[Senate Hearing 115-57]
[From the U.S. Government Publishing Office]
S. Hrg. 115-57
DOMESTIC AND INTERNATIONAL POLICY UPDATE
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
REVIEWING DOMESTIC AND INTERNATIONAL POLICY ISSUES AND RECEIVING
UPDATES ABOUT THESE ISSUES FROM THE SECRETARY OF THE DEPARTMENT OF
TREASURY
__________
MAY 18, 2017
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
Joe Carapiet, Senior Counsel
Matt Jones, Professional Staff Member
Laura Swanson, Democratic Deputy Staff Director
Erin Barry, Democratic Professional Staff Member
Dawn Ratliff, Chief Clerk
Cameron Ricker, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, MAY 18, 2017
Page
Opening statement of Chairman Crapo.............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
WITNESS
Steven T. Mnuchin, Secretary, Department of the Treasury......... 4
Prepared statement........................................... 45
Responses to written questions of:
Senator Brown............................................ 47
Senator Toomey........................................... 51
Senator Sasse............................................ 52
Senator Reed............................................. 62
Senator Rounds........................................... 64
Senator Menendez......................................... 65
Senator Tillis........................................... 67
Senator Warner........................................... 74
Senator Warren........................................... 76
Senator Kennedy.......................................... 83
Senator Van Hollen....................................... 84
(iii)
DOMESTIC AND INTERNATIONAL POLICY UPDATE
----------
THURSDAY, MAY 18, 2017
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
Today we will receive testimony from the Secretary of the
United States Department of Treasury on domestic and
international policy issues.
Thank you, Mr. Secretary, for attending today.
This is Secretary Mnuchin's first hearing since being sworn
in as Treasury Secretary in February, and we look forward to
our discussion.
Many of this Committee's priorities fall within the
jurisdiction of the Treasury Department, including housing
finance reform and development of policies to encourage a
healthier economy. We look forward to working with you and your
staff on these priorities and improving the lives of Americans.
Housing finance reform remains the most significant piece
of unfinished business following the crisis, and it is
important to build bipartisan support for a path forward. Last
week, we received testimony from Federal Housing Finance Agency
Director, Mel Watt. At that hearing, Director Watt emphasized
that it is Congress that needs to act to determine the future
of housing finance reform. The hearing reinforced why
conservatorship is unsustainable--namely, GSEs having zero
capital, taxpayers on the hook for losses, and the Government
effectively taking all risks.
A number of groups have released proposals for reform in
recent months, including the MBA, the ICBA, the Milken
Institute, several co-authors writing jointly for the Urban
Institute, and many others.
Three years ago, seven Republicans and six Democrats on
this Committee voted in support of a comprehensive housing
finance reform bill. A key priority for 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.
I look forward to working with you, Secretary Mnuchin, and
your staff at the Treasury Department as this Committee
develops this bipartisan legislation that will fix the broken
housing finance
system.
Regarding economic growth, I am encouraged by President
Trump's Executive Order on Core Principles for Regulating the
Financial System. I understand that the Treasury Department
will be issuing a report identifying laws and regulations that
inhibit Federal regulation of the U.S. financial system in a
manner consistent with the core principles soon. I will review
this report and work with you, regulators, and Members of the
Committee to enact measures to improve our financial system.
Financial regulation should help ensure a safe and sound
financial system, but in a tailored manner to help grow and
maintain a healthy economy. We want our Nation's banks to be
well capitalized and well regulated, without being drowned by
unnecessary compliance costs. Undue regulation chills
innovation and imposes significant and unnecessary costs and
burdens on financial institutions and companies, often
disproportionately on smaller ones.
For example, community banks and credit unions lack the
personnel and infrastructure to handle the overwhelming
regulatory burden of the past few years, yet in many ways are
treated the same as the world's biggest institutions. Our
regulatory regime should be properly tailored and avoid a one-
size-fits-all approach.
