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December 14, 2012

BUDGET & TAX POLICY
Obama, Boehner Meet Again, But Remain Far Apart on Fiscal Cliff; Cantor Vows to Keep Congress in Session Until Deal is Reached

ENERGY & ENVIRONMENT
Senate Hearing Tees Up Talks for Next Congress on Tax Incentives to Promote Energy Efficient Building Retrofits

CAPITAL & CREDIT POLICY
Dodd-Frank “Volcker Rule” Comes Under Fire at House Financial Services Hearing; Subcommittee Examines Economic Impact of Derivatives Regs


BUDGET & TAX POLICY

Obama, Boehner Meet Again, But Remain Far Apart on Fiscal Cliff; Cantor Vows to Keep Congress in Session Until Deal is Reached  

With the clock ticking toward the year-end “fiscal cliff,” there again appeared to be no progress this week between the White House and Congress on figuring out a plan for averting massive tax increases and budget cuts at the beginning of next year. Whereas last Sunday’s meeting between President Obama and House Speaker John Boehner (R-OH) was viewed as an encouraging sign, the “one after sundown yesterday seems like a signal. . . [of] a calcifying standoff,” according to today’s CQ Roll Call Daily Briefing.

fiscal cliff Capitol profile

The amount of time that’s available for reaching an agreement (be a “grand bargain” or even a significantly scaled-backed budget-and-tax deal) is actually far shorter than the 17 days remaining till Dec. 31.

Virtually everything — including the identical press statements issued by both sides yesterday, and Boehner’s widely telegraphed decision to spend the weekend at home in Ohio — is being parsed for signs of the “real” state of play between the two principals. Are they really digging in their heels — with Obama hinging everything on tax rate increases on top earners, and Boehner defiant on rate increases and demanding spending cuts equal to any tax increases — or are they putting up a tough front for their respective constituencies while actually working toward a deal?

Either way, the amount of time that’s really still left for reaching an agreement (be a “grand bargain” or even a significantly scaled-backed budget-and-tax deal) is far shorter than the 17 days remaining till Dec. 31. This is because it would take at least a week from the time an agreement is reached for congressional leaders to brief rank-and-file Members, round up necessary votes, and complete procedural requirements for passing legislation and sending it to the President for his signature.

With no progress in sight, business CEOs this week ratcheted up their warnings about the economic impact of the cliff — a message that was amplified by Fed Chairman Ben Bernanke’s comment Wednesday that business investment and hiring decisions are already being affected by the uncertainty surrounding the cliff talks. While Fed policymakers this week said they expect the economy to grow by 2.3 percent – 3 percent in 2013, a Business Roundtable survey released this week said CEOs expect only 2 percent growth in GDP next year (The Wall Street Journal, Dec. 14).

Ben Bernanke hands

Fed Chairman Ben Bernanke

Also this week, amid the dearth of progress between the two key principals, various congressional groups have continued floating various possibilities for resolving the crisis. Some Senate Republicans, for example, increasingly believe they should focus on using the debt limit as leverage to get entitlement and spending concessions. Amid expectations that the federal government will run out of cash sometime in February or early March, congressional Republicans reportedly view a debt ceiling increase as their party’s best leverage for getting Obama to cut federal spending. Bernanke has said that a debt limit default — like the one in mid-2011 — would be calamitous.

Meanwhile, House Majority Leader Eric Cantor (R-VA) is threatening to keep the House in session until a deal is reached.

With lawmakers searching intensively for revenue sources to offset deficit reduction and preserve politically popular middle-class tax cuts, The Roundtable continues working to educate current and incoming policymakers about our industry’s vital role in job creation and the U.S. economy.  

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ENERGY & ENVIRONMENT

Senate Hearing Tees Up Talks for Next Congress on Tax Incentives to Promote Energy Efficient Building Retrofits  

While fiscal cliff negotiations continued to dominate Washington this week, the Senate Finance Committee’s Energy Subcommittee held a hearing on Wednesday to examine the role of energy policy in the context of comprehensive tax reform — including how the tax code could be used to encourage energy efficiency retrofits of commercial and residential buildings. Along these lines, subcommittee members gave significant attention to Roundtable-supported proposals that would extend and reform the Section 179D tax deduction for energy efficient commercial and multifamily buildings — a signature element of The Roundtable’s energy policy agenda.

2012_12_03 IMAGE Comm Building Modernization Act Coalition Letter

The Roundtable and a broad industry coalition explained in a Dec. 3 letter to Senate leaders how the 179D deduction has great untapped potential.

