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Markets Overreact to Mnuchin’s Comments on Recap and Release?

Fannie Mae and Freddie Mac stocks dropped significantly during Treasury Secretary Nominee Steven Mnuchin’s confirmation hearing. Senator Mark Warner (D-VA), who previously authored a bill that would do away with the GSEs, pointedly asked Mnuchin whether he supports a “recap and release” of Fannie and Freddie. While the exchange ended with Mnuchin agreeing that he does not support any measure that would lead to “private gains and public losses.”

Fannie Mae $FNMA Equity

The market seems to have taken these comments to mean that Mnuchin would not support allowing the GSEs to retain capital. However, earlier during the questioning Mnuchin also stated that “for very long periods of time Fannie and Freddie have been well run without creating risk to the government. These are very important entities to provide liquidity in the mortgage market. Senate Banking Committee Chair Mike Crapo (R-ID) clarified Warner’s comments saying he is concerned the GSEs would be recapitalized and put back in the market without any reform. Mnuchin responded that the status quo is unacceptable and his priorities are that the taxpayers are not at risk and that capital is not eliminated in the housing market.  Overall, Mnuchin’s comments were supportive of Fannie Mae equity and Preferreds, he indicated the government conservatorship must end, saying “for many years these companies were well run government entities.”

Join our Larry McDonald on CNBC’s Trading Nation, Wednesday at 2pm.

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Where are bond yields going with risk of a euro breakup on the rise?  Click here (above) for our latest report.

Volcker Rule

“I do support the Volcker Rule,” Mnuchin, 54, said during the committee’s hearing on his confirmation. “I think the concept of proprietary trading does not belong in banks with FDIC insurance.”

The rule was one of the core components of the 2010 Dodd-Frank Act, and its strict limits on banks betting with their own money was meant to keep Wall Street from taking dangerous risks and acting against their customers.

 

Recap via Bloomberg

• Mnuchin endorses strong dollar in “long term”.
• Distances himself from “recap and release” of Fannie and Freddie, but won’t say how he would deal with them.
• Supports continuing to enforce Russian sanctions.
• Wants to boost headcount at IRS and update technology.
• Called for a “21st Century” version of Glass-Steagall.
• He supports the Volcker Rule in general but says implementation needs to be improved.
• Went out of his way to talk about cutting regulations that hurt community and small regional banks.
• Wants to preserve the CFPB, but fund it out of general budget.