Trump’s Treasury Secretary simultaneously sits as head of the Financial Stability Oversight Council (F-SOC) even as he appears to be attempting to undermine financial stability in the U.S.
By Pam Martens and Russ Martens of Wall Street on Parade
U.S. Treasury Secretary Steve Mnuchin (a/k/a the former foreclosure king) has been attempting to dismantle regulatory restraints on Wall Street’s worst instincts since he took office. Making Mnuchin even more dangerous is the fact that, under statute, he simultaneously sits as head of the Financial Stability Oversight Council (F-SOC) even as he appears to be attempting to undermine financial stability in the U.S.
One of Mnuchin’s most alarming actions on behalf of F-SOC came last October 17 when the Council announced that it was removing the designation of Prudential Financial as a SIFI – a Systemically Important Financial Institution that required enhanced supervision and prudential standards. Mnuchin stated at the time: “The Council’s decision today follows extensive engagement with the company and a detailed analysis showing that there is not a significant risk that the company could pose a threat to financial stability.”
The chart below shows what happened to Prudential from the date of Mnuchin’s statement to the end of 2018. Its stock started sinking like a rock in a pattern that was so close to the trading pattern of Citigroup, Goldman Sachs and Deutsche Bank that they could have been clones of one another. What does Prudential have in common with those three banks? Like them, it’s a major derivatives counterparty and on the hook for billions of dollars if derivatives blow up Wall Street again as they did in 2008.
Jeremy Kress, an Assistant Professor of business law at the University of Michigan Ross School of Business and a former attorney in the Banking Regulation & Policy Group of the Federal Reserve, had warned against taking this action in March of 2018. Writing for the American Banker, Kress explained that while other SIFIs that had been removed from the list (AIG, GE Capital and Met Life) had taken steps to shrink their systemic footprint, Prudential had actually grown larger and more systemic. Kress wrote:
“…Prudential has grown by more than $100 billion since its designation. Meanwhile, Prudential’s interconnectedness with other financial companies has increased: Its notional derivatives exposures and repurchase agreements have each swelled by more than 30% since its designation. In sum, Prudential’s financial data certainly do not suggest that it has become less systemically important…”
Kress followed his article in the American Banker with a more detailed paper in the Stanford Law Review in December of 2018, after FSOC’s formal action was taken. He detailed further how Prudential had become even more dangerous since its original SIFI designation, writing:
“Prudential increased its asset size and its involvement in risky activities like repurchase agreements, securities lending, and derivatives. Prudential apparently calculated that it could escape its SIFI label simply by waiting until deregulatory policymakers controlled FSOC.”
Kress also explained where Prudential ranked in terms of its systemic footprint:
“FSOC not only relies on misleading empirical analyses, it also inappropriately disregards well-respected metrics of Prudential’s systemic importance. For example, Prudential ranks third among all U.S. financial companies in SRISK, one of the most commonly cited measures of a firm’s systemic footprint. SRISK measures a firm’s expected capital shortfall given a severe market decline, based on its size, leverage, and risk. Prudential’s SRISK is roughly comparable to Morgan Stanley’s, and it ranks behind only Citigroup’s and Goldman Sachs’.”
But Mnuchin wasn’t done greasing the wheels for the next train wreck on Wall Street…