One area I would like this Committee to address is the $50
billion SIFI threshold for regional banks. In prior hearings,
we have discussed whether $50 billion is the appropriate
threshold, and
I hope that we can work together to craft a more appropriate
standard.
My goal is to work with you, Secretary Mnuchin, Senators of
this Committee, and financial regulators to look for ways to
improve regulation and foster economic growth, while
maintaining resiliency in the economy.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. Welcome, Mr.
Secretary. Nice to see you two days in a row. Thank you so
much.
I thank Chairman Crapo for calling this hearing. Treasury
has played a key role in our Government since its creation more
than two centuries ago. That role expanded in the wake of the
Great Recession when it became clear, at great cost, that the
rules in place for financial services were inadequate. Given
the greater role that the Treasury Secretary plays in oversight
of Wall Street, it makes sense that he devotes some of his time
to conveying his views and those of the Administration on
issues within this Committee's jurisdiction to us and to the
public.
So far, that communication has been insufficient. Questions
posed to the Secretary by me and questions posed to the
Secretary by other Senators have gone either unanswered or were
answered by non sequiturs. So I hope today will give an
opportunity to all of us for more forthright conversations.
On Tuesday, we held an ordinary hearing that, in my mind,
turned out to be quite extraordinary. Three of the four
nominees will work in national security positions in Treasury,
if confirmed; the fourth will work in a national security
position at Commerce.
One Senator after another felt compelled to ask the
nominees, to ask each of them, if they would put the law and
the Constitution and their country ahead of loyalty to the
President. Amazing and unprecedented that we thought we had to
ask that question. Given all the troubling revelations from the
White House and about the White House, such a question is vital
for every nominee in a sensitive position. This was hours
before we learned that President Trump very likely asked FBI
Director Comey to shut down an
investigation.
Honesty is critical. Our national interests are undermined,
whether national security or domestic economic security, when
our leaders traffic in falsehoods. You cannot lead if we do not
believe you. And when I say ``we,'' I mean the American public.
China was a champion of currency manipulation, and then it was
not. Wealthy taxpayers would not get a tax cut, and then they
would. The deficit would be eliminated in 8 years, and then it
would not. Wall Street was getting away with murder, but now it
has too big a compliance burden. The carried interest loophole
would be closed, but now maybe not. We must invest $1 trillion
in our ``Third World infrastructure,'' but now there seems to
be no rush. No cuts to Medicaid, it was promised; now a $900
billion--$900 billion--cut to Medicaid is fine.
The President launched the examination of Dodd-Frank with
the claim that creditworthy borrowers cannot get loans, but the
spigot is not dry and we do not need to, in the President's
words, original words perhaps, ``prime the pump.'' Bank loans
and profits are at record levels. These are facts that bear
repeating. Bank loans and profits are at record levels.
The President was elected saying Wall Street has caused
tremendous problems for us; ``we are going to tax Wall
Street,'' his words. Now that he is in office, he seems to have
forgotten the tremendous problems that Wall Street created for
middle-class families across America. That same amnesia seems
to have infected a number of my colleagues who seem to forget
what Wall Street did 10 years ago to our country, to our
economy, to our families, to our neighborhoods. The President
sacked a dedicated public servant for a bank lawyer to oversee
the Nation's biggest banks. He is threatening the Consumer
Bureau, one of the only champions that consumers have in the
executive branch.
Can we improve upon how we regulate the banks and the
shadow banks and the rest of the financial services industry?
Of course we can. I believe we can do so for smaller
institutions. But let us do so based on facts. The fact is that
one in five homeowners in the city of Cleveland--one in five--
holds a mortgage that is more than 120 percent of the value of
their home. The fact is that bank lending has grown 6 percent
annually over the past 3 years. Loan growth at community banks
was 8 percent--8 percent--this past year. Lending stalled in
the first quarter of this year. Why? Because demand was not
there.
