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Treasury Secretary Mnuchin’s Unbelievable Testimony

Wall Street’s 2008 crash cost the economy some $20 trillion, with millions of Americans losing their homes, jobs and savings in what became the Great Recession. For Steven Mnuchin, these were good times. As Dune Capital hedge fund manager, he lapped up failed IndyMac, turned it into foreclosure machine OneWest at the expense of more than 100,000 homeowners and then flipped the company for a profit.

Now, as Treasury Secretary, his views on banking are proving similarly callous. Before the Senate Banking Committee on May 18, his first congressional testimony since assuming office, he nixed not one, not two, but three widely accepted ideas about how to fix Wall Street.

First, there’s the issue of banks having been considered too-big-to-fail. Washington bailed out the major financial institutions in 2008 because leaders concluded that their bankruptcies would be worse for the wider economy. During the crisis, as an emergency expedient, Washington actually worsened the too-big-to-fail problem by patching together some teetering firms with larger, bailed-out firms. The subsequent 2010 Dodd-Frank Wall Street reform legislation empowered regulators to unwind them.

What’s the Treasury Secretary’s view, according to last week’s hearing? Breaking up the banks would be a “huge mistake.”

Second, the major financial firms failed in 2008 when the value of their assets, many built on mortgage-backed securities, collapsed. The difference in value between assets and liabilities is called capital, and the capital of banks sank below zero during the financial crisis. The obvious answer: Banks should have more capital. Even U.S. Rep. Jeb Hensarling, (R-Texas), chair of the House Financial Services Committee, supports increases in bank capital.

What’s Mnuchin’s view? The big banks have “too much capital.”

Third, the financial crash followed by less than 10 years the repeal of the Glass-Steagall separation between commercial and investment banking. This 1933 law had limited the operation of firms with taxpayer-backed insurance from the Federal Deposit Insurance Corp. to relatively safe lending. Repeal sent these cheap and abundant funds into a gambling culture. It even prompted investment banks to expand risk-taking to defend their turf. Proponents from across the political spectrum support reinstating Glass-Steagall, including President Donald Trump himself.

Mnuchin’s take: He does “not support the separation of commercial and investment banking.”

Forty-seven senators did not consider Mnuchin worthy to serve as Treasury Secretary and voted against his confirmation. His background as a Goldman Sachs banker rightly troubled many, given Wall Street’s pernicious influence in Washington and Trump’s own pledge to “drain the swamp.” His harsh record at IndyMac-OneWest, also understandably alarmed senators. California state attorneys recommended litigation against the company. And, on May 17, the Department of Justice penalized a OneWest subsidiary $89 million over false claims for government insurance during Mnuchin’s tenure there.

Following an executive order, Mnuchin is now reviewing banking law changes. U.S. Sen. Catherine Cortez Masto (D-Nev.) pressed Mnuchin at the May 18 banking committee hearing on where he’s seeking counsel for this mission. She referenced his speech at a conference of bankers (price of admission: $12,000), where he said, “You should all thank me for your bank stocks doing better.”

A Treasury Secretary who recalls the Great Recession as a profitable time who also happens to works for a president with, at the very least, a credibility problem, isn’t a comforting foundation for banking reform. The public and our representatives in Congress need to believe Mnuchin shares America’s concerns if he intends to refashion the rules around Wall Street. As Sen. Sherrod Brown (D-Ohio), ranking member the Senate Banking Committee summarized, “You can’t lead if we don’t believe you.”

Unfortunately, his threats to oppose Wall Street reform seem all too believable.