Many have opposed Steve Mnuchin being the new Treasury Secretary under President Trump’s administration. I personally have mixed emotions about him. Mnuchin coming with much financial experience and business acumen, I thought this is what the Treasury and the United States needs to help fix our financial and debt structure.
Mnuchin’s Education in School, and On the Job Training
He graduated from Yale University with a bachelor’s degree. While being at Yale his first job was a trainee at investment bank Salomon Brothers in the early 1980’s. As a side note, Salomon Brothers was a Wall Street investment bank which was involved in many financial scandals in the 1990’s and was financially connected to Long-Term Capital Management, a hedge fund that collapsed in 1998. On September 23, 1998, in The Federal Reserve Bank of New York building, several banks and financial institutions met to come up with a plan to rescue Long-Term Capital Management. Household names like Bear Stearns, Lehman Brothers, Merrill Lynch, J.P. Morgan and many others met with The Federal Reserve and disclosed their asset holdings with Long-Term Capital Management. The Federal Reserve Bailed Out the troubled entity since 16 other major banks and financial institutions would have also gone under. This would have caused a 2008 type of crisis or worse. Back to Mnuchin, clearly in his early years, he has been surrounded or influenced by financial scandals and pre-financial collapses. While at Yale he was the publisher of the Yale Daily News and was also initiated into Skull and Bones in 1985.
In 1985 Mnuchin started at Goldman Sachs and was there for 17 years. At Goldman, he started the mortgage program in 1994 which became very successful. Using that experience he left Goldman in 2002 to briefly work in the Hedge fund industry. He landed as the vice-chairman at hedge fund ELS Investments, which was owned by his Yale roommate, Edward Lambert. The following year he established SFM Capital Management with financier George Soros. The firm invested in at least two Donald Trump projects, The Trump International Hotel Waikiki and in Chicago, The Trump International Hotel, and Tower. The hedge fund also bought the failed IndyMac Bank and then changed the name to OneWest Bank. Under Mnuchin’s management, they bought several failing banks from the FDIC at huge discounts to their book value. In a short amount of time, Mnuchin and Soros would turn around these failed banks and turn them into very profitable banks. This was mostly accomplished by foreclosing on over 137,000 homes. OneWest Bank developed the reputation as “The Foreclosure Machine” and Mnuchin, himself dubbed as “The Foreclosure King”. These titles came in the aftermath from a leaked California Attorney memo saying OneWest Bank allegedly operated in widespread misconduct. The Department of Justice was called upon and after extensive research found that OneWest Bank used potentially illegal tactics in foreclosing on 80,000 loans. OneWest Bank later admitted it was much more profitable foreclosing on homes than going through the process of loan modification. Several lawsuits were filed against OneWest Bank for these aggressive foreclosure tactics that were later settled out of court for millions of dollars. OneWest Bank became profitable the first year under Mnuchin’s management and a couple of years later it was sold to Citi Group. This is why many protested when he was the candidate of President Trump for the Treasury Secretary. Many thought this opposed the campaign ideology of “draining the swamp” rather putting an alligator in the swamp.