The fact is that U.S. households have more debt now than
they did at the peak in 2008, driven by increased auto and
student debt. The fact is the wealthiest Americans may have
recovered from the Great Recession, recovered and then some,
but many, many families like these Cleveland homeowners have
not. If we want to
improve our economy, we would be better off debating how to
create jobs through an effective means like infrastructure
investment rather than the thoroughly discredited trickle-down
approach, whether achieved through the Tax Code or by raising
the speed limit for Wall Street.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Secretary Mnuchin, we will now turn to you. You have the
time that you may need to make a statement. If you would like
to introduce anyone, as you choose, you may do so. And the time
is yours.
STATEMENT OF STEVEN T. MNUCHIN, SECRETARY, DEPARTMENT OF THE
TREASURY
Mr. Mnuchin. Thank you. I would like to introduce my
fiancee, Louise Linton, who is with me this morning, as well as
many other members of my team at Treasury.
Chairman Crapo, Ranking Member Brown, and Members of the
Committee, it is an honor to appear before you today for the
first time as Treasury Secretary. During my confirmation
hearing, I promised to work with Congress to create and
maintain prosperity for all Americans. I want to reaffirm that
commitment to you today.
Let me begin by discussing the Treasury's recent report on
foreign exchange policies of our major trading partners.
Ensuring that American business, consumers, and workers face a
level playing field is one of the essential components of this
Administration's agenda. When foreign governments engage in
currency manipulation, it makes the playing field uneven, which
is why we regularly monitor these practices.
After careful study, the Treasury Department has found that
no major trading partner met the criteria for currency
manipulation during the current reporting period. We will
continue to follow this important issue and have established a
``Monitoring List'' of economies that warrant close attention.
This list comprises China, Germany, Japan, Korea, Switzerland,
and Taiwan.
Additionally, we are committed to rethinking our foreign
agreements and trading practices to ensure that they are both
free and fair to American business and workers. In my
discussions with the IMF and the finance ministers of the G-20,
I have emphasized this goal, and I will continue to do so.
Turning to our domestic agenda, it has been more than 30
years since we have had comprehensive tax reform in this
country. Combined with often imprudent regulations crafted in
the midst of the crisis, the entire American prosperity has
slowed. I believe that a goal of 3 percent GDP or higher
economic growth is achievable if we make historic reforms to
both taxes and regulation.
There are about 100 people working at the Treasury on the
issue of tax reform. It is our goal to bring relief to middle-
income Americans and make American business competitive again.
We will do this all while simplifying the tax system.
On regulatory reform, Treasury is preparing its initial
report in response to the President's Executive Order on ``Core
Principles for Regulating the United States Financial System.''
These principles provide a road map for the Administration's
approach to financial services regulation.
We have taken a systemic approach in our work by meeting
with a variety of stakeholder groups to hear what works, what
does not work, and what can be improved. Our initial report
contains recommendations to provide relief for community banks
and make regulations more efficient, effective, and
appropriately tailored.
Housing finance reform is another priority of mine. This
has been an unresolved issue for far too long and one we are
committed to fixing. We will ensure that there is both ample
credit for housing and that we do not put taxpayers at risk.
This Committee has done extensive work on this along with your
work on community financial institution regulatory relief. My
hope is that we can partner on both of these issues. I look
forward to working with the Congress to develop a solution.
Finally, another area that is crucially important to
Treasury is our commitment to combating terrorist activities
and financing. We have announced a number of sanctions against
individuals and entities associated with destabilizing regimes
like Syria, Iran, and North Korea. This work is essential to
the Administration's efforts to continue to keep Americans
safe.
The first few months of this Administration have been
significant. We have been working hard at Treasury to develop
and implement policy that will allow the economy to grow. This
will make the dream of prosperity once again a reality for all
Americans.
Thank you.
Chairman Crapo. Thank you very much, Secretary Mnuchin. And
I want to thank you personally for your responsiveness to this
Committee. We appreciate your willingness to work with us on
these issues, and certainly your expertise and assistance can
help us get to the right results.
