Deutsche Bank
Global Public Affairs
Global Political and Regulatory Risk
in 2015 and 2016: What to Watch
November 4, 2015
Francis J. Kelly
Managing Director &
Global Coordinator, Public Affairs
11/10/2015 2010 DB Blue template
“There cannot be a crisis next week. My schedule is already full.”
- Former US Secretary of State Henry Kissinger
“Any idiot can face a crisis. It’s day to day
living that wears you out.”
- Anton Chekhov
“Formula for success: rise early, work hard, strike oil.”
- J. Paul Getty, US businessman
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Francis J. Kelly
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1
11/10/2015 2010 DB Blue template
The world is moving rapidly from the model we have
lived within for 25 years. The where, why and what…
LONG TERM OUTLOOK:
- Geopolitical events are increasingly pressuring global markets and will continue to do
so for the remainder of 2015 and well into 2016.
- Middle East serves as locus for key uncertainty and chaos. We continue to believe the
region is at risk of remaining in turmoil for 30+ years .
- We continue to see NAFTA nations as being seen as economic and political “safe
havens” in large part to “Energy Renaissance.”
- China is going through intense political, economic and societal transformation – all of
which could potentially overwhelm the chances of a successful outcome.
SHORT TERM (3-10 month) OUTLOOK:
- In the coming three to six months, three key events will likely happen and have a long
term positive impact on markets:
‣ Approval and implementation of Iran nuclear negotiations
‣ Congressional approval of Trans-Pacific Partnership (TPP)
‣ US will approve repeal ban on export of crude oil/natural gas
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11/10/2015 2010 DB Blue template
The US: Washington’s 2015-2016 agenda - what to
expect and why it will be important
• Despite the contrary and dramatic press accounts,
Washington has been getting things done, a positive
for the political process and the nation. It may have
been messy but here is what they have gotten done
so far this year:
o Trade Promotion Authority (TPA)
o A federal budget
o Iran nuclear deal
o Debt ceiling
o Medicare Payment & CHIP funding
o Homeland Security funding
o Debt ceiling raise
But big policy items are unfinished:
o Appropriations (by December 11 th )
o Repealing oil export ban
o Highway bill
o Corporate Tax reform
o The Trans Pacific Partnership (TPP)
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11/10/2015 2010 DB Blue template
US corporate tax reform: have the seeds been
planted and is there a deal to be done?
- The US Senate has worked on a possible tax
package since January. But no clear consensus
has emerged on a larger package.
- The real focus is on corporate tax reform,
spurred on by the inversion debate.
- In the Senate, a bipartisan bill was offered to
encourage corporate profits abroad to repatriate
at a significantly lower rate (the Portman-
Schumer bill).
- In the House, a plan was offered in late July
that would allow corporations to repatriate at a
lower rate if they invested in “research and
development” (the Boustany-Neal bill). The
revenue from the deal would pay for the
Highway Trust Fund – which needs money.
- What is interesting for both bills is what did not
happen: The White House remained silent.
- Could Congress (in league with US Treasury)
slip a major corporate tax report into the
appropriations bill using the “Reconciliation”
process?
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Francis J. Kelly
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Source: OMB
4
11/10/2015 2010 DB Blue template
Should hedge funds and private equity funds be
worried about Washington? No.
- There continues to be chatter about dealing with carried interest. But chatter does not
mean action and we see little actual movement toward raising the rates on carried
interest through 2016.
- The new “tax reform” focused on hedge funds is projected to raise $11 billion a year.
Somehow this gets done by allowing the IRS to audit hedge funds and find this amount
of unreported revenue annually. Good luck with that.
- Private Equity has also been a focus of political chatter – maybe we see new regulation
on the burgeoning “Shadow Banking” sector? Again, chatter is not action. There is little
chance Congress or regulators will move aggressively in this space through 2016.
- But “Big Banks” continue to take it on the chin: In an effort to raise revenue for the
Highway Trust Fund, Republicans have legislation moving forward that would drop the
guaranteed interest rate banks receive for “investing” in the Federal Reserve – which
they are required to do by law - from 6 percent to 1.5 percent. This will result in a
significant drop in revenues for some of the biggest banks in the US.
