WASHINGTON — Treasury Secretary Steven Mnuchin tackled a host of hot financial topics on Thursday, including saying he did not favor breaking up the big banks, committing to preserving the 30-year fixed-rate mortgage and broadly endorsing a two-tiered regulatory system for big and small institutions.

During a hearing at the Senate Banking Committee, Mnuchin was pressed for his views on housing finance reform, what a “modernized” version of the Glass-Steagall Act would look like and more information on an upcoming series of Treasury reports about the regulatory system.

Though Mnuchin was calm and collected throughout the two-hour hearing, his toughest exchange came with Sen. Elizabeth Warren, D-Mass., over the Trump administration’s support for a 21st-century Glass -Steagall Act. Since July of last year, the administration has consistently endorsed such an idea but never detailed what exactly it meant.

The Treasury chief did little to clarify, except to say what it did not mean: breaking up the big banks. Although the Glass-Steagall Act separated commercial and investment banking, Mnuchin said the administration would not go in that direction.

“We do support a 21st-century Glass-Steagall, which is that there are aspects of it that may make sense, but we never said before that we supported a full separation of banks and investment banking,” Mnuchin said.

Treasury Secretary Steven Mnuchin
“I never said we are in favor of breaking up the banks," said Treasury Secretary Steven Mnuchin. Bloomberg News

Warren appeared perplexed, arguing that if the administration did not want to reinstate the heart of Glass-Steagall, it was not truly in favor of its restoration.

“I thought we in fact had the endorsement of the entire Republican Party when people voted on the Republican platform,” Warren — who has introduced her own 21st-century Glass-Steagall bill along with Sens. Maria Cantwell, D-Wash., John McCain, R-Ariz., and Angus King, I-Maine — told reporters outside the committee room after the exchange with Mnuchin. “I thought that meant they were in favor of a Glass-Steagall breakup.”

But during the exchange Mnuchin said, “I never said we are in favor of breaking up the banks.”

Mnuchin’s response was illogical, Warren told reporters.

“There was never any ambiguity about what Glass-Steagall means,” she said.

Housing finance reform is on the front burner

Mnuchin also touched on reform of Fannie Mae and Freddie Mac, with lawmakers signaling that they intend to move quickly on crafting a new housing finance system.

Senate Banking Committee Chairman Mike Crapo, R-Idaho, referenced his past bill that would have eliminated Fannie and Freddie, replacing them with private market players that had a government guarantee in case of catastrophic losses. That bill cleared the panel at the time but lacked sufficient support to go to the full Senate.

“Three years ago, seven Republicans and six Democrats on this committee voted in support of a comprehensive housing finance reform bill,” Crapo said. “A key priority this Congress is to build on that bipartisan legacy and these new ideas, and pass legislation that will create a sustainable housing finance system for future generations.”

Mnuchin agreed it was a priority but said he would likely not focus on it until the second half of the year, after he’s had a chance to deal with tax reform and complete the Treasury’s review of the financial system.

While he declined to state his views on housing finance reform, he did emphasize the importance of the 30-year fixed mortgage — something most experts agree is possible only if there is some kind of government guarantee.

“I think the 30-year mortgage has been a fundamental part of our mortgage finance,” Mnuchin said when asked if he believed the product should be preserved.

That could signal that the Trump administration does not support efforts by some House Republicans to fully privatize the system, a move that would likely eliminate the 30-year product.

Mnuchin said that he had not made up his mind on the need for a government guarantee but that if he did determine one is needed, there could be some kind of pay-in by market players so that it did not put taxpayers at risk.

“If we end up with a scenario where we need some type of explicit guarantee, I would expect it would be paid for, and I would expect that it would hopefully never be hit,” said Mnuchin, while referencing an insurance system similar to what banks have with the Federal Deposit Insurance Corp., in which they pay premiums in return for deposit insurance.

Is Treasury headed for a showdown with the FHFA?

Mnuchin also indicated that he disagrees with Federal Housing Finance Agency Director Mel Watt’s testimony last week that the agency can act alone to rebuild capital at Fannie and Freddie if necessary.

Under the current system, all profits from Fannie and Freddie go to the Treasury Department. Watt said that could end if Fannie and Freddie deplete their capital and require a draw on Treasury’s line of credit and that he was prepared to act unilaterally. But Mnuchin clearly said he expects Fannie and Freddie to continue giving to Treasury.

“I've had the opportunity to meet with Mel Watt several times,” he said. “Last time we talked about the dividend extensively, and I did tell him that it was our expectation at Treasury that they would pay us the dividend and we hope they continue to do so, per the agreement.”

Mnuchin hints at two-tiered regulation

Lawmakers also asked about progress Mnuchin has made on a broad look at the financial regulatory system and recommendations to improve it.

He said it will result in a series of reports, one of which will likely include a recommendation to carve out banks and credit unions with assets of less than $10 billion from significant portions of the Dodd-Frank Act.

Mnuchin also said he was wary of an approach advocated by some that the best way to prevent a big-bank failure is to force them to hold more capital.

“I believe the large banks and financial institutions have plenty of capital,” he said.

While having more capital is always desirable from a safety standpoint, the question is whether it inhibits lending.

The House is likely to vote on a bill in the coming that would overhaul Dodd-Frank. That bill cannot clear the Senate because of Democratic opposition, but that doesn’t mean a regulatory relief package for banks can’t get bipartisan support. Some lawmakers were trying to feel Mnuchin out on possible areas of compromise.

“There are a number of Democrats that are willing to work with you and Republicans who are willing to work with you to get common-sense reg relief for community banks,” said Sen. Jon Tester, D-Idaho.

In his opening remarks, Crapo also said he would like to address the $50 billion systemically important threshold for regional banks.

“Our regulatory regime should be properly tailored and avoid a one-size-fits-all approach,” he said.

Mnuchin agreed, saying “these are the banks that know the communities, know what's needed and they know how to make loans, and we should make sure that they can do it without undue regulatory burden, without putting taxpayers at risk.”