WASHINGTON — The vast majority of attention regarding Tuesday's election has gone to the presidential campaign, but congressional races are likely to have as much impact on the future of the financial services industry.
A number of veteran banking lawmakers are in jeopardy, and Democrats could pick up enough seats in the Senate to dramatically improve their chances to pass bills that would rein in credit card practices and allow judges to rework mortgages. A bigger Democratic majority could also tilt Congress in a more liberal direction as it undertakes a massive rewrite of financial services oversight.
"There is a degree of skepticism about financial market function that is unprecedented. … It creates an incredibly difficult political environment" for financial companies, said former Rep. Richard Baker, a senior Republican on the House Financial Services Committee until this year, when he left to run the Managed Funds Association. "Given the prospects that we could see the White House, Senate, and House with distinct majorities in Democrat hands, I certainly believe we will have an interesting year."
The House Financial Services Committee could lose as many as 16 of its 70 members; two are retiring, and 14 others are facing tough re-election challenges. That list includes the panel's No. 2 Democrat, Rep. Paul Kanjorski, the 12-term Pennsylvania lawmaker who chairs the capital markets subcommittee.
In the Senate Banking Committee, two Republicans, Sens. Chuck Hagel of Nebraska and Wayne Allard of Colorado, are retiring, and another Republican, Sen. Elizabeth Dole of North Carolina, is in an extremely tight race. Democrats are expected to pick up between 3 and 10 seats in the Senate and are likely to win at least a two-seat edge on the panel, which is currently divided 11 to 10 in favor of Democrats.
Two other banking allies on the Republican side are in danger. Sen. John Sununu, a former Banking Committee member who was a passionate advocate of government-sponsored enterprise reform, is in danger of losing his New Hampshire seat. Senate Minority Leader Mitch McConnell of Kentucky is also in trouble. The banking industry credits him with helping to stop a bill that would have let judges rework mortgages in the bankruptcy process.
There is also an open debate about whether Senate Banking Chairman Chris Dodd will hang on to the gavel or take charge of another committee more aligned with his personal interests.
Though speculation has tamped down since the financial crisis rocketed to the forefront of national priorities, the Connecticut Democrat is known for having a stronger passion for topics like foreign relations and education than for banking.
Even if the Democrats fell just short of a 60-seat filibuster-proof majority, the gains would weaken Republican power to influence bills and give Democrats more running room on regulatory restructuring, credit card practices, mortgage bankruptcy reform, and other priorities.
Francis Creighton, a lobbyist with the Mortgage Bankers Association, said it fears legislation to let judges alter primary mortgage in bankruptcy — an idea the industry has beaten back — would become harder to fend off.
"The big one really is bankruptcy," he said. "The increase in majorities in the House and Senate is going to make it very difficult to win on bankruptcy."
A key element of Democratic efforts to pick up Senate seats has been targeting Sen. Dole. Even though she is a Banking Committee member, she receives far less support from the industry than might be assumed. Several lobbyists said privately that she has done little to assist the industry, aside from opposing an appraisal code of conduct signed by Fannie Mae and Freddie Mac at the behest of New York Attorney General Andrew Cuomo.
Recent polls show Sen. Dole trailing Kay Hagan, a state senator and former banker who aspires to join the Banking Committee, by a few percentage points.
Thad Woodard, the president of the North Carolina Bankers Association, said that even though its policy is to support incumbents, not all bankers in the state are backing Sen. Dole.
Robert Braswell, the president and chief executive of the $600 million-asset Carolina Bank in Greensboro, is a Republican who supports Sen. John McCain's presidential campaign and says the idea of Democrats gaining a filibuster-proof majority "scares the hell out of me."
Mr. Braswell has supported Sen. Dole in the past, but he says he is backing Ms. Hagan. "From my perspective," Sen. Dole "has been a huge disappointment," he said.
He acknowledged that he considers Ms. Hagan a friend, has known her for 13 years, and attends the same church she does.
Ms. Hagan is a former vice president for North Carolina National Bank, which later became part of what is now Bank of America Corp. Her husband, Charles T. Hagan, sits on a community bank board.
Nevertheless, Mr. Braswell said he is opposing Sen. Dole because of her lack of leadership on banking issues. "Her entire time on the committee, she has been silent on every issue," he said. "Given the issues we have been struggling with in the last year to 18 months, where has she has been? She hasn't been out front. … Whether you win or lose, you want somebody putting forth the effort, and you just don't see the effort."