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11/10/2015 2010 DB Blue template
Can US banks get some regulatory relief? Taking care
of small- and mid-sized banks and reforming the Fed
Senator Richard Shelby (R-AL), chair of the US Senate Banking Committee, has put forward a
regulatory relief bill which:
- Raises the “Systemically Important” bar from $50 billion to $500 billion; Re-define small banks from
$10 billion to $50 billion;
- Provides an exemption for banks under $10 billion of assets from the Volcker Rule;
- Requires the Federal Open Market Committee to release quarterly reports on economic
conditions around the country, though the Fed chair would still testify before Congress
semiannually;
- Creates an independent commission to evaluate the structure of the Federal Reserve Board
system, including a review of the number and structure of the Fed's 12 districts and requires the
Federal Reserve to publish a study every two years on its regulation and oversight of nonbanks;
- Requires the Government Accountability Office (GAO) to study the Federal Reserve’s regulation of
systemically important institutions (SIFIs);
- Requires the President of the Federal Reserve Bank of New York to be nominated by the President
and confirmed by the Senate. Also require3 the Fed to speed up the release of Fed minutes.
Some observers have suggested this bill will go nowhere; but we would not
write it off so fast. Shelby is the master of the legislative process and there is
some bipartisan support already for parts of his bill.
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11/10/2015 2010 DB Blue template
Housing reform: 2015 be the year of GSE reform?
- After initial movement on bi-partisan legislation last year, this is a dead effort as indicated by
Banking Committee member and advocate for GSE reform, Senator Bob Corker (R-TN): “Congress
will ignore GSE overhaul for next 16 months.”
- Meanwhile, the housing market is moving on a number of fronts (we’ve seen this horror movie
before):
�
�
Fannie Mae launched their “HomeReady Mortgage” program: You can (again) use the income
from non-borrower household members.
Freddie and Fannie are working on a common Securitization Platform. Just for them (for now)
but will eventually allow other participants. Question as to whether this is a transition to
something new or simply securing the monopoly/duopoly of the GSE’s.
Existing Home Sales
has increased 53.9%
from its lowest level of
3.45 million in July 2010.
Source: Deutsche Bank
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11/10/2015 2010 DB Blue template
The “Americas Decades” - The energy revolution
keeps moving forward, the implications are enormous
- The NAFTA Bloc (US, Canada, Mexico) is emerging as a new “Super Bloc” for business,
finance and energy.
- Combined, the NAFTA Bloc is comprised of more than 500 million people, a $19
trillion economy and the largest energy capability in the world. Not to mention US
and Canadian military superiority and reach globally.
- Mexican government “got it” and amended their constitution; Canada has “gotten it” for
quite some time (i.e. oil sands, Keystone Pipeline, etc.). US Congress now seeing
strategic imperative (not to mention massive federal revenues).
- The local, national, regional and broader geopolitical implications of greater
hemispheric energy independence are extraordinary and are already creating significant
policy changes – and ruptures globally (i.e. Russia, Middle East, Venezuela, China, Iran).
‣ Case in point: If the Ukrainian crisis has done anything, it has intensely focused Washington
(and Mexico City and Ottawa) on the need to rapidly build out natural gas and crude oil
development and export capabilities.
‣ And, in the near future, can tariffs and fees on overseas sales help deal with the US deficit?
There are a growing number of members of Congress who think it can. And will.
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11/10/2015 2010 DB Blue template
The 2016 US election
campaigns have begun…
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9
11/10/2015 2010 DB Blue template
Yes, of course, we are already talking about the 2016
presidential elections…. A multi-billion dollar race?
Republican
Ex-Gov. Jeb Bush (R-FL)
Gov. Scott Walker (R-WI)
Senator Rand Paul (R-KY)
Dr. Ben Carson
Senator Ted Cruz (R-TX)
Gov. Chris Christie (R-NJ)
Gov. John Kasich (R-OH)
Senator Marco Rubio (R-FL)
Senator Lindsey Graham (R-SC)
Ex-Gov. George Pataki (R-NY)
ex-Senator Rick Santorum (R-PA)
Ex-HP CEO Carly Fiorina
Ex-Gov. Bobby Jindal (R-LA)
Donald Trump
Ex-Gov. Jim Gilmore (R-VA
Ex-Gov. Rick Perry (R-TX)
Democrat
Hillary Clinton
Senator Bernie Sanders (D-VT)
Ex-Gov. Martin O’Malley (D-MD)
Harvard Professor Lawrence Lessig
Sen. Elizabeth Warren (D-MA)
Ex-Senator Jim Webb (D-VA)
Ex-Governor Lincoln Chaffee (D-RI)
Vice President Joe Biden (?)
