The revelation came hours before Mr. Mnuchin, a former Goldman Sachs banker, began testifying on Thursday before the Senate Finance Committee, which has historically been bipartisan in its demands for transparency from nominees. Mr. Mnuchin was ready to outline his vision for the economy and defend himself against claims that he headed a bank that ran a “foreclosure machine” during the financial crisis.
“The Treasury secretary ought to be somebody who works on behalf of all Americans, including those who are still waiting for the economic recovery to show up in their communities,” said Senator Ron Wyden, the ranking Democrat on the committee. “When I look at Mr. Mnuchin’s background, it’s a stretch to find evidence he’d be that kind of Treasury secretary.”
In a hearing marked by sharp exchanges, Mr. Mnuchin struggled to answer questions about his use of tax havens as a hedge fund manager and whether he thought such loopholes should be closed.
Senator Debbie Stabenow, Democrat of Michigan, pointedly asked Mr. Mnuchin if he was using Cayman Islands corporations to avoid taxation. He responded that he was working on behalf of his clients, in accordance with the law.
“Let me just be clear again: I did not use a Cayman Islands entity in any way to avoid paying taxes for myself,” Mr. Mnuchin said. “I would love to work with the I.R.S. to close these tax issues that make no sense.”
He added: “I would support changing the tax laws to make sure they are simpler and more effective.”
Republicans came to Mr. Mnuchin’s defense, suggesting that none of his omissions were willful, and they gave strong indications that they would vote for him.
Senator Orrin G. Hatch, Republican of Utah, defended Mr. Mnuchin’s business record and described him as extremely qualified for the job.
“Objectively speaking, I don’t believe anyone can reasonably argue that Mr. Mnuchin is unqualified for the position,” Mr. Hatch said. “If the confirmation process focused mainly on the question of a nominee’s qualifications, there would be little, if any, opposition to Mr. Mnuchin’s nomination.”
But the process was also focused on Mr. Mnuchin’s financial disclosure form, and that prompted intense scrutiny.
“In his revised questionnaire, Mr. Mnuchin disclosed several additional financial assets, including $95 million worth of real estate — a co-op in New York City, a residence in Southampton, New York, a residence in Los Angeles, California, and $15 million in real estate holdings in Mexico,” Democratic staff members of the Senate Finance Committee wrote in a memo on Thursday. “Mr. Mnuchin has claimed these omissions were due to a misunderstanding of the questionnaire.”
According to the memo, Mr. Mnuchin also initially failed to disclose that he is the director of Dune Capital International, an investment fund incorporated in the Cayman Islands, along with management posts in seven other investment funds.
And he belatedly disclosed that his children own nearly $1 million in artwork.
Asked about the omissions at the hearing, Mr. Mnuchin described them as a simple mistake made amid a mountain of bureaucracy.
“I think as you all can appreciate, filling out these government forms is quite complicated,” Mr. Mnuchin said, noting that he had handed over 5,000 pages of disclosures. “Let me first say, any oversight, it was unintentional.”
But Democrats pounced and tied Mr. Mnuchin to Mr. Trump’s campaign pledge to “drain the swamp” in Washington.
Pressed as to whether his failure to disclose the information was an ethical lapse, Mr. Mnuchin insisted that he was following the guidance of his lawyers and made an innocent error.
“I assure you that these forms were very complicated,” he said, explaining that he had pledged to be forthcoming to “the best of my knowledge.”
Senator Robert Menendez, Democrat of New Jersey, was unsatisfied with the response and shot back, “It doesn’t take a rocket scientist to understand the words ‘list all positions.’”
To that, Senator Chuck Schumer of New York, the Democratic leader, added: “Never before has the Senate considered such an ethically challenged slate of nominees for key cabinet positions. Mr. Mnuchin’s failure to disclose his Cayman Islands holdings just reeks of the swamp that the president-elect promised to drain on the campaign trail.”
And American Bridge, the so-called Democratic super PAC, said Mr. Mnuchin’s holdings were a sign that Mr. Trump’s government would not look out for working class Americans.
