May 19, 2024

DealBook: What a Government Shutdown Means for Wall Street

This is not exactly what Wall Street had in mind when it asked the government to stay out of its business.

As the federal government moved closer to shutting down, the financial industry on Friday morning was bracing for the impact. Wall Street needs the government for everything from guaranteeing mortgages to processing regulatory filings. On the other hand, a shutdown could also protect some firms from regulatory scrutiny in the short term — at least those facing investigations.

Top financial regulators like the Securities and Exchange Commission would have to send all “non-essential” staff home. The policy does not mean Mary Schapiro, the S.E.C.’s chairwoman, will get some vacation time. Ms. Schapiro and the agency’s four other commissioners are allowed to stay at work, along with some employees of their choosing.

The agency would keep a skeletal staff “to respond to emergency situations involving the safety of human life or the protection of property,” according to the S.E.C.’s Web site.

At the Commodity Futures Trading Commission, only 25 employees could keep working. That accounts for less than 4 percent of the agency’s staff. Not even the agency’s two administrative law judges can come to work. The remaining employees are not allowed to travel.

E-mail and BlackBerrys will not be shut down, although furloughed C.F.T.C. employees “may not check e-mail or use voice capabilities or conduct any work,” according to the agency.

“In our agency, we are preparing to let markets and market participants know what we will not be able to do during a lapse,” Bart Chilton, a C.F.T.C. commissioner, said in a statement. “This is dangerous territory.”

The S.E.C. and C.F.T.C. would continue to oversee the markets, albeit in a diminished capacity. The online database Wall Street uses to submit regulatory filings about securities would continue to operate, too.

But that’s about it.

The S.E.C. would halt such activities as processing regulatory filings, providing advice to publicly-traded firms and approving new financial products. “As a result, new or pending registration statements or applications for exemptive relief will not be processed regardless of the status of any review of those filings,” the agency said.

This could delay investment advisory applications from getting approved, keep banks from issuing securities and prevent firms from getting guidance on mergers and other regulatory matters.

And let’s not forget about the hundreds of Wall Street number-crunchers and stock analysts. They rely on government data to make predictions about public companies and the markets.

Banks also rely on the government to keep mortgage business flowing. The Federal Housing Administration, which had a hand in about 20 percent of new mortgage loans in 2010, will stop guaranteeing loans to low-income borrowers. JPMorgan Chase plans to stop making new F.H.A. loans during a shutdown.

That said, a government shutdown is not all bad news for Wall Street.

Both the S.E.C. and the C.F.T.C. would effectively halt their implementation of more than 100 new rules facing the industry as part of the Dodd-Frank Act.

In the event of a shutdown, the S.E.C. also would cut its enforcement staff to 178 employees, down from around 1,000. If the S.E.C. feels it needs to immediately file charges against a firm to avoid damage to life or property, it can do so.

“Insufficient funding for the S.E.C. means an investor protection effort hobbled at a time when the events of the last decade have proved that effective enforcement of the securities laws is more important than ever,” Ms. Schapiro said in a speech on Friday to the Society of American Business Editors and Writers.

A few regulators will still be up and running. The Federal Deposit Insurance Corporation, the Federal Reserve and the Office of the Comptroller of the Currency — which oversee the banks — are all funded by the financial industry, not Congress, and thus will remain open.

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