What a difference a week makes.
On January 23, Reuters reported that dialing back the Volcker Rule which limits banks' ability to engage in speculative investments using their own balance sheet, has emerged a top priority for President Donald Trump's nominee for U.S. Treasury secretary, Steve Mnuchin. In written responses to questions posed by members of the U.S. Senate Finance Committee, Mnuchin said he would use his role as head of the interagency Financial Stability Oversight Council to give the Volcker Rule a stricter definition of proprietary trading.
At issue is the Volcker Rule, a contentious provision in the 2010 Dodd-Frank Act that sought to prevent lenders from putting federally-insured deposits at risk through wagers on stocks, bonds and other assets.
"As Chair of FSOC I would plan to address the issue of the definition of the Volcker Rule to make sure that banks can provide the necessary liquidity for customer markets and address the issues in the Fed report," Mnuchin wrote in the document, which also included senators' questions and was verified by a Senate aide.
According to Reuters, Mnuchin also said that "regulators have applied proprietary trading prohibitions to too many activities" adding that "In the responses Mnuchin also made it clear he believes the rule should only apply to "a bank that benefits from federal deposit insurance." The Federal Deposit Insurance Corporation guarantees retail deposits at about 6,000 banks, including the consumer banking arms of the country's largest investment banks."
Just a few days later, in a follow up to Mnuchin's written responses, this time from Bloomberg, the interpretation of his statement was 180 degrees opposite, and as Bloomberg reported, "Steven Mnuchin made clear he doesn’t want Wall Street banks getting back into the business of making risky market bets with their own capital, after Senate Democrats pushed him to clarify his responses to questions they asked during his confirmation process to be Treasury secretary."
Why the difference? Because in the span of just two days, Mnuchin appears to have flip-flopped on Volcker:
Mnuchin’s updated comments, which Bloomberg News obtained, were made after several Democrats on the Senate Finance Committee felt his earlier responses weren’t adequate, according to a Jan. 25 letter that Senator Ron Wyden of Oregon wrote to Utah’s Orrin Hatch, the panel’s Republican chairman.
It appears that the biggest variance between the two sets of responses had to do with the new Treasury Secretary's outlook on prop trading. Mnuchin's Bloomberg added that in his written remarks to lawmakers, "Mnuchin said that even banking units that lack a government backstop should be restricted from making speculative trades."
“A legal distinction between the insured and non-insured entity is an important factor in eliminating risky activities within the institution that has” insured deposits, Mnuchin said in an amended response to a senator’s question about Volcker. “I do not believe that the uninsured entity should be able to perform proprietary trading."
If Bloomberg's interpretation of Mnuchin's statement is accurate, it could cause substantial headaches for bank investors, many of which have priced in substantial deregulation, among which the return of the Volcker rule, as banks were once again expected to have free reign in a Dodd-Frank free environment.
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In addition to Volcker, Mnuchin also weighed in on the issue of how to reform America’s GSE in particular, and mortgage-finance system in general, a topic that has huge consequences for the multitrillion mortgage industry and the fate of shareholders who’ve invested billions of dollars in Fannie Mae and Freddie Mac. In his response, Mnuchin wrote that “any solution will be dependent upon the GSEs being capitalized properly and other such controls that eliminate risk to taxpayers.”
The answer could cheer some advocates of preserving Fannie and Freddie, including investors, small lenders, and some affordable housing groups. Over the past few years, those groups tried to convince the Obama administration to allow the companies to rebuild capital to no avail. In the days after President Donald Trump’s surprise election win in November, his advisers pledged to dismantle Dodd-Frank and cut regulations broadly.
Mnuchin took a softer tone at his hearing before the Finance Committee. He said he mostly favors making changes to rules put in place in the wake of the 2008 financial crisis, not repealing the law entirely. In his amended responses to the Finance panel, Mnuchin said he’d like to use “empirical assessments” to monitor the effects Dodd-Frank has had on the finance industry. He also said that he’ll advocate that any rules needed to protect “public safety” shouldn’t be included in the regulatory freeze Trump has ordered across all federal agencies.
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Assuming that Mnuchin's harsher, second set of responses is accurate, it may also be one of the reasons for today's bank stock selloff, as yet another significiant decoupling between the post-Obama reality and the Trump hope was gently squeezed, prompting traders just how much will really change under Trump who is increasingly getting bogged down in day to day scandals and minutiae - involving both republicans and democrats - that have little to do with his economic promises, something which infurated none other than Matt Drudge earlier today.