I want to ask my first question about housing finance
reform and the status quo. As I indicated in my opening
remarks, last week Director Watt of the FHFA indicated that
this was critical for Congress to deal with. My question to you
is: Do you agree that the status quo is unsustainable and that
Congress must move on this issue?
Mr. Mnuchin. Thank you, Chairman Crapo. I do agree
completely with that. We are committed to working with you on a
solution on housing reform. I think we need to fix Fannie and
Freddie. We are committed to make sure that there is proper
liquidity in the housing markets. It is a very, very important
part of the American economy, and we need to make sure that
there is ample credit for the middle class to buy homes, while
at the same time making sure that the taxpayers are not at
risk. As you know, the Treasury has a very big line outstanding
to those two entities.
Chairman Crapo. Well, thank you. And as you know, during
the 113th Congress, this Committee developed a comprehensive
housing reform bill. We had to make a lot of compromises to
achieve that bipartisan legislation.
As the Committee again focuses on housing finance reform,
what do you think are the key compromises that need to be
achieved?
Mr. Mnuchin. Well, I think we are open to working with you,
as I have suggested. We need to find a solution that creates
necessary liquidity while making sure we do not put taxpayers
at risk. And while we have been busy working on tax reform and
focusing on regulatory issues, during the second half of this
year I will focus on housing reform and look forward to
speaking to many of you on ideas.
Chairman Crapo. Well, one of the big issues that does face
us on housing finance reform is whether there should be an
explicit Government guarantee provided through the housing
system. Do you believe that such a guarantee is necessary? And
if so, how do we deal with implementing adequate taxpayer
protections in exchange for any Government guarantee?
Mr. Mnuchin. Well, I think it is a bit early for me to make
a conclusion on whether a guarantee is necessary. That is
something that we would like to study very carefully, and if
there is a guarantee, we would want to make sure that there is
ample credit and real risk in front of that guarantee so that
taxpayers are not at risk.
Chairman Crapo. All right. Thank you.
I want to move quickly to the Executive order that the
President has issued. I notice I only have a couple minutes
left, and I did not at the beginning of this remind all of our
colleagues that we need to pay very close attention to the 5
minutes for questioning because I am confident that every
Senator on this Committee wants to have his or her opportunity
to speak with you. So I will just in my last 2 minutes quickly
bring up the Order that President Trump signed in February
outlining the Administration's Core Principles for Regulating
the U.S. Financial System.
Now, the Executive order requires you to report within 120
days on the extent to which existing laws and regulations
promote those core principles and to identify laws and
regulations that inhibit the Federal regulation of the U.S.
financial system in a manner consistent with them.
And, by the way, I strongly agree with those core
principles, and I am looking very much forward to working with
you on this effort.
Can you tell the Committee some of the specific issues you
have looked at and perhaps some of the findings that we may
expect to see in your report?
Mr. Mnuchin. Yes, thank you. We have had a very large group
at Treasury working on this. One of the things that I
emphasized to the team ahead of time was that we wanted to make
sure that we reached out to many different groups and got
feedback, that this was not something that Treasury was just
designing on its own.
I know certain people refer to this as a ``review of Dodd-
Frank.'' That is one of the things we are looking at. But it is
actually much broader than that in looking at the core
principles.
We have met with over 16 different groups, many of them
having 50 to 100 people. We have had community banks. We have
had small- and medium-sized banks. We have reached out to each
one of the regulators and had working groups with each one of
the independent regulators to make sure we have input from
them. And we will be issuing a series of reports, the first one
coming out shortly, which will be on banking. And I will say
one of the big
focuses, we will make sure that as we have different
regulators, we have proper coordination between them, and this
is something that I have also been working on at FSOC where I
take my responsibility as Chair very seriously.
Chairman Crapo. Thank you very much.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman. And welcome again,
Mr. Secretary.