Fannie Mae and Freddie Mac’s Troubled History
As a result of the 2008 crisis, it affected Fannie Mae and Freddie Mac to their core since they were the major underwriter of loans in the United States. Approximately 43% of all loans at that time went through Fannie Mae and Freddie Mac. Fannie Mae’s stock was $44 a share prior to this collapse. The United States Treasury came to the rescue and bailed out Fannie Mae and Freddie Mac. The terms were to take over Fannie Mae and Freddie Mac and put them into receivership requiring them to pay a 10% dividend to the Treasury instead of their stockholders that owned 20% of the two company’s stock. In 2008 the Treasury injected $187 Billion Dollars into the two companies with the agreement that they would come out of receivership once they made payment in full plus the 10% dividend. The total payback would be $206 Billion Dollars. The lowest value of the Fannie Mae stock was $.60/share in 2009. In 2012 the Treasury broke the Agreement of 2008 and demands 100% of all dividends since the companies now were very profitable. Prior to this announcement Fannie Mae stock was at $18 a share. Shareholders filed a lawsuit against the U.S. Treasury and it was thrown out of court. When the Treasury was asked their legal stance on this they said that they own the majority of the company, and run it so they can make these decisions. Fannie Mae stock value fell to $5.50/share in just four months. In early 2015 100% of payment plus all dividend payments were made from Fannie Mae and Freddie Mac to the Treasury. At this time they should have come out of receivership and a plan should have been put together where the Treasury sells their holdings as the majority owner of the stock back to the shareholders. Then the board and the shareholders should run this publicly traded company, rather than the government. Today they told us $239 Billion has been paid to the Treasury, which is $33 Billion more than their obligation. Fannie Mae stock is currently at $11.45/share. This has financially benefited the Treasury significantly through 100% dividend payments still and a substantial rise in the stock value. This is all in the current environment where and now Fannie Mae and Freddie Mac are very successful and producing profits.
Mnuchin Talking Out Of Both Sides Of His Mouth
Steve Mnuchin prior to the election, after the election, and up until the recent hearing before The Senate Banking Committee said in many ways and on many occasions that Fannie Mae and Freddie Mac should come out of receivership and stand on their own since the government has no business running companies.
In The Senate Banking Hearings just recently Mnuchin was asked again about Fannie Mae and Freddie Mac coming out of receivership since they’ve met their financial obligations. Mnuchin’s said this “This has been an unresolved issue for far too long and one we are committed to fixing.” More questions were asked on this topic and a startling answer by Mnuchin when asked on the terms of the government’s bailout of the mortgage giants requiring them to make dividend payments still to the Treasury. Mnuchin said “I have had the opportunity to meet with Mel Watt several times,” he told the lawmakers. “Last time we talked about the dividend extensively and I did tell him that it was our expectation at the Treasury that they would pay us the dividend and we hope they continue to do so.” Mel Watt is the head of the Federal Housing Finance Agency who manages Fannie Mae and Freddie Mac in receivership. There’s a $5 billion payment due in June which would drain cash reserves of Fannie Mae and Freddie Mac which has been the problem since the government now takes 100% of profits in the form of a dividend payment. Later in the hearing Senator Sherrod Brown (D-Ohio), ranking member of the committee asked Mnuchin why he did not provide the committee with their previous request on his meetings with banks on this. Mnuchin replied, “My staff has fully responded to all the inquiries from you and the committee, and I believe we have.” Senator Brown responded that the committee hasn’t received what they requested so I am asking again for what meetings you have had with banks, the names of the banks, and what dates you met and the subject matter of those meetings. Many believe Mnuchin does not want to provide this since it might bring out if there is any, financial ties with the Trump administration to Russia. Mnuchin’s response to this inquiry again said he would provide what the committee is asking for as long as it remains confidential. Why would this be confidential? What does he not want us to know? Although I am not a proponent of Senator Elizabeth Warren, I believe in her questioning Mnuchin. She got down to the details of this when talking about Glass-Steagall.
Mnuchin Changing His Tune Again, This Time Glass-Steagall
The Glass-Steagall was a law that was created in 1932 as a result of the 1929 crash. Prior to the 1929 crash banks were overleveraged and bought significant holdings in the stock market. This was a time when banks could operate both as lending institutions but also being in security investments. During the roaring 1920s, much wealth was created in the stock market through leveraging money. From 1921 to 1929 the Dow skyrocketed from 60 points to 400 points creating multimillionaires. Very soon trading became America’s favorite past time as investors jockeyed to make a quick killing. Some investors foolishly mortgaging their homes and life savings to invest in hot stocks. Banks and brokerage companies lead the charge in this as the biggest “player” in the market. In 1929 the Federal Reserve raised interest rates to cool down an overheated economy in the stock market. Later that year a panic selling started in October and continued for several months with the Dow falling from 400 to 125 in just three days, which $5 billion was lost in just three days. By the end of the sell off a staggering $16 billion was lost. The market got spooked when word got out that there might not be enough liquidity and obviously there wasn’t. In the aftermath, to make matters worse, many banks had invested their deposits in the stock market. This caused a run on the banks of not having enough money in the form of cash reserves.
