Mnuchin Sidelined: Is This The Treasury Goldman Sachs Deserves?

Pedigree alone isn’t enough to ensure that Wall Street’s biggest players get to dictate policy. Debt limit upset tests the credibility of “Government Sachs” itself.

For years the stereotype was that Goldman Sachs hired and kept only the best and brightest. Steve Mnuchin was there for nearly two decades. As Lloyd Blankfein puts it, he’s a “smart, smart guy.”

But even a smart guy can fail to manage expectations. Over the last seven months, we’ve seen that scenario play out at the Treasury, and as of last week it looks like confidence in his expertise has hit the limit.

When the debt ceiling deal went down, the negotiations went behind Mnuchin’s back. Evidently the work of keeping the Treasury solvent was too important to keep the Treasury secretary in the loop.

There are still grown-ups in the room. But with Republican lawmakers looking for scapegoats, Mnuchin needs to prove mighty fast that he really is one of the adults.

The “globalist faction” implodes

With chief economic advisor and former Goldman president Gary Cohn ominously absent from recent headlines, Mnuchin is the highest-profile graduate of the firm left in the administration.

He’s the member of the Cabinet best placed to argue economic orthodoxy in the face of competing policy agendas. Since he knows how markets actually work, he’s been a vocal advocate for free trade, realistic stimulus, financial deregulation and everything else Wall Street likes.

But lately there haven’t been a lot of successes to reflect back on the firm while his perceived weaknesses make him a lightning rod for its enemies.

It starts with the federal credit ceiling. He’s been ringing the bell about raising the Treasury debt limit since June. While Wall Street took him extremely seriously, Congress didn’t make it a priority until last week. 

By that point, the yield curve already reflected deteriorating confidence in the administration’s ability to keep the Treasury from even a “selective” default in the immediate future.

Mnuchin knows an inverting curve is not healthy. And he knows that while a Treasury default may not be unthinkable, markets run almost infinitely smoother when global investors have the confidence to operate as though it was. 

We need to believe that these are the safest investments on the planet. If that belief falters, we’ve all got big problems.

Unfortunately, the last few months already strained that belief to the point where people simply didn’t trust Mnuchin to get the job done — nothing personal, but he’s an unknown factor in Washington and this was his first big test.

Having let Congress adjourn for the summer recess without action on the ceiling, he only had 3-4 weeks left to quarterback a deal.

Someone who takes a Treasury shutdown as an existential threat would have grabbed any extension he could. Instead, he started lobbying for a relatively ambitious 18-month deal with real penalties for failure.

Right-wing members of Congress who’d frankly rather shut down the government than cater to the Wall Street status quo laughed in his face.

Trump evidently felt the tide shift because he overruled Mnuchin in mid-meeting to carve out a smaller but easier three-month deal that could happen without unanimous Republican support. We’ve got until December now before the next deadline.

But when it rolls around, Mnuchin will need to work that much harder to be taken seriously. And if he’s Wall Street’s designated proxy in the administration, Wall Street’s agenda might not move as fast as people in the industry hoped.

“Inconvenience” at best

After all, we’re nearly eight months into a four-year term. What concrete progress have we really seen? 

Efforts to roll back Dodd-Frank and other financial industry regulations have gone nowhere. The promise of tax reform has turned into diminishing tax cuts. Stimulus just hasn’t happened. 

Markets have surged on hope, but hope doesn’t last.

While Goldman shares are up a healthy 19% since the election, all of that optimistic wealth creation happened in the first three months. After that, the first cracks in the debt ceiling emerged and the stock has retreated 14% from its March peak. 

All in all, hope for the new administration made Goldman partners and other shareholders $28 billion richer. The evaporation of that hope has taken $14 billion of that windfall away.

And in the meantime, the bank is staring at a relatively bad policy hand: all the risk of rising trade barriers upsetting global cash flow, few of the tangible rewards that would have made up for it.

Months ago, Goldman economists dared to dream that those compensations could translate into an economic growth boom, maybe pushing GDP 7% above last year’s levels for brief spurts.

Now those dreams have rolled back along with the policy calendar. Tax cuts may come, but too late to make any real difference in the 2017 fiscal year. Stimulus and regulatory relief have dropped out of the firm’s macro forecasts.

At best, we’ve been spinning our wheels for the last six to seven months. It’s not the end of the world, but it’s a long way from a free ride for the big firms.

When Hank Paulson came from Goldman to take over the Bush Treasury, he was a tough cop, negotiating bailouts and weighing moral hazard.

Back in the Clinton era, sad-faced Bob Rubin was so integral to Wall Street’s confidence that the market sagged on rumors he might quit and rallied when it looked like he’d stick around a little longer.

So far, the latest Goldman Treasury has been somewhere between zero-sum game and the “inconvenience” CEO Lloyd Blankfein fretted about when he saw how many of his people were joining the administration.

They’re good people. But if they can’t get their share of play in the Washington game, they’re really just a drag on the house brand.

Even the Fed was worried about a debt ceiling debacle. Stanley Fischer quit rather than have to deal with the blowback. That’s far from a ringing endorsement. 

Mnuchin can turn it around. But it’s hard work and serious business. Let’s see if he’s willing to put in the effort to build a stronger outcome between now and December. 


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