At your nomination hearing on January 19th--and as a member
of the Finance Committee, I was there--you stated that OneWest,
the bank you were affiliated with, did not engage in
robosigning and other types of misconduct related to mortgage
practices. Since, there has been a lot of news, including
reports in Ohio from perhaps our State's most conservative
newspaper, some 1,900 signings in Ohio just in the six largest
counties, reports that OneWest did, in fact, engage in
robosigning. Earlier this week, your former company, Financial
Freedom, settled with the Department of Justice for $89
million--$89 million--related to violations of Federal law.
Do you stand by that January 19th testimony?
Mr. Mnuchin. Yes. Let me first comment and let me first say
that, as you know, I am no longer on the board of CIT, so I
only have access to public information and what I have read.
But I would like to comment on the Financial Freedom settlement
which was in the recent press.
Let me first say----
Senator Brown. Please make it as short as possible. I have
other questions.
Mr. Mnuchin.----that these issues were identified by my
management team and self-reported to HUD and FHA when we
became aware of them. These were issues that existed prior to
us taking over the bank. We were concerned. We sent a team to
go see the FHA Commissioner, and we dealt with that.
We also took reserves, and as soon as we learned there were
issues, we put in policies to correct those issues immediately.
Senator Brown. I am sorry to interrupt, but my question,
Mr. Secretary, was did you--you said that OneWest did not--
forgetting the settlement. You said OneWest did not engage in
robosignings. Do you stand by that statement from January 19th
that you said under oath to the Finance Committee?
Mr. Mnuchin. I do, and I would also just comment, I believe
in a series of questions that were issued to me after that
hearing, we responded on the definition of robosigning. And,
again, I am no longer at the bank, so I cannot comment----
Senator Brown. I know that. All right.
Mr. Mnuchin.----on anything that----
Senator Brown. Thank you. Chairman Crapo mentioned the
Executive order, and then you gave us some detail about it, and
I am appreciative of that. As you and your team at Treasury
work through this, are you reviewing the reforms made to the
mortgage market that would address practices that took place in
places like IndyMac and OneWest, including protecting--and you
mentioned all the banks that you have brought in the room, but
there are customers, there are community people that you did
not mention. But the practices that took place at OneWest and
IndyMac, protecting home buyers from predatory mortgages,
banning robosignings, other harmful servicing practices,
evaluating borrowers for their ability to repay a loan, are you
looking at--are you reviewing those
reforms?
Mr. Mnuchin. There will be a series of reports, and we will
be making recommendations on things that impact home mortgages.
Senator Brown. I am just concerned, as I sit through these
hearings year after year after year, that so many of my
colleagues have suffered this collective amnesia about what
happened 10 years ago. I do not want you as Treasury Secretary
to suffer from the same affliction.
Another question. You are meeting with stakeholders on the
Wall Street reform Executive order and housing finance reform.
How many industry groups have you--not your staff, but how many
industry groups have you met with versus how many consumer
groups?
Mr. Mnuchin. First of all, let me just comment on your
other thing. I will not forget those issues. I lived with those
issues very seriously from the problems at IndyMac, and I spent
many years trying to fix those and work on home loan
modifications.
In regards to industry groups, I have met with several
groups of industry leaders and community areas. We have worked
with them, and we have had several meetings of large groups
that have come in.
Senator Brown. Could you spell out for this Committee--I
assume you cannot recite numbers now, but would you get back to
this Committee within the week that the Chairman usually calls
on to delineate whom you have met with, which banks? I mean,
give us a litany of--I mean, diversity of meetings is not small
banks, medium banks, large banks. There are customers, there
are community groups. There is all that. So if you would spell
out specifically whom you have met with and give that to this
Committee, whom you have met with about the Executive order, if
you would be willing to do that.
Mr. Mnuchin. We would be more than happy to do that on a
confidential basis.
Senator Brown. Of course. Of course, and I accept that and
would honor that.