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Francis J. Kelly
francis.j.kelly@db.com
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11/10/2015 2010 DB Blue template
So who would win if the general election were held
today? Strangely, closer than you might think.
The November 4 th RCP* average of major polls shows a surprisingly tight
race between various Republican candidates and Democratic frontrunner
Hillary Clinton.
GOP Candidate
vs. Hillary Clinton
Marco Rubio Clinton +0.4 (45.0 - 44.6%)
Jeb Bush Bush +1% (44.6 – 43.6%)
Donald Trump Clinton +2.2% (46 – 43.8%)
Ben Carson Carson +5.2% (48.6-43.4%)
Carly Fiorina Fiorina +1% (43.5-42.5%)
*RCP = Real Clear Politics Aggregate Poll of major polls
Source: Realclearpolitics.com
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11/10/2015 2010 DB Blue template
How does Clinton do vs. Republican opponents? And,
please, tell me what you really think of Mr. Trump
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Francis J. Kelly
francis.j.kelly@db.com
Source: Quinnipiac College
12
11/10/2015 2010 DB Blue template
Whipsawed! Democrats may be poised to regain
control of the Senate in 2016
- 23 seats have Republican incumbents, 7 seats with Democratic incumbents
- There are 4 open seats: California, Maryland, Indiana and Nevada
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Francis J. Kelly
francis.j.kelly@db.com
Source: National Journal
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11/10/2015 2010 DB Blue template
And remember: The primaries are six months away…
State
Iowa Caucuses
New Hampshire
Colorado/Minnesota/New York/Utah
Nevada
South Carolina
North Carolina
Michigan
Florida/Massachusetts/
Oklahoma/Tennessee/
Texas/Vermont/Virginia
Louisiana
Alabama/Mississippi/
Ohio
Illinois/Missouri
Arizona
Date
January 18 th
January 26 th
February 2 nd
February 6 th
February 13 th
February 16 th
February 23 rd
March 1 st
March 5 th
March 8 th
March 15 th
March 22 nd
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11/10/2015 2010 DB Blue template
The geopolitical outlook: Growing regional tensions
will not get any better in 2016
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11/10/2015 2010 DB Blue template
Iran: US Congress will not stop nuclear deal; EU
already moving forward – fast. What’s next?
- P5+1 and Iran reached a deal. Big
obstacle has been overcome: Enough US
Senators support to ensure it can move
forward.
- Saudi Arabia “supports” the deal. The
Saudi king was in DC last month. US has
quietly promised nuclear protection and
massive weapons sales.
- Market implications of a deal are
significant, especially for European
corporates eager to get back into Iran
marketplace (i.e. Italian PM Renzi already
visited Tehran as has German FM).
- Iran wants to build 400 four & five star
hotels in next five to ten years.
- But do not expect any significant oil
export increase and/or sales into Iran for at
least 8 – 10 months. Iran must first comply
and set up systems for inspections.
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Francis J. Kelly
francis.j.kelly@db.com
Source: IIF; IMF
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11/10/2015 2010 DB Blue template
Yemen in crisis: a new global choke-point?
-13 percent of world’s oil travels
through Gulf of Aden as it travels up
through Suez Canal – almost all of it
heading to Europe.
- Almost 8 percent of all world trade
via shipping goes through Suez
Canal.
- Iran is seen to be trying to build a
“Shia Crescent.”
- Iran sees/fears being encircled by
“Sunni Crescent.”
- If Yemen falls completely to Houthi
tribal control – de facto, becoming an
Iranian satellite – what threat does it
pose to Saudi Arabia?
- Question: will a nuclear deal with
Iran empower them regionally? Or
will it further spur the Sunni nations to
increase their defense efforts?
Yemen: Iran
Backing the
Houthi rebels
Somalia’s Al Shabab
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Francis J. Kelly
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17
11/10/2015 2010 DB Blue template
Libya: Is there any hope for peace or will it become a
hub for regional instability and violence? No and yes
-The US/EU/NATO toppling of long-time
strongman Muammar Gaddafi has led to a
cycle of instability and continuous violence.
