Mnuchin Dims Banks’ Hopes He Will Allow a Prop-Trading Revival

  • Trump’s Treasury nominee offers more support for Volcker Rule
  • Comments made after Democrats seek clarity on his statements

Steven Mnuchin made clear he doesn’t want Wall Street banks getting back into the business of making risky market bets with their own capital, after Senate Democrats pushed him to clarify his responses to questions they asked during his confirmation process to be Treasury secretary.

In written remarks to lawmakers, Mnuchin said that even banking units that lack a government backstop should be restricted from making speculative trades. At issue is the Volcker Rule, a contentious provision in the 2010 Dodd-Frank Act that sought to prevent lenders from putting federally-insured deposits at risk through wagers on stocks, bonds and other assets.

“A legal distinction between the insured and non-insured entity is an important factor in eliminating risky activities within the institution that has” insured deposits, Mnuchin said in an amended response to a senator’s question about Volcker. “I do not believe that the uninsured entity should be able to perform proprietary trading."

The new comments add further evidence that the Trump administration may try to tweak Volcker, rather than dismantle it. Mnuchin is on record saying he has problems with the rule, and stated at his confirmation hearing this month that he thought it should be simpler and that it’s gone too far in restricting market liquidity. But he has broadly said he supports the rule’s intentions.

Not Adequate

Mnuchin’s updated comments, which Bloomberg News obtained, were made after several Democrats on the Senate Finance Committee felt his earlier responses weren’t adequate, according to a Jan. 25 letter that Senator Ron Wyden of Oregon wrote to Utah’s Orrin Hatch, the panel’s Republican chairman.

Mnuchin also weighed in on the hot-button issue of how to reform America’s mortgage-finance system, a topic that has huge consequences for the multitrillion mortgage industry and the fate of shareholders who’ve invested billions of dollars in Fannie Mae and Freddie Mac. The companies, known as government sponsored entities, have been the foundation of the housing market for years; they buy mortgages and package them into bonds, freeing up banks to issue more loans.

Senator Sherrod Brown, a Democrat from Ohio, asked Mnuchin to provide additional details on a housing-finance plan that could protect taxpayers as well as expand mortgage access.

In his response, Mnuchin wrote that “any solution will be dependent upon the GSEs being capitalized properly and other such controls that eliminate risk to taxpayers.”

Rebuilding Capital

The answer could cheer some advocates of preserving Fannie and Freddie, including investors, small lenders, and some affordable housing groups. Over the past few years, those groups tried to convince the Obama administration to allow the companies to rebuild capital to no avail.

In the days after President Donald Trump’s surprise election win in November, his advisers pledged to dismantle Dodd-Frank and cut regulations broadly.

Mnuchin took a softer tone at his hearing before the Finance Committee. He said he mostly favors making changes to rules put in place in the wake of the 2008 financial crisis, not repealing the law entirely.

In his amended responses to the Finance panel, Mnuchin said he’d like to use “empirical assessments” to monitor the effects Dodd-Frank has had on the finance industry. He also said that he’ll advocate that any rules needed to protect “public safety” shouldn’t be included in the regulatory freeze Trump has ordered across all federal agencies.

Housing Crisis

Mnuchin, a former Goldman Sachs Group Inc. banker, is awaiting Senate confirmation. While he’s expected to get through with Republicans in the majority, he’s faced tough questions from Democrats about whether he profited from the housing crisis.

In the new responses, Mnuchin continued to defend his record as an owner of a mortgage lender, OneWest Bank, and said the company appropriately remediated borrowers who were foreclosed upon during the recession and housing slump. He also sought to quell lawmakers’ concerns about how he’ll handle government interactions with firms where he’d previously worked or been affiliated with.

“Upon confirmation I will implement procedures that will screen matters coming before me to facilitate compliance with my recusal obligations,” Mnuchin said.

— With assistance by Saleha Mohsin, Joe Light, and Jesse Hamilton

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