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WASHINGTON (Reuters) - If Republicans make big gains in U.S. Congressional elections on Tuesday, as expected, Wall Street and big banks will have sweet, but incomplete, revenge on Democrats who drove through sweeping financial reforms against industry opposition.
The likeliest outcome of Democrats losing control of one or both chambers of Congress will be divided government and two years of legislative gridlock on issues important to the financial services sector, said policy analysts and aides.
That means the sector's regulatory headaches -- near migraine level following the enactment in July of the Dodd-Frank Wall Street Reform and Consumer Protection Act -- won't get worse, but probably won't get much better, either.
"We expect two years of deep gridlock ... Nibbling at the edges of Dodd-Frank and some cosmetic changes to the new law are possible. Fundamental changes are highly unlikely," said Brian Gardner, policy analyst at Keefe, Bruyette & Woods.
That outlook could shift if a new breed of far-right Tea Party activists being swept into power pushes the Republican Party to confrontational extremes, which is a possibility. One scenario might be an effort to strangle Dodd-Frank by depriving regulators of funding needed to implement it, aides said.
"It's hard to predict what this iteration of the Republican Party is going to do. They're being driven to the far right by the Tea Party. Normal rules of fiscal responsibility and governance may not apply," said David Min, associate director at the Center for American Progress, a liberal think tank.
But the political climate ahead of the 2012 presidential race doesn't favor Republicans pinning their ambitions to a broad rollback of Dodd-Frank that President Barack Obama would only veto anyway. Moreover, the White House would probably welcome such a fight since it would bring the opportunity to once again paint Republicans as the allies of wealthy elites.
So, even with the chairmanships of key congressional committees within their grasp, Republicans can be expected to hold a steady stream of hearings attacking Dodd-Frank, partly to satisfy lobbyists and campaign donors, analysts said.
In the end, though, only incremental changes will be attainable and mostly at the administrative level where Dodd-Frank is already being implemented by regulators.
"I just don't see a lot of political points for Republicans to win by coming out against Dodd-Frank," Min said. "They will have a lot of bark on this issue, but not much bite."
One upside to that scenario for industry is that gridlock reduces the chances of new legislative initiatives and lets lobbyists concentrate on Dodd-Frank's implementation.
Hundreds of rulemakings are called for under the bill, with regulators left to flesh out details on derivatives regulation, the "Volcker rule" provision limiting risky trading by banks, credit rating agency oversight and other key areas.
Seeking to widen end-user exemptions to mandatory central clearing of derivatives and margin requirements for trading are important issues for industry, analysts said.
So is trying to carve out broader exemptions to the Volcker rule for proprietary trading inside banks and for banks' links to hedge and private equity funds, they said.
All 435 seats in the House of Representatives and a third of the Senate's 100 seats are up for grabs on Tuesday. Polls show Republicans will likely win a majority in the House, with control of the Senate remaining in Democrats' hands.
The senior Republicans who would take over the House Financial Services Committee, if their party wins a House majority, were fierce opponents of most of the sweeping financial regulation reforms enacted into law in July.
Like the banking lobbyists they lined up with in opposition, the Republicans fought unsuccessfully over many months of intense debate to block and delay the bill.
Representative Spencer Bachus, as its senior Republican, is in line to lead the financial services committee if its present chairman, Democrat Barney Frank, is ousted.
Bachus told Reuters in September he wants to repeal portions of Dodd-Frank, specifically a section of the bill that sets up a new way for the government to dismantle large nonbank financial firms on the brink of collapse.
The "orderly liquidation" provision is one of several interlocking measures meant to prevent a repeat of the 2007-2009 financial crisis that deeply wounded the economy and led to huge taxpayer bailouts under the Bush administration.
Calling for a repeal of the new process for dealing with troubled firm is easier than doing it, of course. "Let every systemic institution fail and fall into the bankruptcy abyss a la Lehman Brothers? Not so easy in practice, no matter how desirable it may seem in theory," said Karen Shaw-Petrou, managing partner at Federal Financial Analytics.
Under Bachus rather than Frank, the committee would take on a sharply different tone. Key subcommittees would be led by conservatives such as Ron Paul, Jeb Hensarling and Scott Garrett. They could be expected to hold hearings to hear from top regulators about the implementation of Dodd-Frank.
"I do see a technical corrections bill that comes together and gets passed, but that would probably have to be considerably narrower than some on the committee ... would want," said Ed Mills, policy analyst at FBR Capital Markets.
One plus for Wall Street, Mills said, is that a proposed bank tax to fund the 2008 bailouts is probably dead since bailout cost estimates are falling and Republican opposition to the tax will only widen after the elections.
In the Senate, Democrat Tim Johnson is expected to take over the chairmanship of the banking committee from Christopher Dodd, who is retiring, unless Republicans win a majority. In that case, Richard Shelby would lead the panel.
In either case, neither party will be in a position to dominate the Senate, with gridlock the result, analysts said.