Last question, Mr. Secretary. You committed to Senator
Hatch in the Finance Committee that you would respond to all
the Finance Committee members' questions. I wrote to you 2 \1/
2\ months ago, on March 2nd. I have not received an answer that
I asked for about potential conflicts of interest and ownership
in the Administration.
Just today, there is a front-page story in the, shall we
say, mainstream media--it is the Wall Street Journal--about the
President's business partners and his financial entanglements
with a Russian bank that is on the sanctions list. So I would
like to pose the question again that I asked in Finance in
follow-up--I am sorry, that I wrote to you on March 2nd. Will
you get a complete list of Trump business associates and
financial ties to ensure that any foreign
entanglements are benign with respect to the laws you enforce--
terrorism, money laundering, sanctions, CFIUS, IRGC
associations and the like? So would you commit to us to get a
complete list of Trump business associates and financial ties
because of the threat they could have to ensure that they are,
in fact, benign?
Mr. Mnuchin. Well, let me first say I did review before I
came today to make sure that my staff had fully responded to
all the inquiries from you and the Committee, and I believe we
have. And if there are outstanding questions that you have from
letters that you have sent us, please make sure you follow-up
with me after this, and we will make sure that we are
responsive.
In regards to your specific question, again, if you would
just send me a note on what you are looking for, we will review
internally whether it is appropriate to come from us or
somewhere else, and we are happy to respond to you.
Senator Brown. I appreciate that. Thank you for your
cooperation. But the letter was March 2nd. It was not answered.
I am asking it again. I will follow up with a letter again. But
we want to know--we want a complete list--I mean, people in
this country are troubled by the President's business
connections. They are troubled when the President's family goes
to another country to do business and American taxpayers
provide security for their families and that money goes to the
Trump business empire, including the President. People want to
know about those financial entanglements. That is not an
academic or a political science exercise. It is not even a
political exercise. It is about the national security of this
country, and it is about people wanting, needing to know that
information. So I reiterate how important it is.
We just last week listened to the nominee for CFIUS and
terrorism and financial crimes, all those very important
issues--or those positions, and we want to make sure his ties
do not affect their ability, the Under Secretary of Treasury
for Terrorism and Financial Crimes, the ability of the CFIUS
nominee to do their jobs.
Mr. Mnuchin. Well, I can assure you I take the CFIUS
responsibility very seriously. I review the cases weekly. My
team reports to me on it, and I can assure you that if there
were any cases that involved the President or any members of
his family, they would be treated very seriously, and we would
review them like anything else.
Senator Brown. But the public needs to know that as you
review them.
Thank you, Mr. Chairman.
Senator Shelby. [Presiding.] Senator Corker.
Senator Corker. Thank you, Mr. Chairman.
Mr. Secretary, thank you for being here. I appreciated our
conversation yesterday evening, and I know that you heard
Chairman Crapo's commitment to housing reform in his opening
comments. I know that you have got some tax reform issues and
others to deal with, but it is my sense that you are strongly
committed to finally dealing with housing finance reform in an
appropriate way. Is that correct?
Mr. Mnuchin. That is correct, and I hope that is something
that we can do on a bipartisan basis.
Senator Corker. And I think the only way to do it
appropriately, where you deal with some of the charter issues
that are necessary to really go beyond the model that we had
back in 2008, the only real way to do that is through
congressional action. Is that correct?
Mr. Mnuchin. My strong preference is to do it through
congressional action and working with you and your colleagues.
I will say that, obviously, the Treasury has a lot of exposure
and taxpayers are at risk. But my strong preference is to do it
exactly as you have described.
Senator Corker. I talked to you a little bit about the--I
guess a couple nights ago Mr. White called me to talk a little
bit about a conversation we had had here publicly about the
capital cushion and some other issues, and, you know, I
sincerely believe that he feels strongly about the position
that he has laid out. I discussed that with you a little bit
last night, and I know your position there. But it seems like
we have got another 75 days or so to figure out the appropriate
resolve to that. Is that correct?
