By Sarah N. Lynch and Emily Stephenson and Rick Rothacker
REUTERS - Wall Street firms gambled on Mitt Romney and lost.
Now, faced with the prospect of even tougher regulations in President Barack Obama's second term, their stocks paid the price. Shares of Goldman Sachs Group
"This is the triumph of the regulators," said Terry Haines, senior analyst at Potomac Research Group in Washington and a former staff director of the U.S. House of Representative's Financial Services Committee.
Obama's win is bad news for financial firms, particularly big bank holding companies, which face regulations still being written to implement the 2010 Dodd-Frank reform law, Haines said. "The Administration's regulatory approach has triumphed and is going to continue for some years," said Haines.
After backing Romney nearly across the board, the financial services industry must quickly reverse course and seek to mend ties, Haines and other public policy experts said.
But there were mixed signs of accommodation in the wake of Obama's re-election, with some bankers maintaining their critique of the Democratic President's regulatory policies.
"He will continue to increase regulation, demonize and vilify businesses, and spend a lot of money, and tax people, and so forth," said Dick Kovacevich, former CEO of Wells Fargo & Co
On the other side, Scott Sperling, co-president of private equity firm Thomas H Lee Partners, reached out towards Obama, who he abandoned for Romney in 2012. "It is incumbent on us to work with the administration in a productive way to deal with these issues," he said.
Wall Street firms are also worried about Elizabeth Warren, whose victory in the Massachusetts Senate race may galvanize her to push for more regulations on bank lending to protect consumers. Warren was instrumental in creating the Consumer Financial Protection Bureau, which critics say could weigh down the economy with new regulations.
"I think the Obama win, along with Elizabeth Warren, will lead to more accountability and tighter regulation on Wall Street," said Chris Tobe, who advises pension plans as a principal at Stable Value Consultants and is a trustee of the Kentucky state pension fund. "Especially after a big shift to Romney from Wall Street, Obama I believe will be less likely to hold back on regulation this term."
Republican former regulators sought to downplay Warren's impact. "Wall Street has a decided enemy on its hands," said Harvey Pitt, who ran the Securities and Exchange Commission under President George W. Bush. Still, Warren's election by itself "isn't going to have a very dramatic impact on anything," he said. "She's just one of 100 senators."
People working in the U.S. securities and investment industry gave $20 million to Romney's campaign, versus $6 million to Obama, according to the Center for Responsive Politics. Four years ago, Obama received $16 million and Republican nominee John McCain only attracted $9 million.
Obama's administration has still not finished writing many of the most important rules called for in the Dodd Frank law, passed after the U.S. financial system nearly collapsed in 2008, forcing taxpayers to pour hundreds of billions of dollars into banks' coffers.
Many Americans believe the financial crisis was caused by banks' terrible judgment in areas like mortgage lending and securitization. Public support is strong for laws designed to make the financial system safer, even if bank profits suffer.
A 2010 Gallup poll showed that Dodd-Frank was Obama's most popular law, exceeding healthcare reform, for example. Few Washington lobbyists thought that Romney could fully repeal Dodd-Frank, because public support for the law is too high.
RELATIONS WITH REGULATORS
Banks must now focus on softening regulations to the extent they can. Among the financial industry's top complaints are the Volcker rule, which prevents banks from making big bets in financial markets with their own money, and the Durbin Amendment, which limits the fees they can charge merchants for processing debit-card transactions.
Banks also want to scale back capital requirements, which cut into the returns banks can earn on their equity capital.
The industry had hoped to weaken the Consumer Financial Protection Bureau through steps like changing its structure to be headed by Democrat and Republican commissioners, but these steps are unlikely to gain much traction, analysts said.
"What I was told last night by Obama's win is, there will be no change to the CFPB in 2013," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading in Washington.
Some banking industry lobbyists say their focus will be on the key regulators Obama is expected to name in his second term.
Major power players under Obama, including Treasury Secretary Timothy Geithner, are expected to step down, offering Wall Street a chance to reset relations.
Chairmen determine agendas at agencies such as the SEC and Commodity Futures Trading Commission (CFTC), so Obama's choices to fill any open spots could affect how quickly new rules are implemented.
"If there was a different chair who had a different agenda, you could slow things down," said Bart Chilton, a Democratic commissioner at the Commodity Futures Trading Commission.
One possible replacement for Geithner, who has said he will not stay for a second Obama term, is White House Chief of Staff Jack Lew, a former Citigroup banker.
"I hope Obama puts someone in who understands fiscal issues and who will have stature to work on the Hill to negotiate some type of package on fiscal reform," said Sheila Bair, former Federal Deposit Insurance Corp chairman.
SEC Chairman Mary Schapiro's term does not expire until June 2014, but speculation about her departure has been swirling for well over a year. Last month, she attempted to shoot down the rumors, saying she had not thought about her post-SEC plans.
SEC watchers speculate the job could go to SEC Commissioner Elisse Walter, a close friend of Schapiro's and a former executive at the Financial Industry Regulatory Authority, an industry-funded watchdog.
CFTC Chairman Gary Gensler's term technically expired in April. He is allowed to stay on as chairman until the end of 2013 and his renomination is an open question.
Gensler has been assailed by Republicans over his implementation of Dodd-Frank and criticized by lawmakers on both sides of the aisle following the collapse of futures brokerages MF Global and Peregrine Financial Group.
Much of Wall Street's regulatory agenda, however, is set to take a backseat in the short term due to the looming fiscal cliff -- a package of tax increases and federal spending cuts that will begin in January unless lawmakers act.
Bankers fear an impasse in solving the issue could spark an economic downturn that would hurt the industry.
In the longer term, banking lobbyists and other opponents of Dodd-Frank acknowledge that much is in the hands of rulemakers, and the best they can do is to try to beat back some rules with technicalities.
Paul Atkins, a Republican and former SEC commissioner, said he expects Dodd-Frank reform critics may have some success making narrow legal challenges and seeking to throttle reforms through congressional oversight.
"Dodd-Frank assigned a lot of powers to the regulatory agencies, so there is not much that Congress can do," he said.
"I expect that the Republican House would keep the pressure on through hearings, like they are doing now. People will also certainly take the fight to the courts."
(Reporting By Emily Stephenson and Sarah N. Lynch in Washington, D.C., Rick Rothacker in Charlotte, Lauren LaCapra, Dan Wilchins, Olivia Oran and Katya Wachtel in New York, and Aaron Pressman and Ross Kerber in Boston; Writing by Aaron Pressman and Greg Roumeliotis; Editing by Paritosh Bansal, Tiffany Wu, Richard Pullin, Maureen Bavdek and Tim Dobbyn)