Why 'Going Nuclear' Matters for Banks

WASHINGTON — Senate Majority Leader Harry Reid has finally made good on longstanding threats to alter chamber rules on executive nominations, likely paving the way for embattled White House nominees to win confirmation — including Rep. Mel Watt to head the Federal Housing Finance Agency.

Reid invoked the so-called "nuclear option" on Thursday, altering Senate rules so that presidential nominees, except those to the Supreme Court, can now proceed to a confirmation vote with a simple majority instead of needing to meet a 60-vote threshold. (Confirmation votes already only require just majority support.)

Observers said the change will have an immediate impact on nominations for bank regulators, including Watt's and several pending openings on the Federal Reserve Board.

"The fascinating thing is that the president has enormous freedom in who he names to run regulatory agencies," said Jaret Seiberg, a policy analyst at Guggenheim Securities. "Agencies won't have to go for months or years without confirmed directors."

The move comes after Reid repeatedly threatened to enact the rule change earlier this year — including over the summer when Democrats and Republicans instead reached a broad agreement on several nominees, including Richard Cordray, director of the Consumer Financial Protection Bureau.

Below are several key takeaways for the banking industry in the wake of this historic development.

Green light for Watt
One of the most significant near-term changes for the housing industry is likely the installment of a new director at the FHFA.

Watt has faced an uphill battled to get confirmed since his nomination last spring, over Republican charges that he lacked the necessary technical experience to run the agency. Despite being blocked by in the Senate late last month, the North Carolina Democrat is now expected to succeed Edward DeMarco, the agency's acting director since 2009. Obama even referenced Watt in his remarks supporting Senate Democrats Thursday afternoon, suggesting the position remains a priority.

"They blocked our nominee for our top housing regulator at a time when we need more help for more families to afford a home and prevent what has caused mortgage meltdowns from happening again," said the president, who added that he supports "the step a majority of senators today took to change the way that Washington is doing business, and more specifically the way the Senate does business."

Though it's still unclear when Watt would be officially confirmed or sworn it, observers have long suggested that the change in leadership could have important implications for the mortgage market.

"It's a game-changer for mortgage credit availability," said Edward Mills, an analyst at FBR Capital Markets. "You have a mindset at FHFA of shrinking [Fannie Mae and Freddie Mac], trying to ensure there's as few losses as possible in trying to facilitate the rebirth of private label, to a shift towards someone who cares deeply about having mortgage credit expanded."

Watt has indicated that he's open to expanding the government's refinancing program and doing more on affordable housing. He may also modify moves the agency is making to bring private capital back into the housing market, including making changes to guarantee fees and loan limits.

No changes for Yellen, but move could influence other Fed positions
Janet Yellen's bid to succeed Ben Bernanke as chairman of the Federal Reserve Board remains secure in the wake of the rule change, after advancing through the Senate Banking Committee with a 14-8 bipartisan vote earlier on Thursday. Though she is likely to continue to face some Republican opposition on her monetary policy views, she was expected to gain the needed 60 votes before the Democrats went nuclear, and thus is even more likely to be confirmed if all she needs is 51.

"Yellen's confirmation is as close to a sure thing as you can get in Washington," said Seiberg.

But Reid's move does raise questions about several more Fed governor positions that could be opening up soon. The White House will need to replace Yellen, who currently services as vice chairman, if she is confirmed as chairman, along with Sarah Bloom Raskin, who is likely to be confirmed as deputy Treasury secretary. Jerome Powell's term is also up at the end of January.

"You'll probably see more liberal nominees," said Mills, noting that could impact monetary policy, but also bank supervision, because the Fed board will need to sign off on Dodd-Frank rules related to capital requirements and the oversight of systemically important institutions.

Obama's nominees could take a "slightly more aggressive stance" on regulations impacting the big banks, he added.

Broader implications for GSE reform, Senate comity
It's too early to determine how big of an impact Reid's coup will have on Democrat-Republican relationships long term — including how difficult it will be to govern going forward.

"The $64,000 question is whether Senate Republicans will take the bait, because what the majority leader has done is turn the focus from Obamacare's troubles to a procedural battle on Capitol Hill," said Seiberg. "So if Republicans shut the government down again and threaten default and bring the workings of Congress to a halt — that probably plays to the benefit of the Democrats."

He added that at first blush, the GOP has been "enormously measured" in its response, suggesting they might not wage all-out war on their Democratic colleagues, which could even help issues like housing finance reform to move along more successfully.

"You could even make the argument that housing finance reform is more possible, because Republicans want to demonstrate that they aren't going to shut things down over this fight," said Seiberg.

Mills added that reform of the government-sponsored enterprises could also gain momentum when Watt is installed at the FHFA by those interested in keeping the efforts started under DeMarco going.

"To extent that the political center is behind Corker-Warner, even if you didn't do anything legislatively, administratively that was already happening under DeMarco," he said. "Now that Watt will be in charge, the real question is, how much of DeMarco's strategic goals continues? If you wanted to see through what DeMarco was doing, you have a real incentive to push for compromise."

More broadly speaking, however, the decision to go nuclear is likely to have some fallout. The rule change does not eliminate how much of lawmakers' limited time is required for nominees to go through the confirmation process, between the process of invoking cloture and the mandatory period for debate. To the extent the GOP is no longer inclined to let less controversial nominees pass via unanimous consent, lawmakers may need to devote considerably more time to the confirmation process at large.

"It allows Democrats to get nominees confirmed who were blocked by Republicans, but it also means that dozens of more easily confirmable lower profile nominees could now be held up if Republicans refuse to provide unanimous consent," said a former senior Senate aide. "There's just not enough time to vote individually on all the nominees the Senate considers."