“By slamming through Mnuchin, Senate Republicans are becoming accessories to Trump’s future corruption, helping him stack his cabinet with shady billionaires who, like Trump, will rig the government to serve their own interests at the expense of the American people,” said Shripal Shah, vice president of American Bridge.
|Steven Mnuchin, Trump's campaign finance chairman arrives at Trump Tower for meetings with President-elect Donald Trump on January 2, 2017 in New York. / AFP / Eduardo Munoz Alvarez (Photo credit should read EDUARDO MUNOZ ALVAREZ/AFP/Getty Images)|
Treasury Nominee Mnuchin Supports Strong Dollar, Calling China Manipulator, Raising Debt Ceiling
President-elect Donald Trump's nominee for Treasury Secretary Steven Mnuchin went to Washington for his confirmation hearing with the Senate Finance Committee, where the the former Goldman Sachs partner took on questions over his resume and gave new insight into his views on taxation, trade, housing policy, and a potential reform of post-crisis financial regulations.
Mnuchin, a Yale graduate and longtime executive at Goldman who was stationed on the front-lines of the mortgage backed securities market, faced the toughest criticism for his activities after leaving the investment bank. After a 17-year career at Goldman, Mnuchin became an investor first with ESL Investments and then with his own fund Dune Capital Management. However, Mnuchin's big strike came in the aftermath of the housing bust when he arranged a $1.6 billion rescue of IndyMac Bank, one of the largest bank failures in U.S. history.
Mnuchin renamed the bank OneWest and over a number of years worked through the California-based lender's portfolio of defaulted home loans, while expanding its footprint. The deal proved wildly successful for Mnuchin and his partners. In 2015, OneWest was sold to CIT Group for $3.4 billion. However, when President-elect Trump nominated Mnuchin as Treasury Secretary, renewed scrutiny was given to OneWest's activities while he was in control, including its foreclosure practices and its reverse mortgage lending operations.
Recently, a housing advocacy group accused OneWest of being a 'foreclosure machine' due to the alleged 36,000 foreclosures that occurred under Mnuchin's watch. On Wednesday, reports in the media indicated New York Attorney General Eric Schneiderman may target OneWest for its now-shuttered reverse mortgage operation, Financial Freedom.
Mnuchin got a chance to defend his record. In testimony the Treasury nominee said, "we invested $1.6B of capital into a failing financial institution when most investors were running for the hills." Mnuchin added, "let me be clear: my group had nothing to do with the creation of the risky loans in the IndyMac loan portfolios. When we bought the bank, we assumed these bad loans which had been originated by previous management. Some of those individuals had to answer to federal authorities for their bad lending decisions."
About foreclosures, Mnuchin said OneWest extended 100,000 loan modifications to delinquent borrowers. "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. I ran a 'Loan Modification Machine,'" Mnuchin said. He also rejected the idea that a foreclosure was financially beneficial to OneWest versus a modification.
He further argued OneWest was an advocate for struggling homeowners, working with bond trusts to gain freedom to modify loans and proposing regulatory changes with the Department of Housing and Urban Development to avert foreclosure on elderly homeowners. About Financial Freedom, Mnuchin said the operation was built under the previous management and it was dismantled during his tenure.
Record aside, Wall Street is closely watching Mnuchin's commentary for insights on how regulations, taxes, and the housing market may be reformed in the new administration. The two most germane statements Mnuchin made for global investors during the early parts of testimony surrounded the U.S. dollar and the U.S. debt ceiling.
Despite President-elect Trump's concern with the dollar's strength, which has rattled currency markets, Mnuchin said unequivocally he supports the strength of the currency. “The U.S. currency has been the most attractive currency to be in for very long periods of time," Mnuchin said. “The long term strength of the dollar, over long periods of time, is important," he added.
Mnuchin also vowed to work expeditiously to raise the U.S. debt ceiling, averting a standoff similar to the 2011 crisis that harmed the U.S. economic recovery. “I would like us to raise the debt ceiling sooner rather than later," Mnuchin said before stating that honoring U.S. debt obligations is his greatest priority. "The U.S. has the obligation to honor its debt," he said, a statement that differs with Trump's campaign trail hints at renegotiating debts. Mnuchin also will call China a currency manipulator if it restarts such efforts.
