Senators put Treasury Secretary nominee Steven Mnuchin through the ringer on Thursday as they vetted the former banker’s credentials to serve in President-elect Donald Trump’s cabinet.
In a five-and-a-half hour confirmation hearing, Mnuchin faced questions probing his previous and potential impact on all aspects of the U.S. financial system, from his views on tax reform, to his role in the mortgage crisis when he ran OneWest Bank, to whether he’d used an offshore account to evade taxes on his personal income.
Tense and often dramatic, the hearing also yielded several surprising revelations, including that it was Mnuchin’s bank that had forced the famous Octomom’s house into foreclosure, and that the would-be Treasury Secretary, in a break with Republican orthodoxy, apparently supports expanding the IRS.
Mnuchin, who built a net worth of as much as $500 million thanks to a banking career that began at Goldman Sachs (GS), went on to run a hedge fund and executive-produce Hollywood movies. A rookie to government service, Mnuchin sought to convince senators not only that his Wall Street career prepared him for the Treasury job, but that he had developed sufficient compassion for the average American taxpayer to be able to effectively work on their behalf.
But the nominee sometimes came up short on specifics about the policies he would pursue if confirmed for the job. While several lawmakers confronted him with questions about how he would handle matters that came before the Treasury relating to the President-elect’s business holdings, Mnuchin pledged to “deal with President Trump’s business no different than I would deal with any business that comes before the committee.”
Here’s what Mnuchin had to say about a few other closely watched issues facing the Treasury:
1.Fannie Mae and Freddie Mac
After recently voicing support for ending government control of Fannie Mae (FNMA) and Freddie Mac (FMCC)— exciting hedge funds and other investors who have speculated on privatization of the bailed-out mortgage giants—Mnuchin reversed his previous statements during the hearing. “My comments were never that there should be recap and release,” Mnuchin said, using financial lingo for lifting government control of Fannie and Freddie.
“I think that Fannie and Freddie have been well run without creating risk to the government,” he continued. “What I’ve said and I believe is we need housing reform. So we shouldn’t just leave Fannie and Freddie as is for the next four or eight years under government control without a fix.” Mnuchin added that he believes a “bipartisan fix” is possible, “so on the one hand we don’t end up with a giant bailout, on the other hand we don’t run the risk of completely limiting housing finance.” Fannie Mae stock fell more than 4% on Thursday while Freddie Mae shares plunged about 5% as investors struggled to interpret Mnuchin’s actual policy goals for the mortgage lenders.
2. Volcker Rule
In a twist, Mnuchin endorsed what is perhaps his Wall Street peers’ most hated provision of the Dodd-Frank Act: the Volcker rule. The rule, named for former Fed chairman Paul Volcker, restricts banks from making certain kinds of investments such as engaging in proprietary trading that could put their own funds at risk, but critics say it hampers banks’ ability to generate profits. “I do support the Volcker rule,” Mnuchin said during the hearing. “I think the concept of prop trading does not belong in banks with FDIC insurance.”
But the former banker did acknowledge concerns that the Volcker rule prevented banks from generating adequate liquidity.
The Treasury secretary nominee also offered a good-humored retort to one skeptical senator’s dubbing of the “Mnuchin rule,” referring to Mnuchin’s promise that there would be no absolute tax cuts for the wealthy. “I am now in great esteem having the Mnuchin rule with both the Buffett rule” that no wealthy person should pay higher taxes than his secretary, “and the Volcker rule, so thank you for putting me in with these,” Mnuchin said.
3. Tax inversions
Last April, the Obama administration’s Treasury Department took unprecedented measures to block a proposed merger of pharma and healthcare companies Pfizer (PFE) and Allergan (AGN) that would have moved Pfizer’s corporate headquarters from the U.S. to Europe in a so-called tax inversion, which lowers an American company’s tax rate to that of their new foreign home. Lest anyone think that the position was strictly Democratic, Mnuchin assured senators that he would take an equally hard line against inversions and other tax-lowering maneuvers. “We want to incent as part of behavior that money comes back to the United States…and that we stop things like inversions because it makes economic sense for U.S. companies to do business here,” he said.
How would he accomplish that? First, lower the corporate tax rate in accordance with the plans Trump has outlined. That would have “a huge impact on stopping inversions,” Mnuchin said. “I think there are some other things that we may be able to do, but I think the biggest thing that creates inversions is the incentive for much, much lower tax rates abroad.”
4. The U.S. Dollar
After President-elect Trump sent the value of the U.S. dollar swooning earlier this week by saying that the American currency was “too strong,” lawmakers —noting that no other president had publicly weighed in on the country’s foreign exchange rate—demanded to know whether Mnuchin would make similar market-moving pronouncements if he became Treasury secretary. “As Treasury secretary I don’t see it as my role, commenting on the dollar on short-term movements,” Mnuchin said, refusing to offer his opinion on whether the dollar is actually too strong at the moment. (He also wouldn’t promise that his potential future boss would hold his tongue on market-moving issues: “I think this president is willing to do a lot of things that other presidents haven’t done,” Mnuchin said.)
The nominee, however, did express support for a strong dollar, generally, as he sought to reconcile Trump’s comments. “The currency is very, very strong, and you see people from all over the world wanting to invest in the U.S. currency,” Mnuchin said. “I think when the President-elect made a comment on the U.S. currency it wasn’t meant to be a long-term comment; it was meant to be that perhaps in the short-term, the strength in the currency…may have had some negative impacts on our ability in trade. But I agree with you, that the long-term strength over long periods of time is important.”
5. GDP Growth
Throughout the hearing, Mnuchin emphasized his intention to stimulate economic growth, calling it the “most important issue we have” as a country and portraying it as a panacea for all sorts of U.S. problems. “Whatever issues we have as Republicans or Democrats, I think we can agree that with more growth it’s a lot easier to solve these issues, and we should all be focused on things that help grow the economy,” Mnuchin said.
That said, however, he offered fairly modest targets for how fast he expects the American economy can grow, saying that he believes the U.S. can achieve a sustained rate of 3% to 4% annual GDP growth. That expectation is in line with economists’ consensus, but falls below some of Trump’s more optimistic forecasts as well as the hopes expressed by some lawmakers at the hearing. The biggest question that went unanswered at the hearing: Whether such economic growth will be enough to reduce the nation’s debt as much as the Trump administration has promised.