NEW YORK — As Treasury Secretary, Steven Mnuchin would have significant influence over the way the financial system, particularly Wall Street, operates. And the former Goldman Sachs banker indicated Wednesday that he would at least partially be relying on his time as a regional banker to guide his decisions.
“We’ve been in the business of regional banking and we understand what it is to make loans,” Mnuchin said in an CNBC interview, apparently referring to his time leading IndyMac, a bankrupt mortgage lender. “That’s the engine of growth to small- and medium-size businesses.”
But Mnuchin’s time at the bank, which was recently purchased by another regional lender, CIT, has quickly turned into one of the chief criticisms of his nomination by Democratic lawmakers and progressive groups.
Mnuchin “is just another Wall Street insider,” Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (D-Vt.) said in a joint statement. “That is not the type of change that Donald Trump promised to bring to Washington – that is hypocrisy at its worst.”
And Mnuchin, who must be confirmed by the Senate, is also likely to face questions about how he would separate himself from CIT, a small business lender that is partially regulated by the Treasury Department. Mnuchin, who could not be immediately reached for comment, serves on the bank’s board and has stock worth about $100 million in the company.
Mnuchin is a Wall Street veteran who spent nearly 20 years at Goldman Sachs before starting his own hedge fund, Dune Capital. He leapt into the banking industry when he led a group of investors in the purchase of lender, IndyMac, during the financial crisis. That bank was eventually bought by CIT.
His financial industry experience has heartened Wall Street insiders, but left some Democratic lawmakers and progressive groups crying foul. Mnuchin “made himself enormously wealthy by cashing in on the country’s financial collapse,” Take on Wall Street, a progressive group calling for Wall Street reform, said in a statement.
In a series of television interviews Wednesday, Mnuchin reflected fondly on his time as a regional banker. “Let me tell you one of the most proud aspects of my career was buying IndyMac during the financial crisis,” he told CNBC. “We brought it from the government in a highly competitive six-month auction and we saved a lot of jobs and created a lot of opportunities.”
As part of the deal, federal regulators agreed to cover a significant share of the bank’s losses — a guarantee that lasts through 2019. The bank — later renamed OneWest —has also repeatedly faced criticism over its attempts to foreclose on homeowners who were in the process of modifying their loans, among other practices.
OneWest was sold to CIT last year for more than $3 billion, more than double what Mnuchin and the other investors paid for it. The CIT merger “was the first bank deal to be approved post-Dodd Frank over $50 billion,” a threshold that puts the bank under tough regulatory scrutiny, Mnuchin noted.
Advocacy groups complained that the merger would combine two banks scarred by the financial crisis. CIT had nearly collapsed in 2009 before receiving more than $2 billion in taxpayer bailout funds. It filed for bankruptcy a few months later after regulators refused to give the bank another bailout.
“The same community groups protested against the deal and the regulators looked at the deal and thought it made sense,” Mnuchin said.
The merger vaulted CIT into an exclusive club: Financial institutions deemed so important that their failure could harm the economy or “too big to fail.” The designation comes with a cost. CIT must now comply with tougher rules overseen by the Federal Reserve and other financial regulators.
Among the new requirements is an annual “stress test” in which large banks must prove they can have enough capital to continue operating during times of economic and financial turbulence and have a “living will” that would unwind their operations without harming the economy. The Federal Reserve gave a “qualitative objection” to CIT’s plan earlier this year, the company said in a government filing. “We have begun our remediation efforts,” the company said in its filing.
But the tougher requirements, called for by 2010’s financial reform law known as Dodd Frank, could be weakened during the Trump administration. On Wednesday, Mnuchin, called for a partial repeal of extensive banking industry regulations put in place after the Great Recession.
The 2010 financial reform law should be simplified, he said during an interview on CNBC Wednesday morning. “We want to strip back parts of Dodd-Frank that prevent banks from lending, and that will be the number one priority on the regulatory side,” said Mnuchin.
As Treasury Secretary, Mnuchin would have significant influence on how any new rules are drawn, industry analysts said. “That designation may not mean much anymore once Donald Trump gets a hold of Dodd Frank,” said Bert Ely, a banking consultant in Alexandria, Va.
This also comes as the House is expected to pass legislation as soon as Thursday that would ease regulations on dozens of big banks, a move progressive groups worry could be the first step towards dismantling restrictions put in place after the financial crisis to rein in Wall Street. The legislation would eliminate the $50 billion threshold for additional regulation all together.
The current system is arbitrary and should be replaced by a more “holistic” approach, said Matt Well, a spokesman for the Regional Bank Coalition, an industry group that has called for changes to Dodd Frank law.
The proposed legislation “would allow regional banks to focus on their core business rather than on regulatory compliance, which is the current reality under Dodd-Frank,” he said. “Regional banks are far less risky than their Wall Street counterparts and hence should not be forced to abide by the same complex compliance requirements.”
But the legislation would also give Mnuchin, as Treasury Secretary, more power to directly influence which banks receive additional regulatory scrutiny and limit the Federal Reserve’s ability to act unilaterally to rein in a financial institution, said Marcus Stanley, policy director for Americans for Financial Reform.
If the legislation passed “then Mnuchin has a direct and personal role in deciding whether enhanced prudential standards are applied to CIT,” he said. “It would be a very radical, new thing.”