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Josh Targoff

Third Point LLC

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From: Hunter Biden [mailto:hbiden@rosemontseneca.com]
Sent: Wednesday, January 19, 2011 5:25 PM
To: Hunter Biden
Subject: Rosemont Seneca Update- 1/18/2011


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In this Newsletter:

This Week in Washington: Healthcare Vote

Financial Shorts: Corporate Tax Reform; SEC Budget Woes; SEC Probe; Prop Trading Regulations

Politics: Blue Dog Coalition

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1. This Week in Washington: Healthcare Vote

Lawmakers returned to Washington this week for their first substantive actions in the aftermath of the Tucson shooting. For all the debate over the tone of political rhetoric prompted by the shooting, it is unlikely there will be any significant changes to the agenda being pursued by newly empowered Republicans.


The highly anticipated vote Wednesday to repeal the health care reform bill will make headlines and count as a promise kept by House Republicans. But in the end, it’s really just for show. The real work begins immediately afterward, with Republicans using every legislative and political tool at their disposal to wage a two-year campaign against the overhaul.


House committee Chairmen will call administration officials before their committees in efforts to drive news coverage and build the GOP case against the law. GOP leaders will call for votes on bills dismantling pieces of the law, such as the mandate requiring all Americans to buy insurance. They will try to choke off funding at every turn, starting with the stop-gap funding measure that expires in March. It still remains to be seen if they will offer an alternative health care reform plan, one that could be pushed legislatively in 2012. For now, putting as many roadblocks into funding and implementation measures will be the main focus. In addition, at the state level many Republicans are focused on the legal challenges making their way thru the courts.


The vote also gives Democrats a second chance to defend their landmark legislation- and the first substantial chance to show a united front on health reform. Their message is more cohesive now than the last time they voted on the legislation, united now in defending the law. Furthermore, thirteen Democrats voted against the bill in March, but only four broke ranks to vote with Republicans in a procedural vote on the health debate this month.


Republicans now see independents as a crucial demographic that could break any stalemate in their favor. In polls commissioned by House Republican leaders and the Quinnipiac Polling Institute, independent voters lean in the GOP’s direction- but less so than Republican voters. This helps explain why Republicans have moved to have repeal-and-replace votes, instead of just a repeal vote. So on Wednesday, the House will also approve a resolution ordering four relevant committees to draw up alternative health care proposals. But the leadership isn’t giving them a deadline. The open-ended process suggests Republicans won’t be rushing to push their own vision of health care through the House anytime soon.


Republicans will still proceed with repeal efforts despite the fact they will be blocked by Senate Democrats and the White House. Even attempts to make smaller changes will be very difficult due to the fact that most of the healthcare bill is funded through mandatory, not discretionary, spending. Meanwhile, GOP leaders also need to pull together a strategy on other imminent priorities- such as raising the debt ceiling, clearing a final appropriations bill for FY11, moving the budget resolution and potentially addressing housing finance reform.


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2. Financial Shorts


Corporate Tax Reform

· The Obama administration has begun to take its first concrete steps toward tax reform when it met with top business executives for a ground-level discussion of overhauling corporate taxation. It is widely acknowledged the current system is dysfunctional as the top tax rate, 35 percent, is highly uncompetitive by international standards and the base is narrow (only about half of business income is taxed). But doing something about the situation presents complex economic, political and legislative challenges. Former Treasury Secretary Henry Paulson pursued reform several years ago as did the Chairman of the House Ways and Means Committee Rep. Charles Rangel (D-NY) before he lost his chairmanship and Democrats lost their majority. Neither effort gained traction, and Secretary Timothy Geithner has acknowledged that the Obama administration might not either.

The possibility of reforming the entire tax system has drawn increasing attention lately with talk surrounding how to reduce the deficit. However overhauling corporate taxes represents a more manageable challenge as the tax represents about two percent of the economy, a quarter the size of the individual income tax. Wall Street firms would be among the biggest beneficiaries of a rewrite that curbs deductions and lowers rates. But major manufacturing firms, which have far more political champions, would suffer. Another issue is that a corporate tax reform that lowered the rate below 35 percent would still leave higher taxes in place for some unincorporated firms, which account for half of all business income and whose owners pay under the individual tax system. This factor alone could delay any tax-reform consensus until after the 2012 presidential election.

The House Ways and Means Committee will hold the first hearing of the new Congress focusing on beginning the dialogue on broad-based tax reform. Robert McDonald, chief executive of Proctor & Gamble is one of the witnesses scheduled to testify. He is testifying in his role as chairman of the Business Roundtable’s Fiscal Policy Initiative which focuses on US domestic and international tax reform as means to promote the competitiveness of US companies and workers.


