Ex-Senator Aims to Soften Regs, Industry Reputation

Former Sen. Judd Gregg is trying to balance Wall Street's need to fix its public image with the impulse to protect its livelihood from policymakers.

Gregg, a Republican who retired from the Senate in 2011 after three terms, became chief executive officer of the Securities Industry and Financial Markets Association last month. The trade group represents broker-dealers, investment banks and asset managers — including some owned by big banks.

Gregg, 66,was governor of New Hampshire and held one of its House seats before joining the Senate, where he was chairman of the Budget Committee and served on the Banking Committee. More recently, he worked as an advisor for Goldman Sachs.

In a recent interview in Chicago, Gregg discussed regulatory threats to the derivatives and secondary mortgage markets as well as his thoughts on "too big to fail," consolidation and the prospects for an economic boost from the energy sector.

The following transcript was edited for length and clarity.

Which Dodd-Frank regulations are you going to try to change?

The ones that affect our membership are the ones we will focus the most on. For instance, we feel strongly that there should be a fiduciary standard, but we have to make sure it is done correctly and protects the consumer, but still gives them choice. We are looking at the big issues of derivatives, the big issues of the Volcker rule and how you manage international requirements here on capital. As long as we are being transparent and honest about why we think what we do in making our case, I think we will be OK.

How are new regulations affecting your members' ability to compete globally?

We are seeing this massive amount of regulation coming at especially the small and medium-sized companies, and it is costing them a massive amount of money. That is money that is not going out the door to help people create jobs and grow companies and create activity.

A strong regulatory environment is critical in this industry because you're dealing with the life savings of people, but the pendulum has swing too far and we are retarding this economy's growth as a result.

Globally, it is huge. If we arbitrarily and ineffectively regulate in, say, the area of derivatives, derivatives will go somewhere else and the markets will go somewhere else and we will be less competitive.

Just take the financial transaction tax in Europe. That is a lose-lose for them to do that, and they are going to see all sorts of business leave and come to the U.K. and here. It is unhealthy for people to move because of regulatory activity.

If you fail, what will happen?

The pendulum will work its way back, even though there are people who are still trying to push it out further, but I don't think they are in the majority any longer. Treasury Secretary Jack Lew made the point[May 21] that we don't need more regulation; let's work with what we've got. I think it was Elizabeth Warren who demanded that he put in more.

What is the M&A outlook among your members?

There hasn't been much recently, primarily because everyone has been so focused on figuring out their position vis-à-vis regulation. But consolidation is natural and is inevitable. As it occurs, there become opportunities for other people to grow. It leaves openings. It is a dynamic market. We don't encourage or discourage it; we just want the market to stay dynamic.

What are your predictions for the primary and secondary mortgage markets?

It is not clear where Fannie and Freddie are going. Obviously right now, they are doing about 95% of the securitization, but I think it is clear that they will be ratcheted back and the private sector will be coming forward. I'm concerned about the rules coming out of the Consumer Financial Protection Bureau relative to qualified mortgages. You could potentially end up with no mortgages if qualified mortgages are not functional. Nobody will take the risk of going into the mortgage business. We are going through an interesting period; the mortgage market is coming back, the securitization market is coming back – it is just a question of doing it in an orderly evolution that doesn't get into the speculative activity that created the problems.

What are your thoughts on "too big to fail"?

It shouldn't occur. That was the goal of Dodd-Frank, and it was the right goal. It is still being sorted out. We think that Title II makes sense. We think a strong bankruptcy law, perhaps a new section, might be a way to go.

You've talked about restoring the image of Wall Street to Main Street. What specific things can you do?

It is largely education. There has been a disconnect to some degree driven by this excessive populist atmosphere, which says anything big is bad and if people make money they are bad and capitalism is bad, markets are bad, profits are bad. That is not true. America was built on capitalism, markets, profits and individuals willing to take a risk and creating jobs. And we need to talk about it in a way that lets people understand how it affects them.

At the same time, we have to make it clear that we are committed to the individual investor. We are not committed to the individual institutions. Our job is to give the investors choices, transparency and protection of their savings.

What will spur loan growth and the economy?

We are on verge of a major economic expansion in this country because of energy. We are going to have the lowest cost of energy in the world and it is going to give us a competitive advantage that is going to be a paradigm shift of dramatic importance. It is probably the most significant economic event since the digital age. When you have the lowest cost of energy in an industrial economy, no one can compete with you.

We are well positioned, we just have to get through the federal government being irresponsible fiscally and we have to get past this regulatory excess.