WASHINGTON — Treasury Secretary-designate Steven Mnuchin’s time as OneWest’s chief executive is expected to draw ample attention at his nomination hearing Thursday, but it will not be the only issue to come up as senators try to gauge how he would lead President-elect Trump’s financial policies.
Thanks to Democrats’ rewriting of confirmation rules when they were in control, the Senate’s current GOP leaders only need a majority of the chamber to approve Mnuchin. But analysts say that how well Mnuchin answers questions will still matter, particularly if some Republicans have reservations about the nominee. The Senate Finance Committee hearing could also provide a window into Mnuchin’s views on key financial services issues, such as housing finance reform and the fate of the Financial Stability Oversight Council.
“The base case is he gets confirmed. The president usually gets his or her nominees for top cabinet positions pretty quickly. But Mnuchin is a wild card. … If he performs poorly that is the only point where his confirmation becomes in doubt,” said Ed Mills, a managing director and analyst at FBR Capital Markets.
At the start of the crisis, Mnuchin led a team of investors to acquire assets of the failed IndyMac Bank in Southern California and formed OneWest. But the new bank garnered a reputation for aggressively foreclosing, and has been at the center of Democrats’ efforts to put Mnuchin in a negative light.
“OneWest, I would expect is going to be a centerpiece” of the hearing, said Kurt Walters, spokesman for the progressive group Demand Progress Action.
Demand Progress, the Progressive Change Campaign Committee and Allied Progress Action are running ads featuring stories of borrowers who were foreclosed on by OneWest in the lead-up to Mnuchin’s hearing.
Democrats have gone so far as to call Mnuchin the “Foreclosure King” and launched a web portal for consumers to submit anecdotal complaints about foreclosure experiences with OneWest during the mortgage crisis, in addition to holding events on Capitol Hill with former OneWest borrowers. Consumer groups have particularly focused on how OneWest, which was sold to CIT, foreclosed on seniors with reverse mortgages. (Mnuchin became vice chairman of CIT.)
But with all the attention on the bank’s foreclosure practices, Mnuchin is likely preparing his defense for what could be aggressive questioning, observers said.
“He will come with stats on the number of modifications he did and battle numbers with numbers,” said Isaac Boltansky, a policy analyst with Compass Point Research & Trading.
Clifford Rossi, an executive-in-residence and Tyser Teaching Fellow at the University of Maryland's business school, said Mnuchin is a “detail-oriented kind of guy.”
“If I were in his shoes I would try and have as many facts and figures about the programs that were in place then to try to deflect a lot that is coming at me,” Rossi said.
But Democrats are likely also doing their homework. Sen. Elizabeth Warren, D-Mass., who is not on the Finance Committee but has been leading the opposition against Mnuchin, sent a letter with other Democrats last week to the committee’s chairman, Orrin Hatch, R-Utah, requesting that former OneWest borrowers be allowed to testify against Mnuchin.
A spokesperson for the Finance Committee said Hatch is not going to fulfill the Democratic senators' requests because “Chairman Hatch is committed to holding nominees to the same, bipartisan vetting and hearing process afforded to Obama’s nominees, which has been standard practice at the Senate Finance Committee for years.”
Mills said Democrats want to make Mnuchin “a bogeyman.”
“Policy differences are not going to be the reason a Republican decides to not vote for Mnuchin. It will be the way he defends his background or what they try and make stick to his background,” Mills said.
But Boltansky said it is highly unlikely that the foreclosure claims will threaten his appointment.
“I don’t think he needs to counter any of the foreclosure claims in order to get confirmed,” the analyst said. If this were a 60-vote threshold, he said, “my comments would be completely different.”
FDIC loss-sharing deal
The testimony dealing with the OneWest foreclosures could revolve around the details of the bank's loss-sharing agreement with the Federal Deposit Insurance Corp. In the crisis, the FDIC often inked deals with acquirers of a failed bank – in this case IndyMac – to cover a portion of asset losses. Those agreements were often a draw for potential acquirers.
