During the course of a five-hour hearing on January 19 before the Senate Finance Committee, Steven Mnuchin, President Donald Trump’s nomination for Treasury secretary, faced no shortage of criticism about past business dealings.

Perhaps more meaningful for businesses affected by the Treasury Department and its associated rules and agency interconnections, however, were his various regulatory views—from the Volcker rule to “too big to fail”—as they came into focus throughout the grilling.

Meet the nominee

Mnuchin studied economics at Yale University and, during summers, worked at Salomon Brothers, a firm that, in the 1990s, lost its Wall Street prominence amid a Treasury bond trading scandal.

Upon graduating, Mnuchin was hired by Goldman Sachs, where he was employed for 17 years. “I started on a folding chair in the mortgage department,” he recalled at the hearing. “Nine years later, and after many sleepless nights, I was put in charge of mortgages, government bonds, and municipal securities.”

Several years later, Mnuchin worked directly for future Secretary of the Treasury Hank Paulson as the firm’s chief information officer. In that role, he oversaw 5,000 people and a $1 billion-dollar budget. “While at Goldman Sachs, I learned the importance of the financial markets in providing liquidity and capital to businesses, governments, and consumers,” he said.

Subsequent endeavors, post-Goldman, included a stint with ESL Investments and starting his own investment business, Dune Capital Management.

Then, came Mnuchin’s tenure at OneWest (he ran the institution from 2009 to 2015) and associated controversies that have dogged him throughout the nomination process. Critics have seized upon the more than 36,000 foreclosures pursued by the bank.

OneWest also faced accusations it violated state foreclosure laws, as well as federal fair housing and anti-discrimination laws. In some highly publicized cases, the bank foreclosed on homes where the owners, sometimes as the result of paperwork issues, were delinquent in the amount of $1 or less on their mortgages.

Mnuchin addressed the foreclosure issues at the start of the Senate hearing.

“Since I was first nominated to serve as Treasury Secretary, I have been maligned as taking advantage of others’ hardships in order to earn a buck,” he said. “Nothing could be further from the truth.”

In Mnuchin’s version of events, during the summer of 2008, he “saw the devastation that was caused by the housing crisis,” watching people line up to get their life savings out of IndyMac Bank.

“I fully support regulation for banks with FDIC insurance, but my biggest concern is that all this regulation is killing community banks. We are losing the ability of small- and medium-sized banks to make good loans to small- and medium-sized business in the community, where they understand the credit risks better than anybody else.”
Steven Mnuchin, President Donald Trump’s Nomination for Treasury Secretary

“I saw a way to save the bank,” he said. “I applied for a banking charter and submitted a bid to the Federal Deposit Insurance Corporation for IndyMac.” On Dec. 31, just before midnight, he and his financial backers signed a binding agreement with the Federal Deposit Insurance Corporation.

“When we bought the bank, we assumed these bad loans [that] had been originated by previous management,” he said. “We invested $1.6 billion of capital into a failing financial institution when most investors were running for the hills. We renamed the business OneWest Bank and saved thousands of jobs.”

Like many banks at that time, IndyMac, and its reverse mortgage division Financial Freedom, was unstable due to the large amount of distressed credit mortgages in its portfolios. “The responsibility landed on me to clean up the mess that we inherited,” Mnuchin said.

Ultimately, OneWest extended more than 100,000 loan modifications to delinquent borrowers, he claimed. When the FDIC took over IndyMac, they estimated that more than half of the foreclosures would not meet their test for a loan modification.

“My group had to adhere to servicing agreements, which limited our ability to modify loans that could have helped borrowers,” Mnuchin added. “In the press it has been said that I ran a ‘foreclosure machine.’ This is not true. On the contrary, I was committed to loan modifications intended to stop foreclosures.”

Then, due to actions by the Department of Housing and Urban Development, “we were forced to foreclose on senior citizens even when they only owed $1,” he said. “Not complying with these HUD policies would have subjected the bank to penalties and losses.”

Lessons learned

The experience greatly informed Mnuchin’s economic viewpoint. “Sensible regulation is a necessity for healthy markets,” he said. “However, I saw first-hand how regulatory excess can inhibit lending by financial institutions, resulting in a lack of access to capital for small businesses and entrepreneurs.”

During the nearly three-hour nomination hearing, Mnuchin stressed the importance of improving cyber-security at the Internal Revenue Service and efforts to combat terrorism. “There are very important tools within the Treasury Department that can combat terrorism,” he said. “Many of these tools, especially sanctions, are extremely effective and keep our armed services out of harm.”

Proper regulation

Although Mnuchin would rise to power in an administration focused on rolling back the federal regulatory regime, Mnuchin stressed that he “believes in proper regulation.” At IndyMac, he “understood, the responsibility of being given a banking charter.”