As The Roundtable and a broad industry coalition explained in a Dec. 3 letter to Senate leaders, the 179D deduction has great untapped potential “to leverage greater private investment in U.S. real estate, create American construction and manufacturing jobs, save businesses billions of dollars in utility bills — and help make our nation more energy secure.” 

Retiring Senator Jeff Bingaman (D-NM), who chairs the Senate Energy Committee as well as the Finance subcommittee on energy tax issues, noted that “energy efficiency is a worthy policy goal,” and that Congress should remain committed to “examin[ing] the best and least-cost ways to promote those policies,” even within the “context of a contentious debate on how to close the federal deficit.” Bingaman, along with Senators Olympia Snowe (R-ME), Dianne Feinstein (D-CA), and Benjamin Cardin (D-MD), are the original co-sponsors of the “Commercial Building Modernization Act” (S. 3591).

This bill would extend the 179D tax deduction (expiring at year-end 2013) while making important improvements to encourage more energy upgrades of existing buildings. S. 3591 would also make it easier for REITs (and other real estate holding structures with pass-through characteristics) to claim the 179D deduction.

Witnesses at Wednesday’s hearing included Steven Nadel, executive director of the American Council for an Energy Efficient Economy (ACEEE). “[F]ederal tax incentives can have a large ‘multiplier effect,’ helping to leverage future market growth,” stated Nadel. “Targeted federal tax incentives [focused on building efficiency] are needed because the federal government brings unique attributes that other market players … do not have …. Specifically, the federal government can provide consistent incentives nationwide, rather than a patchwork where some states have incentives, others do not, and incentive levels vary from place to place.”

  PERI entire cover

The  2011 analysis prepared by The Roundtable, the Natural Resources Defense Council, and the U.S. Green Building Council

In terms of maximizing the benefits of limited federal investment and getting more “bang for the buck” in a time of budget austerity, said Nadel, the 179D deduction and S. 3591’s reform measures are among the most cost-effective options that Congress could pursue in promoting energy policy.

Mark Wagner, vice president of government relations at the Fortune 100 energy services company Johnson Controls, also testified at the hearing. Wagner specifically voiced support for S. 3591, noting that it would establish a technology-neutral tax deduction that would afford building owners “the freedom to install traditional as well as state-of-the art technologies to meet a variety of operations and tenant needs.” He also emphasized that the 179D reform bill would provide the retrofit market with a performance-based tax incentive that would “reward building owners for deeper energy savings and implementation of more improvement measures.”

In an exchange with Senator Cardin, Wagner also highlighted the jobs-boosting impact of 179D reform measures. He cited a 2011 analysis prepared by The Roundtable, the Natural Resources Defense Council, and the U.S. Green Building Council, which estimated that 114,000 new jobs would arise from financial incentives that encourage existing building retrofits (including proposed 179D reforms). These new jobs would range from construction to the manufacture of high-performing materials produced in the U.S. [June 17 2011 Roundtable Weekly]   

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CAPITAL & CREDIT POLICY

Dodd-Frank “Volcker Rule” Comes Under Fire at House Financial Services Hearing; Subcommittee Examines Economic Impact of Derivatives Regs  

Proposed regulations to implement the Dodd-Frank Act’s “Volcker Rule” and derivatives provisions — both of which could have significant negative implications for commercial real estate — were the focus of two hearings held by the House Financial Services Committee this week.

2012_01_27 IMAGE - VolckerRule

The Jan. 27, 2012 comment letter to regulators on the Volcker Rule.

The Volcker Rule — the subject of earlier hearings by the same committee in January and July — is intended to reduce risks facing U.S. financial institutions by barring them from so-called “proprietary trading” and from sponsorship of private equity and hedge funds. But, with some financial firms serving as sponsors of private equity funds and other “third party” investment funds that invest in commercial real estate, the Volcker Rule could, in effect, push financial services companies out of the asset management and real estate fund business — constraining capital and credit flows as commercial real estate markets make their uneven recovery. [See The Roundtable’s Jan. 27 comment letter to regulators re: Volcker Rule]

At yesterday’s hearing by the full committee, Chairman Spencer Bachus (R-AL) pointed out that the Volcker Rule is designed to prevent proprietary trading by banks, yet “no one, not even Paul Volcker himself, argues that proprietary trading was a cause of the financial crisis.” (BankInvestmentConsultant.com, Dec. 14). 