- It has also led to severe cuts in oil production
and loss of significant revenue.
- More importantly, Gaddafi’s massive weapons
stocks have directly flowed to Boko Haram in
Nigeria, terrorist groups in Mali and to arm
other movements in Tunisia – as well as
financing them via the sales and trading of
these weapons.
- The US and EU seem to have no strategy to
deal with the situation. White House sources
tell us “it has literally fallen off the table” as an
issue of focus. Is this now Egypt’s problem
through which the US will send
money/weapons?
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18
Conflict in Ukraine: is it all over but for the shooting?
- Moscow got what it wanted: securing
the naval port in Sevastopol and creating
a buffer state between Ukraine and
Russia as well as keeping Kiev weak and
unstable.
- But there has been a cost: Sanctions
are crushing the Russian economy and
Crimea has become a giant money pit for
Putin to pour rubles into. A complete
economic mess.
- However, do not exclude possibility of
more violence in Ukraine or elsewhere in
the region.
- Still waiting for any significant financial
aid or military relief from EU or US. Word
to the wise: do not hold your breath.
- One other conflict is now drawing in
Russian troops: Syria. Russian pilots are
now flying missions with Syrian Air Force.
Ukraine Lines of Withdrawal
Russian vs. Ukrainian Speakers in Ukraine
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Francis J. Kelly
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Source: Washington Post; IIF, National Bank of Ukraine
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Russia: Return of the empire or death of a nation?
- Russia covers nine time zones and
almost 7,000 miles end to end.
-The current Russian population:143
million. With the annexation of Crimea:
146 million.
- By 2030, the Russian population will
have shrunk to136 million.
- By 2050, it will likely have shrunk to
below 120 million and perhaps as low as
115 million (roughly the size of Mexico
or Philippines today).
- Putin has also promised to increase
military spending by $770 billion between
now and 2020.
- Putin has also overseen the building or
reconstruction of 23,000 Russian
Orthodox Churches. And urged
Russians to have lots of children
(offering financial incentives).
Natural population growth of Russia since 1950
Birth rate Death rate Natural growth
Sources: United Nations; American Enterprise Institute; Globe & Mail
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11/10/2015 2010 DB Blue template
Washington is watching this deal: A Sino-Russian oil
and gas alliance?
Russian President Putin inked a $400 billion deal with China in May 2014
Source: Gazprom
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11/10/2015 2010 DB Blue template
China’s Siberian energy plans: 7,000 km of new pipe
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Francis J. Kelly
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Source: Chatham House Paper: Through the Dragons Gate? 12/13
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11/10/2015 2010 DB Blue template
China goes big in Pakistan… $46 billion big…
- China, in an effort to
counter India, build
additional shipping
points and expand
trade, has just arranged
for a $46 billion
investment in pipelines
from one end of
Pakistan to the coastal
city of Gwadar.
- India is not happy and
we suspect al-Qaeda
and ISIS in the northern
region are not happy
about this, either.
- Will China build a
naval port, too? We
believe so.
Where the bad guys
live…
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11/10/2015 2010 DB Blue template
China and the evolution of revolution: Rise of radical
Muslims in China’s western provinces
- China now has a rapidly growing radical Islam problem: Ethnic Uyghur’s – who
are Turkic speaking – feel badly repressed and left out of the Chinese economic
growth.
- They have become increasingly radicalized. Uyghur’s are fighting with ISIS and al-
Qaeda. More importantly, they are conducting more and more terrorist strikes within
China. China now is seeking to engage in Afghanistan. And they have become a key
partner to Pakistan in recent years.
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11/10/2015 2010 DB Blue template
The new frontier: Drilling in the Arctic and race with
Russia and China
- Once cold and forbidding, climate change
has allowed multiple countries to see it as
a massive new and untapped region for
natural resources and critically important
geopolitical/military vantage point.
- President Obama visited this week and
both called for renewed climate strategy as
well as ramping up Coast Guard capabilities
to operate in the Arctic.
- Russian President Putin has placed great
emphasis on Russian military presence in
the Arctic. China is also trying to lay claim
to region as part of their never-ending
search for oil.
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25
11/10/2015 2010 DB Blue template
Cuba: we showed you the love, now show us the
money
- President Obama’s historic re-opening of
diplomatic relations has set the stage for
potentially significant new investment
opportunities in Cuba. But we stress
“potentially” as the Castro Brothers now
seem to be slowing considerably with
respect to any reforms.