On taxation, Mnuchin and President-elect Trump's tax plans are still unclear. It appears Mnuchin believes he can lower tax rates for businesses and workers, but in a manner that may not necessarily lower absolute rates paid by America's wealthiest individuals. Meanwhile, many have panned the House GOP plan for border adjustability, arguing that tariffs will leave U.S. businesses and the global economy worse off.
"We will work diligently to limit regulations, lower taxes on hardworking Americans and small businesses, and get the engine of economic growth firing on all cylinders once again," Mnuchin said. Further insights into his plans for a prospective repatriation holiday, or the extent corporate rate cuts, are of great interest.
In commentary, Mnuchin said the Trump administration will bring trillions of dollars in corporate cash onshore, where it can be reinvested and overall rates can be lowered. Presumably, there will also be a coincident growth bump. Mnuchin believes the administration will come up with a plan that doesn't increase the deficit. “I want to make sure tax reform doesn’t result in a widening of the deficit,” Mnuchin said, without citing specifics.
As Treasury Secretary, Mnuchin will have a major role in regulating the sector where he was employed for decades.
The Treasury Secretary is a pivotal figure on the Financial Stability Oversight Council, a committee established in the wake of the crisis to oversee America's largest lenders and potentially dissolve a failing firm. During testimony, Mnuchin indicated he would limit the oversight of FSOC where it might harm the competitiveness of small community banks, which he characterized as pivotal for business creation and reviving local economies.
"Regulation is killing community banks," Mnuchin said before stating he would relieve regulatory burdens on these small lenders so "we don't end up in a world where we have four big banks in this country."
More broadly, the Trump campaign has vowed to repeal and replace the 2010 Dodd Frank Act, the signature post-crisis financial reform. However, even some large bank CEOs see such a maneuver as unnecessary and counterproductive given the increased health of the U.S. banking system. In his commentary, it appears Mnuchin will take a middle ground.
He said he supports the so-called Volcker Rule, which bars proprietary trading but also has limited the ability for market makers to hold inventories of assets that can help stabilize markets at times of volatility. "I do support the Volcker Rule... The concept for proprietary trading doesn’t fit banks that are FDIC insured," he said. But Mnuchin will look to improve the rule so it doesn't impede market liquidity, citing recent analysis from the Federal Reserve and echoing long-standing concerns raised by investors.
Mnuchin also did not express a desire to dismantle the Consumer Finance Protection Bureau, instead arguing the agency should be funded by government appropriations, not the Federal Reserve. When pressed by Senator Maria Cantwell of Washington, Mnuchin rejected the idea of breaking up America's largest banks, stating "I don't support going back to Glass Steagall as is." He favors a so-called 21st Century Glass-Steagall because a break-up of banks would disrupt capital markets and commerce.
Still unclear are Mnuchin's views on Fannie Mae and Freddie Mac, two trillion dollar government sponsored mortgage agencies that are the lifeblood of the housing market.
In commentary with the press, Mnuchin has vowed to restructure Fannie and Freddie, putting them in private hands. Those comments caused Fannie and Freddie shares to spike, netting a big windfall for hedge funds (including one where Mnuchin was a limited partner) who've long speculated on a privatization. These so-called GSE's backstop most prime mortgages in the United States, so any change to status quo will have a meaningful impact on America's over 60 million homeowners. Mnuchin downplayed the idea he will push a so-called recapitalization of Fannie and Freddie and release of their profits.
"My comments were never that there should be recap and release,” Mnuchin said before favoring a more generic recommendation ofbi-partisan housing reform and an exit of the GSE's from government control. Fannie and Freddie, two of the most volatile stocks and a large holding inside America's biggest hedge funds, plunged as much as 11% on Mnuchin's comments before rebounding.
When it comes to trade policy, the Treasury Secretary has a major influence. Again, Trump has vowed to tear up long-standing deals and take a more insular view of global trade. Wilbur Ross, nominee for Commerce Secretary, echoed some of these ideas on Wednesday stating he would look at renegotiating the North American Free Trade Agreement.
