Purge of moderate Dems will haunt financial industry

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It’s the end of an era.

While Democrats have successfully regained control of the House, their results in Tuesday’s midterm elections were decidedly more mixed in the Senate.

Big picture, the addition of new Republicans in the Senate could be good news for the banking industry, but officials also have a new stumbling block in place: Several Democrats defeated Tuesday were key backers of the regulatory relief package that passed Congress this spring.

Sens. Heidi Heitkamp, D-N.D., and Joe Donnelly, D-Ind., both lost tough re-election bids to Republican competitors. Sen. Claire McCaskill, D-Mo., who is not on the Banking Committee but played a role in shaping the banking bill, also lost her re-election bid on Tuesday night. At the same time, votes continued to be tallied for Sen. Bill Nelson, D-Fla., another bill supporter, as of Wednesday.

Sen. Jon Tester, D-Mont., meanwhile, narrowly avoided the same fate. It took until Wednesday afternoon for The Associated Press to call the race for Tester over contender Matt Rosendale.

Heitkamp, Donnelly and Tester in particular have been core centrist members of the committee — along with Sen. Mark Warner, D-Va., who was not up for re-election — often working across the aisle with Chairman Mike Crapo, R-Idaho, and Sen. Bob Corker, R-Tenn., who is leaving Congress at the end of the term. (Corker did not seek re-election.)

The departures of Heitkamp and Donnelly, along with that of Corker, leave open real questions about what compromise on key banking issues might look like in the years to come, including in the fight over mortgage finance reform, and who, if anyone, might step in to fill the void.

“With the center on the Senate Banking Committee dwindling — and very nearly nonexistent — it is difficult to imagine any substantive banking legislation in the next Congress,” said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. “The Crapo bill may prove to be the most consequential banking legislation for some time.”

Of course, Republican gains in the Senate could render support from across the aisle less necessary, but with the GOP still well shy of the required 60 votes to avert a filibuster, lawmakers will continue to need at least a handful of Democrats to move any major initiatives forward.

James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association, added that while often there can be new policymakers who will step into the fold, the loss of lawmakers like Heitkamp and Donnelly will still be felt.

“Anytime you lose a pragmatic voice from either side of the aisle, it's certainly a loss for Congress,” he said. “Those pragmatic voices can be replaced with others, but for members that have had a position and been at the table — knowing the knowledge and care they brought to banking issues — that's always going to be a loss.”

The problem for bankers is that it’s unclear at this point whether the remaining Democrats in the chamber — and those who will be joining next year — will view the risks as outweighing the rewards. And it may take substantial time for any new moderates to step forward.

All three Dem lawmakers from the committee — Heitkamp, Donnelly and Tester — were criticized harshly by others in their party, including Sen. Elizabeth Warren of Massachusetts, for their backing of the regulatory relief bill, and it would seem that the risk didn’t pay off in their home states either — at least for Heitkamp and Donnelly.

Issues like the reform of Fannie Mae and Freddie Mac were going to be exceedingly difficult regardless, said Brian Gardner, a policy analyst at Keefe, Bruyette & Woods.

And the loss of lawmakers like Heitkamp and Donnelly could potentially add to that challenge.

“For Democrats who remain in Senate who might be willing to work with Republicans, the centrists who worked on the Crapo bill took a lot of flak internally, and it didn't translate into results at the ballot box, at least for some of them,” he added. “Some centrist allies might not see the reward in working with Republicans — it will depend on the issue.”

Bankshot is American Banker’s column for real-time analysis of today's news.

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