Watch for These Ripples out of Washington

 | Apr 28, 2013 | 5:00 PM EDT
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Strolling through the Washington theme park the other day, I picked up three new stories involving super regional banks; retailers and card companies; and on general political risk timing for the markets. A couple may be "investable" -- but, interestingly, all seem to constitute unintended consequences.

Super Regionals Caught in the Crosshairs

First, a bill proposed by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) proposes to put an end to "too big to fail" (TBTF) status for banks. Yet, while the bill clearly targets the largest U.S. banks, the most substantial impact could fall on non-TBTF super regionals like PNC (PNC) and U.S. Bancorp (USB).

Here's why: This bill -- which is akin to using heavy artillery to kill a fly -- has virtually no chance of passage, with the White House in opposition, along with hardline Federal Reserve Governor Dan Tarullo. As a result (per my colleague Joe Engelhard), the Fed and other regulators may now attempt to head off this legislation while simultaneously addressing the senators' concerns. First, they might increase the slope of capital surcharges on banks with more than $50 billion in assets. Second, they could impose a substantial senior debt requirement, at the holding-company level, in order to facilitate orderly liquidation authority under the Dodd-Frank Act.

This could expose super regionals like PNC and U.S. Bancorp to a new domestic surcharge. Many of the very largest bank-holding companies – Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC) and Bank of America (BAC) -- already carry a significant amount of senior debt. So if these heightened requirements are implemented in order to stave off the Brown-Vitter bill, the burden might fall most heavily upon the super regionals.

The Big Four have mostly outperformed the super regionals over the past year, but Jim Cramer and others have begun to highlight PNC and KeyCorp (KEY) as breakout candidates and plays on relative valuation within the sector. So, while you should keep this potential risk prominently in mind, I wouldn't necessarily place a downside bet on it. 

A Boon for Credit Cards

My second story relates to Internet sales-tax legislation from Sen. Richard Durbin's (D-IL), which passed procedural-vote hurdles in the Senate last week and is now greased for floor passage on or around May 6. Even though the House will also toy with the bill this spring and summer, majority Republicans are resisting the higher tax burden it could represent, so passage is only a 40% prospect at best.

Nevertheless, related lobbying efforts by big-box retailers Wal-Mart (WMT), Target (TGT), Best Buy (BBY) and Home Depot (HD) are likely to stretch throughout most of this two-year Congress. This comes amid their parallel ambitions to curb credit-card "swipe fees," which are likely to be stymied in the courts.

With a settlement on course toward final approval by September regarding the swipe-fee issue, the big-boxers will no doubt experience a renewed urge to once again push for curbs against interchange fees in debit transactions. But, while they once found a sympathetic champion in Sen. Durbin regarding this issue, his political capital (along with that of the Retail Industry Leaders Association) will be tied up in the Internet tax bill, perhaps well into 2014.

So, that interchange-fee bill might fail -- and the biggest winners here could actually be Visa (V), MasterCard (MA) and their card-issuing bank partners.

Dragging Out the Risk Window

Finally, with regard to a mini-grand bargain to reduce the deficit, we are off to a decidedly mixed start. Both chambers have passed radically different budget resolutions -- which entail spending and revenue blueprints not only for the fiscal year beginning Oct. 1, but also plans on achieving $2 trillion or more in deficit savings over the next 10 years.

Meanwhile, the debt ceiling is scheduled to reset to $16.65 trillion on May 19, at which point the U.S. Treasury has been expected to take "extraordinary measures" to avoid hitting that limit. But a lower federal deficit year to date may push back the "drop-dead/default" date from July to as late as October. (The lower deficit is thanks to the expiration of the payroll tax holiday and upper-income tax hikes, in addition to the marginally improving economy.)

The significance for investors is potentially huge. Rather than having a shorter May-to-July window for maximum risk of a negative Capitol overlay for the markets, the risk of negative headlines may now ramp up during a back-loaded five-month period between May and October -- and it may also help continue the market's upward bias well into the summer. After this, of course, we'd finally see whether lawmakers will kick the can once again, or whether they'll ultimately surprise with a low-quality deal that might nevertheless constructively take the U.S. "austerity imperative" off the table.

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