“I took it very seriously,” he said. “I must say that I enjoyed working with very smart regulators and I have tremendous respect for them.”

That being said, he also witnessed the headaches caused by overlapping regulation among multiple agencies.

“I fully support regulation for banks with FDIC insurance, but my biggest concern is that all this regulation is killing community banks,” Mnuchin said. “We are losing the ability of small- and medium-sized banks to make good loans to small- and medium-sized business in the community, where they understand the credit risks better than anybody else.”

As Treasury secretary, Mnuchin pledged to do what he can “to have proper regulation, but eliminate overlap” and “make sure we don’t end up in a world where we only have four big banks in this country.”

On the campaign trail, Trump offered contradictory statements on whether he supported the Dodd-Frank Act’s Volcker Rule, a prohibition on proprietary trading by federally insured banks.

Mnuchin was more direct in his assessment. “I do support the Volcker Rule,” he said. “I think the concept of proprietary trading does not belong in banks with FDIC insurance.”

Nevertheless, there are concerns. Mnuchin cited a recent report by the Federal Reserve that concluded, as he paraphrased it, that the Volcker Rule “has completely limited liquidity in many markets.”

“It is concerned that the interpretation of the Volcker Rule doesn’t allow banks to create enough liquidity for customers,” he said. “That is something I would absolutely want to look at.”

Mnuchin was referring to a staff working paper, The Volcker Rule and Market Making in Times of Stress, that was released on Dec. 22.

“Our main finding is that the Volcker Rule has a deleterious effect on corporate bond liquidity and dealers subject to the rule become less willing to provide liquidity during stress times,” it said. “While dealers not affected by the Volcker Rule have stepped in to provide liquidity, we find that the net effect is a less liquid corporate bond market.”

Mnuchin was also asked to weigh in on the Consumer Financial Protection Bureau, a Dodd-Frank Act creation that congressional Republicans have attacked over its constitutionality, structure, and approach.

“The biggest issue I have with the CFPB is that I don’t believe [it] should be funded out of profits from the Federal Reserve,” Mnuchin said. “I think [it] should be funded out of an appropriation process.”

Pat Toomey (R-Pa.) pushed Mnuchin to share his views on Title II of the Dodd-Frank Act, referring to it as one of the legislation’s “many failures.”

Title II, also known as the Orderly Liquidation provision, created a process for liquidating a large, complex financial company that is close to failing. An alternative to bankruptcy, the FDIC takes over as a receiver to oversee liquidation efforts.

“I believe in a codification of a mechanism to require future bailouts from taxpayers in the event that a large financial institution should fail again,” Toomey said. “It is much more desirable to amend the bankruptcy code so we could handle the resolution of a large, complex financial institution through bankruptcy and not ever have to go to taxpayers to bail out big banks.”

“I 100 percent agree with you that we should not be in the business of bailing out big banks, and I share certain concerns with Title II,” Mnuchin said. “I think we need to look at the bankruptcy code and what we can do as an alternative.”

“One of the big problems we had during the financial crisis was the intermingling of banks and holding companies and complex securities,” he added. “I think if we have proper regulation, a lot of the need for Title II goes away.”

The discussion later turned to the Glass-Steagall Act. Passed in 1933, but repealed during the Clinton Administration, it prohibited commercial banks from engaging in investment businesses. In large part, the Volcker Rule was an attempt to fill the longstanding regulatory gap.

“Do you support returning to Glass-Steagall?” asked Sen. Maria Cantwell (D-Wa.)

“I don’t support going back to Glass-Steagall as is,” Mnuchin said. “What we’ve talked about with the President is perhaps the need for a 21st-century Glass-Steagall. But no, I don’t support taking a very old law and saying we should adhere to it as is.”

Cantwell expressed her confusion as to what “some modern version” would entail.

“I think that separating out banks and investment banks right now under Glass-Steagall would have very big implications for liquidity, capital markets, and banks being able to conduct necessary lending,” Mnuchin said.

In an interesting twist, Mnuchin’s answer may have placed his views squarely in line with a proposal by Sen. Elizabeth Warren (D-Mass.), one of Trump’s most vocal critics.

In 2013, senators Warren, Cantrell, John McCain (R-Ariz.), and Angus King (I-Maine) attempted bringing back the Glass-Steagall Act, with a new plan for separating traditional banks (with savings and checking accounts that are insured by the FDIC) from riskier financial institutions that provide investment banking services, insurance, swaps dealing, and hedge fund and private equity activities.

The 21st Century Glass-Steagall Act, a modernized version of the Banking Act of 1933, was designed to go beyond the restrictions of the original regulation and the prohibitions of the Volcker Rule.

The bill includes, for example, measures to keep banks from simply adding a technical partition between commercial and investment banking operations.

Despite Mnuchin seemingly name-checking the lingering legislation, neither he nor Cantwell made a specific mention of it.