Elizabeth Warren Fires A Warning Shot At Hillary Clinton On Stock Market Regulation

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Includes: BP, COP, CVX, RDS.A, RDS.B, TOT, XOM
by: Tristan R. Brown

Summary

Senator Elizabeth Warren recently asked President Barack Obama in a public letter to remove Securities and Exchange Commissioner Mary Jo White from her position.

The letter was really directed at Mr. Obama's likely successor Hillary Clinton, however, and its message called for an expansion of SEC reporting requirements in unorthodox directions.

Ms. Warren has stepped up her attacks on large oil & gas firms in recent months as she has supported state and federal investigations into Exxon Mobil's past climate modeling.

Election models suggest that the elections will result in greater influence for Ms. Warren, in which case investors can expect her to push new regulations on oil & gas companies.

Democratic presidential nominee Hillary Clinton's continued dominance in the polls over Republican opponent Donald Trump - every national poll in the last two weeks has placed her in the lead, in some cases by double-digits - has caused her party to begin positioning itself for its strongest governing position at the national level in six years. Nate Silver gives the Democrats a 77.4% likelihood of achieving a majority in the Senate in next month's elections. While PredictWise gives the Democrats a mere 17% likelihood of doing the same in the House of Representatives, down sharply from the probabilities calculated in the immediate aftermath of Mr. Trump's infamous "hot mic" video, it is becoming clear that Ms. Clinton's party has few qualms about resorting to unconventional tactics to bypass that Congressional body in pursuit of its agenda.

For a case in point, see Senator Elizabeth Warren's recent letter to the Obama administration calling for the defenestration of Securities and Exchange Commission [SEC] Chair Mary Jo White. Supporters of Ms. Warren and her ally Senator Bernie Sanders have long opposed Ms. White's leadership on the grounds that she has not used the SEC's powers to force, among other things, the disclosure of corporate political contributions. As early as 2013 the Sanders-Warren wing of the Democratic party was pressuring the SEC to broaden the scope of the disclosures that it requires from publicly-traded firms to encompass items that have not traditionally been within the Commission's remit.

So why push for Ms. White's sacking as Chair now? After all, Mr. Obama's term in office ends in less than three months, at which point his likely successor Ms. Clinton will have the ability to fill executive branch positions of her own accord. Unless, of course, Ms. Warren's letter was only nominally addressed to Mr. Obama. From the Wall Street Journal:

"But with Mr. Obama a short-timer, Ms. Warren's broadside is really aimed at Mrs. Clinton. It's a warning that she should replace Ms. White with a new chair who will impose the political rule, and that anyone Mrs. Clinton nominates as SEC chair won't make it through a Democratic Senate without the approval of Queen Elizabeth."

The letter, in other words, was intended as a warning shot to Ms. Clinton rather than as a petition to Mr. Obama. The Sanders-Warren wing in the Senate has been staking out its positions on everything from energy policy to for-profit colleges to corporate pay ever since Mr. Trump's meltdown in the polls began earlier this month. The steady drip by WikiLeaks of hacked Clinton campaign emails showing the candidate, among other things, calling fracking "a gift" and telling anti-fracking activists to "get a life" has only invigorated the Democratic party's radical wing. A recent CNBC commentary piece goes so far as to label Ms. Warren the "real winner of the 2016 election":

"Clinton won't need Warren to get Democrats in Congress to vote for her agenda, she'll need Warren to actually set her agenda in the first place. That will be true even if the Democrats win control of Congress and longtime Clinton cronies Nancy Pelosi and Senator Chuck Schumer become Speaker of the House and Senate Majority Leader, respectively. Pelosi and Schumer wield no national power at the polls and it's not clear what they stand for at any given time."

Messin' with Massachusetts?

It can be tempting to categorize the Sanders-Warren wing as being broadly anti-business (medical device manufacturers excluded, of course). This ignores the fact that Ms. Warren was actually a self-identified Republican until the (first) Clinton administration, however. Rather, her record suggests that she generally treats most companies equally, albeit stringently, with one important exception: the fossil fuel sector. And top of that list is Exxon Mobil (NYSE:XOM), which is currently the subject of investigations at both the state and federal levels into if it is overstating the value of its fossil assets in a post-COP21 world. Witness Ms. Warren's June Twitter eruption that followed Exxon Mobil's attempt to block Massachusetts attorney general Maura Healey from obtaining access to the company's internal records (an attempt, ironically, that last week resulted in an order from a federal judge for Ms. Healey to open her office's internal records to Exxon Mobil).

In an August 2016 op-ed published in the Washington Post, Ms. Warren (along with Senator Sheldon Whitehouse) strongly supported efforts by the attorneys general of New York and Massachusetts to determine if Exxon Mobil covered up its own internal research on climate change in the 1970s and 1980s. While that investigation has ultimately fallen by the wayside, with New York attorney general Eric Schneiderman telling The New York Times just ten days after the op-ed was published that his office was no longer investigating the company's 20th-century activities, Ms. Warren and her colleague called for the Senate to bring the company's executives in to testify about the supposed cover-up. That didn't happen, of course, given that the Republicans controlled (and still control for the time being) the Senate, but it indicates that Ms. Warren would very much like to make Mr. Schneiderman's earlier investigation a federal matter if and when the Democrats regain control of the Senate early next year.

Mr. Schneiderman has since shifted the focus of his investigation to how Exxon Mobil values its fossil fuel assets in the context of climate change, a subject that the SEC under Ms. White is also investigating. Both investigations raise a number of questions that are of critical importance to investors in the energy sector, not least of which is how companies are supposed to value their assets if market prices are no longer appropriate. The SEC's investigation has been relatively quiet on the issue and, to its credit, it has hardly advertised the investigation's very existence, making it difficult to know just what it is that it is investigating.

Ms. Warren has made it clear, on the other hand, with her past support for measures to increase the scope of SEC reporting requirements for the supposed benefit of shareholders, that she is willing to resort to unconventional methods of pursuing her pro-regulation agenda, as evidenced by her letter to Mr. Obama. At the same time, she has also used her Senate position to loudly advocate for investigations into fossil fuel producers' historical activities. It requires no major stretch of the imagination to envision the two initiatives being combined.

Last week I wrote that the energy policy battles of the next presidential term are more likely to be between Ms. Clinton and Ms. Warren than they are to be between Ms. Clinton and the Republican party. The former scenario is becoming increasingly likely as polls continue to favor the Democrats in the wake of Mr. Trump's scorched earth campaign shift. While it can be easy to read too much into how a presidential election will impact the economy, I see growing evidence that securities regulation will be the next major battleground in U.S. climate and energy policy. As the world's largest fossil fuel producer and one of its largest companies overall, Exxon Mobil has been and will continue to be the primary target if the Democrats win the White House and Senate next month. That said, investors in other large publicly-traded firms such as BP (NYSE:BP), Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP), Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) and TOTAL SA (NYSE:TOT) can also expect their holdings to potentially be affected, either directly or by association.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long XLE.