Lawmakers may try to focus on whether the agreement between the FDIC and OneWest amounted to a "sweetheart deal."
"I would really hope and expect there would be some questions there," said Walters.
Yet similar loss-sharing agreements became standard in the crisis, and the FDIC's obligations never utilized taxpayer resources; the agency's insurance fund is supported by banking industry premiums.
Critics of the deal might say that the FDIC sold IndyMac's assets at too much of a discount. But Sheila Bair, now the president of Washington College in Maryland who chaired the FDIC at the time, said the IndyMac deal was part of a competitive auction. She said the loss-share agreement only pertained to the whole loans that IndyMac held, which amounted to just 7% of the assets sold.
"This was a heavily competitive bid and he was by far the best bidder," said Bair of Mnuchin and his investment group.
"[IndyMac] was a very troubled bank. It had a lot of troubled mortgages and reverse mortgages and it also had a very unstable deposit base," she added.
Housing finance, FSOC
But the hearing will also be the best opportunity to date to hear Mnuchin’s thoughts on financial services policy issues he would likely face as Treasury chief. His positions remain largely unknown.
In particular, Mnuchin raised eyebrows last month when he told Fox Business, “We’ve got to get Fannie and Freddie out of government ownership.” The two government-sponsored enterprises have been in government conservatorship since 2008.
Sen. Sherrod Brown, D-Ohio, sent a list of questions to Mnuchin in December asking him a number of policy questions including what he believes the government’s role in housing finance should be.
Mnuchin never responded to the letter. But Brown is one of six lawmakers set to question Mnuchin Thursday who also sit on the Senate Banking Committee. They are almost certainly interested in where the nominee comes down on the future of housing finance.
Other policy areas ripe for questioning are tax reform and what Mnuchin believes to be the appropriate role of the Financial Stability Oversight Council.
“I would like to hear what Mnuchin wants to do with FSOC since the Treasury secretary has to be on board with any major action the council takes,” said Justin Schardin, director of the financial regulatory reform initiative at the Bipartisan Policy Center. “Does he see an active role for FSOC or will he turn it into just a forum for regulators to get together and talk and will he support dedesignating SIFIs?” — systemically important financial institutions.
Schardin also said we could find out if Mnuchin aligns with Trump’s international policy.
“Trump has signaled that he may pull out of certain international agreements,” Schardin said. “It would be good to know if Mnuchin would be committed to global efforts like Basel and the global Financial Stability Board.”
Conflicts of interest
Democrats may also question Mnuchin over whether his past business dealings present conflicts of interest that make him ill-suited to be Treasury secretary. One of the questions that Brown asked in his letter to Mnuchin is whether his comments about the GSEs would benefit him or any of his associates.
“How will your past business — and presumably social — connections to hedge fund partners who invested in preferred shares of the Government Sponsored Enterprises, Fannie Mae and Freddie Mac, inform your views on efforts to reform those Enterprises?” Brown asked in the letter.
Mnuchin plans to divest a number of assets and investments if confirmed, but one of those investments is in a hedge fund run by Trump adviser John Paulson. The fund is invested in Fannie and Freddie stock and received a boost after Mnuchin’s GSE comments.
“The mere fact is that he made all these dramatic market-moving statements right after he was made presumptive nominee back in November and it really benefited the Paulson fund,” Walters said.
Some have also pointed generally to Mnuchin’s experience in the financial services sector as a possible conflict. In addition to his time at OneWest, Mnuchin worked on the mortgage trading desk at Goldman Sachs prior to the financial crisis.
Yet others see his business experience as an asset, and Treasury secretaries have often worked in the industry before entering the government. Henry Paulson, the last Treasury secretary under President George W. Bush, had formerly been CEO of Goldman Sachs.
“Mr. Mnuchin is an effective choice to lead our Treasury Department,” Hatch said in a statement. “Getting America’s economy back on track is a top priority for this new administration and his wealth of private sector experience will serve him well in this new role.”