The chorus of voices expressing concern about the proposed regulations also includes former FDIC Chair Sheila Bair, who last fall characterized the pending regulatory proposal as a “300-page Rube Goldberg contraption of a regulation.”  

Both she and Volcker have reportedly said the existing proposal should be scrapped — a point echoed at yesterday’s hearing by lawmakers as well as witnesses, including Thomas Quaadman of the U.S. Chamber of Commerce.  [See the hearing witness list and archived webcast of hearing].

Along these lines, 120 House lawmakers wrote to banking regulators in January, urging them to go back to the drawing board with the proposed rulemaking. (Roundtable Weekly - Jan. 27, 2012)

The incoming chairman of the House Financial Services Committee, Rep. Jeb Hensarling (R-TX), focused on the rules’ complexity and the massive amount of negative comments (more than 18,000) that have been submitted to regulators since they first unveiled implementing regulations in October 2011. “As the Vice Chairman of this committee, I have noted not a few, not hundreds, but literally thousands of negative comments to have either arrived to this committee or to regulators from entities that are supposedly not negatively impacted,” said Hensarling.

Hensarling

The incoming chairman of the House Financial Services Committee, Rep. Jeb Hensarling (R-TX)

Other committee Republicans argued that the Volcker Rule should be looked at in conjunction with the multitude of other financial regulations that are pending — such as new derivatives rules and regulations to implement the Basel III capital accord. [The Roundtable and its coalition partners made essentially the same point in Nov. 14 and Nov. 28 letters to regulators, in conjunction with recent congressional hearings on Basel III, warning that the array of pending regulatory initiatives would have “direct impacts upon the ability of non-financial businesses to mitigate risk and raise the capital needed to expand and create jobs.”]

At yesterday’s forum, yet another GOP lawmaker asked about the potential for regulatory arbitrage, if other countries do not adopt measures similar to the Volcker Rule.

Democrats — including outgoing Rep. Barney Frank (D-MA), co-author of Dodd-Frank — largely defended the need for the Volcker Rule and the pace at which regulators are proceeding with implementation.

“I understand the difficulty, but I do want to say in defense of the regulators that they are in some sense damned if they do and damned if they don’t,” said Frank, adding that regulators have “listened to a very large number of comments and seek to deal with them and improve the rules,” but then “people complain it’s taking too long.”

Regulators were hoping to finalize the rule by year-end, but now expect to complete their work early next year, Fed Chairman Bernanke said at a press conference this week. The Fed is one of five regulators working on the measure (Bloomberg, Dec. 13). 

House Subcommittee Examines Pending Derivatives Regulation

A hearing on Wednesday by the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises focused on the economic impact of pending derivatives regulations and efforts by the Commodity Futures Trading Commission (CFTC) to enforce cross-border regulation of derivatives contracts. 

 Gensler_testify_reflection

CFTC Chairman Gary Gensler testified that “during a default or crisis, risk knows no geographic border.”

“Lawmakers focused most of their attention on the CFTC, raising concerns that some are being driven out of the swaps market because of the agency’s changes,” according to a report in American Banker on Dec. 13

According to FINCad Derivatives News (Dec. 14), CFTC Chairman Gary Gensler testified that “during a default or crisis, risk knows no geographic border.” He added, “If a run starts on one part of a modern financial institution, almost regardless of where it is around the globe, it invariably means a funding and liquidity crisis rapidly spreads to the entire consolidated entity.” 

The Real Estate Roundtable and its partners in the Coalition for Derivatives End-Users remain focused on Dodd-Frank regulations governing business end users’ ability to cost-effectively manage risk through over-the-counter (OTC) derivatives.

In a positive development, the U.S. Treasury Department recently determined that foreign exchange swaps and forwards should not be regulated as “swaps,” since they do not share the risks associated with these other products. In a Nov. 19 press release, the coalition said Treasury’s final decision is “welcome news for Main Street businesses that rely on these products to manage their foreign exchange risk.”

The coalition is “hopeful that this commonsense determination will be followed quickly by other Executive Branch actions designed to protect end-user companies from unnecessary regulations that could cost the economy jobs. To that end, the Coalition urges regulators to ensure that margin requirements, inter-affiliate trade regulation and cross-border rules are appropriately tailored so that they do not impact end-users.”  

In a Nov. 26 comment letter to banking regulations, the Coalition restated its “fundamental belief” that the Dodd-Frank Act “does not permit regulators to impose margin on end-users, either directly or indirectly.” 

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