Other bankers in the state disagree. Larry Barbour, the president and CEO of the $675 million-asset North State Bank in Raleigh, said he is supporting Sen. Dole. She has a reputation for being less involved than others in banking matters, Mr. Barbour said, but that is better than too much government intervention.
"Some folks don't think she has been very effective, but I think she's tried to be very cautious before she pushes legislation down the throats of people in commerce," he said.
Mr. Barbour cited Sen. Dole's support of the financial rescue legislation and higher deposit insurance limits as examples of times she has been on the banking industry's side.
On the other side of the Capitol, Rep. Kanjorski is one of the few Democrats facing a tough race this year — but for financial services companies, it may be one of the most important. Rep. Kanjorski has been hurt by attacks from Republicans for directing millions of dollars of earmarks to a company owned by family members. The company later went bankrupt but Rep. Kanjorski has denied any wrongdoing.
Though Rep. Kanjorski has been a significant player on financial services matters, he is not always on the bankers' side. Since 1998 he has been a chief sponsor of several bills to help credit unions. Likely as a result, the American Bankers Association, which has the eighth-largest political action committee in the country, has not donated any money to his campaign.
However, Rep. Kanjorski has supported other banker priorities. He has been a recent advocate for the idea of creating a federal insurance office within the Treasury Department, and he has flirted with supporting an optional federal insurance charter — a goal shared by big banking companies and major insurers.
Mr. Creighton of the MBA said Rep. Kanjorski has also supported GSE reform and is credited with helping to tone down accounting requirements in the Sarbanes-Oxley Act. The lawmaker is "a calming influence," and his loss would cull a moderate Democrat from the top of the committee dais.
John von Seggern, the president of the Council of Federal Home Loan Banks, praised Rep. Kanjorski for his allegiance to the Home Loan banks.
"He had a lot to do with the structure of the system capital," Mr. von Seggern said. "He had a lot to do with the structure of the system's ability to provide community development, and he's had a lot to do with community financial institutions' access to the Home Loan Bank System."
Mr. Baker, who chaired the House Financial Services capital markets subcommittee until 2006, while Rep. Kanjorski was the ranking Democrat, said the lawmaker's historical perspective would be hard for a successor to match.
"The stuff that we were engaged in covered an enormous scope of subject matter, and without discounting anyone else, it would be difficult for anybody to step into that role and have the financial world view that Paul has on those matters," Mr. Baker said.
A number of other financial services lawmakers — mostly Republicans — are at risk of losing their seats. Rep. Tom Feeney of Florida, a free-market conservative to whom the banking industry has turned frequently, is likely to lose his re-election bid. Rep. Feeney has pressed for repealing cumbersome requirements on small businesses in the Sarbanes-Oxley Act — a repeal the industry has sought — but he opposed housing legislation this year over an affordable housing trust fund championed by Democrats. He also opposed the recently enacted bailout bill.
Rep. Chris Shays of Connecticut, who has been called the last Republican in New England, is consistently in tough re-election contests. During his long tenure on the Financial Services Committee, he was viewed as a relative moderate. He was a fierce critic of Fannie and Freddie, and he pushed hard for GSE reform, but he was also an early cosponsor of Rep. Maloney's card reform bill, which the banking industry adamantly opposed.
Another free-market conservative, Rep. Michele Bachmann of Minnesota, has sunk in the polls since she suggested on "Hardball with Chris Matthews" that Sen. Barack Obama is anti-American. Other committee Republicans in competitive races are: Reps. Peter Roskam, of Illinois, Shelley Moore Capito, of West Virginia, Dean Heller of Nevada, Jim Gerlach, of Pennsylvania, Scott Garrett, of New Jersey, and Patrick McHenry of North Carolina.
On the Democratic side, Rep. Tim Mahoney of Florida is not expected to be re-elected. He has admitted to having multiple affairs and is being investigated for improper use of campaign funds.
Rep. Don Cazayoux, a newcomer to the committee, is in a toss-up race in the Louisiana district where he won a special election this spring after Mr. Baker vacated his seat.
Noting the high number of competitive races, many of them for seats currently held by Republicans, Mr. Baker acknowledged that next year's committee will look significantly different.
"It's going to be a new world," he said. "The only certainty in all this is that it is going to change rather dramatically."