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Vote Results Cheer Wall Street

Wall Street got what it wanted most of out the midterm elections on Tuesday: more gridlock.

The strong showing by Democrats in the House, where they gained five seats, means Republicans will have a harder time pushing through their agenda, while President Clinton's proposals will be blocked by Republican majorities on Capitol Hill.

If the Democrats can't spend more money and the Republicans can't cut taxes, the federal surpluses should continue to mount, giving a boost to the bond market, lowering interest rates and making stocks more attractive.

The biggest loser could be House Speaker Newt Gingrich and his leadership team in the House: Dick Armey, Tom Delay and John Boehner. Republicans hoped to turn the election into a referendum on the impeachment of President Clinton. But it turned into a test for Gingrich, who led his troops to a historic defeat: No president's party had gained seats in the House in an off-year election since 1934.

Gingrich failed to meet expectations. And everyone on Wall Street knows what happens when you don't meet expectations: You get hammered.

With history as a guide and running against a wounded president, Republicans hoped to add 10 to 20 seats to their majority in the House and perhaps reach the 60-seat mark in the Senate that would stop the Democrats' constant filibustering. It didn't happen: Republicans lost five seats in the House and barely hung on to their 55-45 margin in the Senate.

The class of 1994, which swept Gingrich into power, has been impatient with the slow pace of change in Washington ever since Clinton broke the Republicans over the government shutdown in 1996. The more radical back-benchers in the party think Gingrich has been weak and too conciliatory.

It's time for Gingrich & Co. to go, they think. And they're sure to act now.

"The long knives are going to be out," said political analyst Chuck Gabriel of Prudential Securities in Arlington, Va.

If they toss Gingrich & Co., a more aggressive Republican agenda could be revitalized, including a new push for across-the-board tax cuts. But will the new Republicans have any more luck than Gingrich did, now that the Democrats are stronger and Clinton feels exonerated?

"We're going to have tons of gridlock," Gabriel said.

The most important single race from Wall Street's point of view was the stunning victory of Democrat Charles Schumer over Sen. Al D'Amato in New York. D'Amato was the chairman of the Senate Banking Committee, which was very close to agreeing on a financial modernization bill that is crucial to the Citigroup (CCI) merger and to other big deals rumored and pending.

If current law is not changed, Citigroup will be forced to spin off its insurnce operations, which were the whole rationale for the deal with Travelers.

Schumer, who was a top Democrat on the House Banking Committee, shares many of D'Amato's views on bank reform, but he won't take D'Amato's place on the Senate committee. That task will fall to Sen. Phil Gramm, R-Texas, who blocked the bill in committee over his demands that the Community Reinvestment Act provisions not be extended.

President Clinton was already promising a veto of the bill over a regulatory turf battle between the Treasury and the Federal Reserve. If Gramm's views prevail, President Clinton will never sign the bill.

Washington, despite its gridlock on taxes and spending, may actually act in the next two years on a bigger issue: Social Security reform.

"The really significant game for the markets in this town is Social Security," Gabriel said. The White House has been hinting that it will offer a plan that will include some so-called privatization options that will give workers the chance to target some of their payroll taxes into individual retirement accounts.

"We're talking about $70 billion a year," Gabriel gushed. "That's a real infusion of cash into mutual funds."

Whether any action is taken on Social Security will depend on how each party (and its presidential hopefuls) view the landscape heading into 2000. If gridlock is rewarded, reform won't pass. But if the parties see value in either getting something done or in differentiating themselves on Social Security, the next two years could produce a new retirement system for the nation.

Written By Rex Nutting, Washington Bureau Chief, CBS MarketWatch

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