SEC Budge Woes

· The US Securities and Exchange Commission is facing a budget squeeze from the Republican-controlled House of Representatives, which officials say is hampering efforts to improve its enforcement division. US securities regulators say they are failing to follow up on tips about potential wrongdoing and postponing examinations of money managers and brokers who are far from their offices because of a worsening budget shortfall.

Congress last month failed to agree a 2011 budget and is funding the government through short-term “continuing resolutions”, which have frozen SEC funding at its 2010 level of $1bn. The Dodd-Frank financial reform act authorized Congress to double the SEC’s budget by 2015. Congressional Democrats have been pushing for a 12-18 per cent increase in the SEC’s budget and have accused Republicans of trying to derail Dodd-Frank. Mary Schapiro, chairwoman, said she needed 800 more staff to write and police new rules, including on derivatives, risk management and investor protection.


SEC Probe

· The SEC is investigating whether banks and private-equity firms violated bribery laws in their dealings with sovereign-wealth funds. The SEC has sent as many of ten letters of inquiry in the past week to banks such as Citigroup Inc. and private-equity firms including Blackstone Group LP. Though the letters didn't contain specific allegations of bribery, they requested that firms retain documents and asked about the firms' dealings with sovereign-wealth funds, the people said. The SEC letters appear to be tied to a broad Foreign Corrupt Practices Act (FCPA) investigation of the banking industry. The focus of the inquiry couldn't immediately be determined, but FCPA inquiries involve bribes paid to foreign-government officials or employees of state-owned companies to gain a business advantage. The FCPA pertains to cash as well as non-monetary gifts such as entertainment and trips.


Prop Trading Rules

· Financial regulators moved towards tough prescriptions on banks’ trading activity, which could increase costs and increase internal bureaucracy. The industry had been anticipating loopholes in the final rules because the difficulty of separating allowed market making and prop trading, as well as a perceived lack of appetite for a tough rule from the Treasury and the Fed. But a study by staff on the Financial Stability Oversight Council (FSOC) recommended that banks' compliance departments first decide whether a trade is proprietary using a raft of metrics, followed by supervision from regulators and punishment for flouting the rules.

The FSOC brings together the Treasury, Federal Reserve, Securities and Exchange Commission and other regulators. In total, Dodd-Frank requires about 250 separate rules from regulators on subjects as diverse as securitization, consumer protection and derivatives. Some officials have hinted that they will struggle to meet deadlines – most of which come in July, a year after the legislation's passage.

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3. Politics: Blue Dog Coalition


Blue Dog Democrats remain deeply frustrated with Minority Leader Nancy Pelosi’s leadership and are signaling they are ready to break ranks and cut deals with Republicans. They argue that Minority Leader Nancy Pelosi has yet to reach out to the moderate bloc since Democrats lost the majority, nor has she acknowledged any mistakes. Blue Dogs remain confounded over her decision to stay on as the party’s leader after she presided over what they consider to be a series of political blunders that led to Democrats’ historic defeat at the polls on Nov. 2, and most of them refused to vote for her for Speaker.


Blue Dogs have already started having informal discussions with Republicans in the hope that they can help forge bipartisan deals, such as President Bill Clinton and the GOP did with welfare in 1994. In fact, the 1994 GOP takeover sparked the creation of the Blue Dog Coalition. Members believe that they can be the bridge between parties in a grand deficit-cutting compromise especially with their centrist position and ability to work in both minority and majority positions.


The mounting conflict over the debt ceiling has been portrayed as a battle between President Obama and Tea Party-backed fiscal conservatives, with the House GOP leadership trapped somewhere in the middle. But rather than rallying to Obama’s side, House Democrats are remaining aloof. And even if Democrats wanted to encourage the Blue Dogs to vote against raising the ceiling in order to force Boehner to find more “yes” votes, that strategy is limited by the fact there are so few Blue Dogs left after the November “shellacking.” Of the 54 Blue Dogs who served in the last Congress, only 26 are left. Many Blue Dogs only voted to raise the debt ceiling last time because they were promised and received statutory pay-as-you-go legislation. Blue Dogs are waiting to see what Republicans come up with on the debt limit before deciding how to vote.


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R. Hunter Biden
Rosemont Seneca Partners, LLC
1010 Wisconsin Ave., NW
Suite 705
Washington, DC 20007
(202) 333-1880


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