In 1932 Glass-Steagall was created and signed into law separating banks from security firms. This prohibited banks from leveraging money and also using depositor’s money in the stock market. The results of this law created a safe environment in the economy. It also didn’t allow banks to influence the market since they were prohibited from investing and leveraging their money in it. Since then we had free markets that couldn’t crash and didn’t until 2008. So then you ask “Why did we have a crash in 2008 and why did the government have to bail out the banking industry and many others, if banks could not do this function and only could lend out money?” In 1999 President Clinton at the time nullified the law of Glass-Steagall and removed it. Banks started investing in stocks once again and leveraged money also. This started a small boom called the Tech Rally which created the bubble that popped 2 years later in 2001. Again, several millionaires were created but this time also billionaires as a result of this rally. Congress didn’t learn from history and didn’t see the connection of Glass-Steagall bringing stability to the markets and the economy. The new investment in Wall Street called derivatives was now being used in the earlier part of this decade. The world soon learned that the term “Derivatives” is equated with a financial collapse. Banks fell in love with this new investment vehicle called Derivatives. According to a report from Deutsche Bank, 90% of the revenue came in from Derivatives during the years from 2004 to 2015. Clearly, Derivatives brought down the whole financial system in 2008 and since then banks STILL are allowed to continue this behavior.
Previously Steve Mnuchin was for implementing Glass-Steagall. This would’ve caused big banks to be broken up, separating them from banking and securities. This would create a much safer environment in stocks, significantly limiting another financial crisis. This is what Glass-Steagall is all about!
Although I am not a proponent of Senator Elizabeth Warren I support Glass-Steagall to the fullest degree. Being a free market and a free capital person, I am also not in favor of our government regulating publicly traded companies. At the same time I know it is challenging to separate banks, yet it is a must since otherwise, we will have another financial crisis. This is what Senator Warren went in depth with Steve Mnuchin on. In his testimony, he said he was not in favor of breaking up big banks. Warren asked him isn’t that what the heart of Glass-Stegall is all about, separating commercial and investment banking? Mnuchin replied that it is a complicated question. Warren disagreed saying that it is simple that was the purpose of the law in 1932. He argued and said he was not in favor of breaking up the banks and it would be a huge mistake. Senator Warren commented and said that he was for Glass-Steagall and now he was not and asked what has changed? Mnuchin replied that he was never for breaking up of big banks. Warren fired back and said she thinks the change happened when Mnuchin recently met with big banks at the White House, in which he still hadn’t disclosed what the committee has asked.
Moving Forward, If Possible
History is our teacher, without Glass-Steagall implemented we will have another crisis and this is what is also coming out in the news. There are now warning signs being given. The Federal Reserve raising interest rates, the same action before 1929. The stock market is overheated and now showing signs of that. Banks being allowed to leverage money which has always brought down the markets and banks. This time we have a law to seize your hard earned money like they have done in 9 other countries called a Bail-In. Mnuchin has recently admitted that the Treasury will run out of money sometime in August rather than the fall. This could be the first time in our country’s history where our government will default on our financial obligations. Mnuchin has already taken what is called “Extra Ordinary Measures,” which means the shell game of taking money from one area to keep the government afloat. These measures he has said will be exhausted sometime in August when we will hit the Debt Ceiling. In the mainstream news recently The House Freedom Caucus said: “The U.S. government is drowning in debt, yet continues to spend into oblivion on the backs of future taxpayers.” There is an internal fight in the Republican Party on government spending which is out of control. This is mostly Trump supporters. The other side of Republicans do not want to shut the government down and want to spend more money on infrastructure. Democrats don’t support most of the spending since it takes funding away from programs they support. So what we have again is massive gridlock.
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