The Wall Street man heading to Treasury is a letdown for Americans
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One big question stirred by the results of the 2016 presidential race was what Donald TrumpDonald John TrumpLawmakers release defense bill with parental leave-for-Space-Force deal House Democrats expected to unveil articles of impeachment Tuesday Houston police chief excoriates McConnell, Cornyn and Cruz on gun violence MORE would do, in victory, to make good on all those campaign promises to stick up for the little guy and stand up to Wall Street?

Not much is the answer suggested by the signals coming from Trump Tower since Nov. 8. The President-elect has chosen Steven Mnuchin to run the Treasury Department.

If and when he assumes that post, Mnuchin will be in a position to serve his own interests, and those of others like him, in a multiplicity of ways. This is powerfully illustrated by a piece of legislation (H.R. 6392) set for a vote in the House of Representatives as soon as today.

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Mnuchin is a hedge fund manager and bank chief executive bidding to become the fifth of the last eight Treasury secretaries with a Wall Street background, and the third with a stint at Goldman Sachs on his resume. That chain of facts alone should unsettle the vast majority of voters, regardless of political party, who want financial regulation to be toughened rather than weakened and do not want bankers and lenders to be writing their own rules. But Mnuchin is more than just an emblematic traveler though the Wall Street-to-Washington revolving door. He also has a record of generating large profits from deals that other, less knowing parties have experienced as financial disasters.

At Goldman Sachs, Mnuchin was a bond trader and an early player in the mortgage-backed securities market, which was later to figure prominently in the 2008 financial crisis. After the crisis, Mnuchin organized a team of investors to buy the collapsed IndyMac bank at pennies on the dollar, renamed it OneWest, and made a heap of money through a combination of federal bailout help and aggressive foreclosure practices. In all, One West was responsible for kicking some 36,000 families out of their homes, sometimes with the aid of cooked or robo-signed backup documents. A judge on Long Island characterized some of OneWest’s methods as “harsh, repugnant, shocking and repulsive.”

What’s the connection to the bill coming up for a House vote? The Systemic Risk Designation Improvement Act of 2016 would put a Treasury Secretary Mnuchin in the lead in deciding whether a set of important rules apply to a bank he now sits on the board of. To explain more fully, the point of the legislation is to let about two dozen very big banks escape heightened risk controls established after the financial crisis, and to restrict the power of the Federal Reserve to re-impose such controls in the future.

This would be a dangerous misstep as a general matter of policy: it would make the financial system less safe in order to benefit a small number of bankers and banks that are doing extremely well already. The 27 banks in question, while smaller than the very largest mega-banks, still rank in the top one-half of 1 percent of all U.S. banks by size. Collectively, they hold over $4 trillion in assets. They loom especially large in certain areas of the country, accounting for more than 60 percent of deposits in Ohio and half of deposits in Pennsylvania. The failure of one or more of these banks could have a profound economic impact on regional economies if not the national economy.

It is important to recall that banks of similar scale, such as Countrywide, Washington Mutual, Wachovia and Indymac, were important drivers of the toxic subprime mortgage market. Their collapse played a significant part in the 2008 financial and economic meltdown.

H.R. 6392 would also increase the conflicts of interest faced by the new Treasury Secretary nominee. One of the banks that stand to benefit from this bill is CIT, which purchased OneWest for $3.4 billion, more than doubling Mnuchin’s initial investment. Mnuchin, in addition to being a board member, holds millions of dollars in CIT stock. Under current law, CIT’s assets of more than $50 billion make it automatically subject to heightened prudential standards (that is, to greater risk controls than those that apply to a community bank). The details of these heightened standards are controlled by independent regulators at the Federal Reserve.

The bill, sponsored by Rep. Blaine Luetkemeyer (R-Mo.), would eliminate the current risk controls on CIT, and mandate that they could only be re-established by a two-thirds vote of the Financial Stability Oversight Council (FSOC), a body that would be chaired by Treasury Secretary Mnuchin. He would be in a perfect position to help deregulate a bank from which he has made lots of money and stands to make still more. This is an issue of central importance to CIT, which has been lobbying to remove its additional risk controls since at least 2013.

The bill is hardly the only glaring conflict of interest that Mnuchin could face. As a hedge fund manager-turned-Treasury secretary, he would have the power to set tax policies that determine how much hedge fund managers pay. As the head of FSOC, he would oversee efforts to determine whether hedge funds pose risks to the financial system that require additional regulation. These and other pitfalls will need to be addressed in the confirmation process. But the conflict of interest raised by H.R. 6392 can and must be dealt with immediately by voting this misguided legislation down.

Jim Lardner is communications director for Americans for Financial Reform, a coalition of more than 200 consumer, civil rights, investor, labor, business, faith-based, civic and community groups working for a safer and more ethical financial system, and one that does a better job of serving the economy and the country as a whole.


The views expressed by contributors are their own and not the views of The Hill.