As the chief executive of Royal Bank of Canada's U.S. wealth management business, John Taft works in Minneapolis and reports to Toronto. But now, as a leading voice of the securities industry lobby, he will be devoting much more of his time to Washington.
Taft was installed Tuesday as chairman of the Securities Industry and Financial Markets Association (SIFMA), and he represents the industry during a key year of rulemaking as regulators sort out the tasks left to them by the Dodd-Frank Act.
Politicking should come naturally to Taft, a former assistant to the mayor of St. Paul, Minn., and a great-grandson of President William Howard Taft. Taft has worked in financial services since 1981. He sat down this week with American Banker to talk about the industry and his priorities at SIFMA for the coming year. He also talks about his views on securitization.
A condensed version of the interview follows:
The contouring of the rules laid out by Dodd-Frank no doubt will be a focus for you. Where will you begin?
JOHN TAFT: SIFMA has identified, out of the 200-plus rulemaking and 70-plus studies, seven priority areas that we are focusing on now and will be focusing on throughout 2011. Those are systemic oversight, resolution authority, derivatives reform, the Volcker Rule, securitization, capital and liquidity standards and fiduciary standard of care. There are dozens of other important rules and regulations we'll be monitoring, not to mention the normal flow of ordinary-course, regulatory rulemaking. All of [that will] need to be looked at in the same time we're looking at Dodd-Frank.
What's your outlook for the securitization market, and particularly mortgage securities?
TAFT: You can write rules that implement the securitization provisions of Dodd-Frank in a way that permanently impairs the functioning of the securitization market, and you can write rules to implement Dodd-Frank that permit a return to normalcy in the securitization market. It all depends on details.
When it comes to the role of securitization in housing finance, getting the securitization rules right is only part of the equation. That has to be married up with an overall reform of the housing finance system in the U.S., including a rewriting of the rules and missions of the GSEs.
We don't think it's realistic to think that the private sector can step entirely into the government's shoes. We believe there is a role for the government in the mortgage market, and unless we have that, we're not going to have a housing finance system that works. But it all goes back to what's national housing policy and what are the roles of the GSEs, almost more importantly than getting specific operational regulations right on securitization.
What will limits on proprietary trading and hedge fund ownership, as prescribed by the Volcker Rule, mean for securities firms?
TAFT: I think there's as much uncertainty about the Volcker Rule as there is about any single provision of Dodd-Frank. It's turning out to be extremely difficult to draw the distinction between pure proprietary trading and risk trading for the benefit of customers.
[It's important that] we not write implementation rules for Volcker that have the negative and unintended consequence of making it harder for financial institutions to support their clients by taking risk in the markets and making markets. If you do that, then you will actually increase overall risk and hurt liquidity, which are not things that Dodd-Frank intended.
At SIFMA's annual meeting this week, outgoing Senate Banking Committee Chairman Chris Dodd explained that the Volcker Rule caps — limiting a bank's ownership of a hedge fund to 3% of the fund and to 3% of the bank's Tier 1 capital — were based on a political compromise rather than principled economic reasoning.
Do you worry that sound financial policy is getting subverted by politics? Or is that risk mitigated by the fact that Congress left much of the reform work to regulators?
TAFT: Nobody involved in the process expected a perfect piece of legislation, but it was good enough in a number of ways. Dodd-Frank was the architect's rendering of the house and then it delegated to regulators the development of detailed blueprints and schematic design. The decision not to try to hard-wire into legislation rules and principles [intended to] work for 20, 30, 50 years — that was the right decision. The result, however, is, we still don't know today, and won't until the rules have been written, what regulation reform really looks like when it's all said and done. So much depends on the specific operational rules that regulators write.
You are the first SIFMA chairman to come from a Canada-based company. What special knowledge can you share with industry in that regard?
TAFT: [There are other countries] where the government's role is more limited and, notwithstanding that, rates of homeownership are equal to or greater than that of the United States. So I would of course hope that as policymakers look at the housing finance system that they look at the Canadian model, which has performed admirably.
There is no tax subsidy for homeownership; banks tend to hold the majority of originated mortgages on their own balances sheets, and we did not have the same kind of meltdown in the housing market in Canada, and that's one of the reasons why the whole system held up better in Canada than in the United States.
Kevin Warsh, from the Federal Reserve Board of Governors, addressed SIFMA this week and said that jump-starting the economy requires not just action by the Federal Reserve but a suite of pro-growth policies ranging from reform of the tax code to rollbacks in trade protectionism.
Will SIFMA get involved on any of these fronts?
TAFT: Beyond the specifics of Dodd-Frank's implementation, the broader policy issues Sifma is focused on include Basel III — capital, liquidity and leverage standards; coordination among global regulators — syncing up Dodd-Frank with what's going on in other countries; and taxes — not so much income taxes but continuation of the preferential treatment for dividends and capital gains.
One of the things we need to do is encourage capital formation in this country, and if we allow dividends to be taxed as ordinary income, that's going to be detrimental to dividend-paying stocks, which have the most appeal right now in the marketplace. [Regarding] capital gains, you want to encourage long-term ownership of financial assets — that's exactly what the system needs. And government housing reform would be the other area SIFMA is focusing on.