Mnuchin appeared to toe the party line, stating NAFTA will likely be scrutinized. But he took a softer tone, noting trade policy will be about increasing exports, not necessarily limiting imports. Mnuchin, whose post Goldman life also included years of financing Hollywood films, said he would be focused on protecting U.S. intellectual property. "Among President-elect Trump’s signature issues is reviving trade policies that put the American worker first. I will enforce these trade policies that keep and protect American jobs," Mnuchin said.
During the early stages of Mnuchin's confirmation hearing, his most striking comments surrounded the Internal Revenue Service. Though Mnuchin has vowed to simplify the tax code, he told the Senate Finance Committee he believed the IRS was understaffed and had insufficient technology.
“The IRS should hire more people,” Mnuchin said. He also vowed to close loopholes surrounding offshore entities, particularly those employed by hedge funds to shield profits from income tax. “It would be one of my great priorities. I hope that is at least a bi-partisan issue that we all can agree on,” Mnuchin said.
U.S. Treasury nominee Mnuchin hammered over offshore tax havens
U.S. Treasury Secretary nominee Steven Mnuchin said on Thursday he would work to eliminate the need for offshore tax havens, as Democratic senators accused the Wall Street veteran of using such vehicles to shelter hedge fund money from the government.
In a confirmation hearing before the Senate Finance Committee, President-elect Donald Trump's pick to lead the Treasury was attacked for failing to promptly disclose he was a director of an offshore business vehicle domiciled in the Cayman Islands and owned more than $100 million in real estate.
Offshore tax havens used to shield income have become a symbol of the growing divide between rich and average Americans. Democrats seized on the disclosures, made late on Wednesday, to question Mnuchin's qualifications to revamp the tax code.
"One does not go and create offshore entities at the end of the day other than to avoid, in some form or fashion, the tax laws of the United States. That's pretty simple," New Jersey Democratic Senator Robert Menendez said.
"We have to decide whether that's necessarily the essence of what we want as leadership," Menendez said.
Mnuchin, a former Goldman Sachs executive, hedge fund manager and Hollywood film financier, said he moved his Dune Capital Partners LLC registry to the Caymans to allow for some pension fund clients to invest in his funds, not to avoid taxes.
But Mnuchin, 54, added that it "makes no sense" for the U.S. tax code to encourage the use of such entities. "In the hedge fund world these are only set up to make the accountants rich and I would love to work with the IRS to close these tax issues that make no sense."
Among the incoming Trump administration's top economic priorities is a massive tax reform effort aimed at lowering rates for businesses and individuals and closing many deductions and credits.
Mnuchin, who insisted his last-minute disclosures were not intentional but due to the complexity of his holdings, complicated federal forms and a lawyer's advice that the real estate disclosure was not required, also tried to clarify Trump's recent market-moving comments on the U.S. dollar.
The Republican businessman-turned politician, who will be sworn in on Friday, said in an interview published this week in the Wall Street Journal that the dollar's strength was "killing us," prompting the greenback to fall and gold prices to jump.
Mnuchin said he believed that Trump's remarks, which usurped a role normally reserved for Treasury secretaries, referred to a short-term spike in the dollar due to market factors, not its longer-term value.
"The long-term strength over long periods of time is important" for the dollar, Mnuchin said.
He also said he would like to see an increase in the U.S. government's debt ceiling "sooner rather than later" to avoid another standoff with Congress that could upset financial markets.
The current debt ceiling extension expires on March 15, but the Treasury would not likely exhaust its borrowing capacity for several more months after that.
Democrats had gone into Mnuchin's hearing perceiving him as one of the more vulnerable Trump nominees, partly due to his involvement with OneWest Bank, which he ran in the aftermath of the 2007-2009 financial crisis.
They hammered him for the 36,000 foreclosures that the bank pursued after Mnuchin struck a lucrative deal with the Federal Deposit Insurance Corp to absorb most of the losses from such actions.
Critics have described OneWest as a 'foreclosure machine' and Senator Ron Wyden, the committee's top Democrat, criticized the bank's automated "robo-signing" of foreclosure documents and foreclosing on the widows of reverse mortgage holders.
Mnuchin argued that his bank was a "loan modification machine," offering payment reductions to 101,000 borrowers to try to keep them in their homes, and said his turnaround of the failed IndyMac bank, which became OneWest, saved thousands of jobs and homes.