within the caucus with some potential negative outcomes for industry versus having a Democratic majority that is far more likely and more willing to pass legislation that leads to more regulation," said Mills.

The divisions within the GOP have also come to a head several times in recent years over how to handle the country's debt ceiling, the maximum amount of money the Treasury is sanctioned to borrow. Congress came to a last-minute deal to raise the ceiling in the summer of 2011, and again this past fall and winter. "That we really had a true debate over whether we should pay our bills and whether we should hit the debt ceiling or breach it — that marked a period where there was some irrational discussion in the public policy community," said one senior industry official. "That has waned. We had a peak of irrationality a couple of years ago, and we're becoming more rational in terms of the debate. We're not out of the woods by any stretch, but I think some positive lessons have been learned."

Looking forward to next year, it's unclear whether a Republican majority in the Senate would help to mend some of party fractures or serve to exacerbate them.

"I do think there would be less friction if they controlled both chambers," the senior industry official said. "The president will have few allies on the Hill, and he'll be in legacy mode — you never know, he might start dealing. If there's recognition that there might be a window to get things done, people might align to cooperate."

But other observers pushed back, in part because it is very unlikely the GOP would win the 60 seats needed to overcome a filibuster and fully control the Senate agenda.

"Regardless of who wins, it's going to be a closely divided Congress," cautioned Brian Gardner, a policy analyst at Keefe, Bruyette & Woods. "Having a majority and having control are two different things."

Moreover, some said the political divisions within the party just run too deep.

"You still have Ted Cruz and Susan Collins in the same caucus," said Mills.

He added that pressure has remained off Republicans because "they've been very clear about messaging that they are one-half of one-third of the federal government, and while they might have a majority in the House, they are the minority party in D.C."

"If they have control of the Senate, they now own Congress, and there's an increased responsibility of governing," which could further expose existing divisions, Mills said.