- Meanwhile, the US Congress is going to
make sure there is no funding of the US
Embassy and will be vigilant on any new
business licenses granted by US Treasury
for banking or foreign trade with Cuba.
- What to watch for: Pope Francis – who was
critical to the success of the negotiations –
just finished visit to Cuba and US. Will
there be further agreements to hasten better
relations.
“That hoard of capitalist investor’s should be
arriving…just… about… now.”
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11/10/2015 2010 DB Blue template
Argentina: Elections in October bring little clarity to
future
- The August 9 th mandatory open primaries (PASO) brought little clarity as to who will
succeed President Cristina Kirchner in the October 25 th elections. She has held office
since 2007 and, before that, her husband held the presidency from 2003-06.
- Kirchner’s handpicked successor, current governor of Buenos Aires province, Daniel
Scioli (of the Peronist faction) leads in the elections held last week. But the 2 nd and 3 rd
place finishers could band together to pull off a victory.
- The Argentine economy has seen zero growth this year. FDI has declined 41 percent
and inflation stands at 30 percent. Voters remain deeply divided over which candidate
and which economic policy to support. We expect continued problems for the
foreseeable future.
“You’re only going to get this much back. . .”
Inflation and recession are clobbering the
average Argentinean.
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Francis J. Kelly
francis.j.kelly@db.com
Source: Straftor
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Venezuela: The spiral widens and intensifies… but
there is some good news
- The Venezuelan legislative elections are only one month away (December
6 th ) and the country continues to be wracked by dysfunction, corruption and
shortages of food, toilet paper, medicines, etc.
- The government has also banned a number of leading opposition figures
from running for office and/or has placed them under house arrest.
- In the first half of 2105, their were reports of 132 lootings of stores and 2,800
protests*.
- Inflation is now estimated at over 800 percent, making it the highest in the
world.
- Meanwhile, President Maduro has revived old border disputes with Guyana
and closed the border with Columbia, causing significant social unrest.
- So what is the good news? There is a new and serious dialogue underway
between the United States and Venezuela. Multiple high-level diplomatic
visits have been undertaken in the last six months. A by-product of the US-
Cuba rapprochement?
*source: Venezuelan Observatory for Social Conflict
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Contact:
Francis J. Kelly
Managing Director &
Global Coordinator, Public Affairs
Deutsche Bank
801 17 th Street, N.W.
Suite 300
Washington, DC 20006
DC Office: 202-626-7022
NY Office: 212-250-7253
Email: francis.j.kelly@db.com
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Francis J. Kelly
Managing Director & Global Coordinator, Public Affairs
Head, Government & Public Affairs – North and South America
Frank Kelly is Global Coordinator for Public Affairs as well as head of Government & Public Affairs for North and
Latin Americas. In this role, he manages and coordinates relationships with elected officials and political and
legislative bodies globally.
Additionally, he heads up the Bank’s U.S. Direct Investment Advisory Group (DIAG) providing strategic counsel to
non-US companies engaged in cross-border mergers and acquisitions requiring regulatory and political approvals.
Mr. Kelly also serves as the Bank’s Chief Political Risk Strategist advising clients on geopolitical and domestic risk
issues and their impact on markets and industry sectors.
Previously, he was Head of Communications & Public Affairs – Americas overseeing legislative and regulatory
matters, corporate and internal communications, branding and advertising and conferences and events for
Deutsche Bank in the Western Hemisphere.
Prior to joining Deutsche Bank, Mr. Kelly held senior positions at both Charles Schwab & Co. and Merrill Lynch &
Co, Inc.
Before joining the private sector, Mr. Kelly served at the U.S. Securities and Exchange Commission as Chief
Spokesman as well as the US Department of Justice as Assistant to the Director for Policy Development.
Prior to these posts, he served in both the George H. W. Bush and, earlier, the Reagan White House where he
started as a writer for President Reagan.
Mr. Kelly is a member of the Council on Foreign Relations and the International Institute of Strategic Studies. He
serves as a member of the Board of Directors of the American Council on Germany and the Atlantic Council of the
United States.
Mr. Kelly, his wife, Maura, and their two living children resides in Great Falls, Virginia.
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