WASHINGTON (Reuters Breakingviews) - Donald Trump is delivering another mixed message to Wall Street. The White House will order Treasury Department reviews of rules that discourage so-called inversion deals and set out how to resolve a crisis-related financial failure. The directives themselves are innocuous for now, but the cues might encourage lax enforcement and fresh changes to the liquidation framework.
President Barack Obama’s administration issued regulations last year that put a chill on mergers designed to help companies lower their tax bills by moving overseas. One rule limiting foreign enterprises from bulking up on U.S. assets torpedoed Pfizer's $160 billion acquisition of Botox maker Allergan. Another controversial measure restricts the use of interest deductions by a U.S. subsidiary on debt to its foreign parent company or affiliate.
The reviews being requested on Friday could induce Treasury Secretary Steven Mnuchin to pause enforcement. Agencies have a lot of discretion on how forcefully they want to back regulations. A sign that officials may turn a blind eye for the time being could very well prompt dealmakers to recalculate the odds for their M&A-inclined clients.
Trump also wants Mnuchin to revisit the so-called Orderly Liquidation Authority laid out in Dodd-Frank. It allows the Federal Deposit Insurance Corp to wind down big banks and other systemically important non-banks. Some Republican lawmakers have been trying to scrap such authority, arguing that it enshrines the idea of too-big-to-fail.
In an effort to influence the U.S. budget reconciliation debate, Senator Pat Toomey says OLA will cost the government $20 billion over a decade. That money would in fact be coming from fees imposed on the financial industry, which would be used to reimburse Treasury for any losses on what it lent to help with a resolution.
There also is widespread support on Wall Street for resolution authority. Leaving such a process to the alternative – bankruptcy – is scarier, especially when the judge assigned might not have expertise with complex, global financial institutions or relationships with international regulators. And another funding mechanism probably would be needed at the onset to support any wind-down.
Initial optimism over potential tax reform and major regulatory rollbacks has been waning. These latest orders from Trump easily could instill further confusion.