Financial services

Executives in the financial services industries say Democratic gains in Congress make broad changes to retirement programs like Social Security less likely, but could lead to smaller reforms and changes in other areas such as hedge fund regulation.

While the Democrats' are now in a better position to block ideas such as private savings accounts that President Bush had put on the table, Paul Schott Stevens, the president of the Investment Company Institute, a mutual fund trade group, said the Democrats' electoral base could allow them to pass new retirement programs that Republican majorities could not. "Like Nixon in China, the Democrats might be able to address these kinds of issues," Stevens said.

Privatization of Social Security would provide a major boost to the region's financial industry, which is dominated by mutual fund firms such as Fidelity Invesments and Putnam Investments. After several lean years following the Internet bust of 2000, investors are again putting money into mutual funds as the stock market improves and recent federal legislation to encourage saving for college and retirement takes effect.

One immediate impact of the elections is to set up Newton Democrat Barney Frank to become chairman of the House's Financial Services Committee. Yesterday, Frank vowed to protect Social Security and proposed a broad compromise with Republicans in which Democrats would support trade and immigration reform policies to drive economic growth, in return for passage of measures like housing aid and better scrutiny of executive pay.

Another area of great interest is the regulation of hedge funds after a court overturned an attempt at greater oversight by the SEC.

Another major issue facing the financial services industry is whether Congress will preserve Republicans' tax credits for capital gains generated by investments, set to expire in 2010. Many executives think allowing these to end would be a blow to the industry. Paul Oldfield, the chief investment officer of US Trust for New England, said he doesn't expect Congress to act on the area before 2008 at the soonest. The issue, he said, will likely become "a bargaining chip in terms of withdrawal from Iraq."

Frank's committee will also oversee the banking industry. Dan Forte, head of the Massachusetts Bankers Association, said the rise of Democrats in Congress won't be disruptive, noting Frank and others have opposed some lending by nonbank companies. "I think the Wal-Marts of the world should be concerned this morning," Forte said yesterday.

ROSS KERBER