Mr. Mnuchin. That is, and I appreciated you calling me and
talking about that issue. I have had the opportunity to meet
with Mel Watt several times. The 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.
Senator Corker. I think most of the models that have been
put forth to try to resolve the issues that have continued to
exist with Fannie and Freddie, most of them call for an
explicit guarantee because of the fact that there was an
implied guarantee, which really caused the situation where
there were private gains and public losses. Certainly if there
is any guarantee that is put in place after hopefully a large
amount of capital being put in front, that is something that
should be priced, should it not?
Mr. Mnuchin. Absolutely. If we do end up with a situation
where the Government is issuing a guarantee, no different than
FDIC insurance or FHA insurance, the Government and the
taxpayers should be compensated for that risk.
Senator Corker. Well, I would just like to say, again,
there has been a lot of work, Senator Warner and myself, many
of the people here at the Committee, have spent a great deal of
time on this issue. As I mentioned to you last night, I doubt
we will have a Secretary of Treasury like you that knows as
much about this topic as you, and I look at this as a
tremendous opportunity really to resolve this issue because of
your knowledge and the strong interest on our Committee.
I think when we attempted this back in 2013, we did so in a
fashion that was so complicated, very difficult, even though we
passed something out of the Committee, to bring that into the
mainstream on the floor, and certainly in front of the American
people. My sense is there has been a lot of work to streamline
since, and I will say I feel for the first time a real
opportunity to align not just the interest of U.S. taxpayers
and the fact that we want to have a housing finance system that
is robust, but also, in fairness, one that more fully aligns
the public sector interest and the private sector interest.
I know I talked to you a little bit about some potential
proposals last night on the phone, but I just want to thank you
for your interest in this and look forward to hopefully
completing the work that is the last piece of work, the one
piece of work that really should have been front and center on
financial reform when we did it in 2010. And I want to thank
you for your concern, your interest, and hopefully involvement
in bringing this to a close.
Mr. Mnuchin. Thank you. I am committed to work with you on
it.
Chairman Crapo. [Presiding.] Thank you.
Senator Reed.
Senator Reed. Thank you, Mr. Chairman, and thank you, Mr.
Secretary, for joining us today.
You noted in your testimony the importance of the work done
in the Treasury Department to identify and disrupt terrorist
activities specifically by targeting their financial networks,
and this work is critical and depends a great deal on
cooperation of our allies around the world, specifically where
intelligence sharing is concerned.
After the recent revelation that President Trump shared
highly classified information with the Russian foreign
minister, reportedly information given to him by an ally but
shared without its knowledge, do you have concerns about the
chilling effect this is likely to have on our relationships
with these critical intelligence-sharing partners?
Mr. Mnuchin. Well, I cannot comment on what information was
shared or not since the only thing I know is what I read in the
press. But I will say I am probably spending 50 percent of my
time on TFI issues. It is, I think, perhaps the most important
issue right now as part of my job. I assure you that I take it
very seriously. I have had two foreign trips, meeting with both
the G-7 and G-20, and in each one of those meetings with my
counterparts, I have discussed this. And I am happy to report
that we have a very close working relationship with our
partners and our allies on this issue and something I think can
be incredibly effective in stopping terrorism throughout the
world.
Senator Reed. Thank you. The White House has also asked you
to review the orderly liquidation authority established by the
Dodd-Frank Act. And as you know, the statutory purpose of the
OLA is to provide the necessary authority to liquidate failing
financial companies that pose a significant risk to the
financial stability of the United States and a mandate that
mitigates such risk and minimizes moral hazard. And I would
like to highlight some of the OLA provisions and ask whether
you support them.
In the case of a failure of a mega bank, do you support the
mandatory removal of the mega bank's executives and board
members responsible for the failure?
Mr. Mnuchin. Again, we are going through an extensive
review of OLA as instructed by the President. We are just
starting that process. I have had discussions with many finance
ministers and Governors throughout Europe, and this is
something that is obviously very important to them as well.
It would be premature for me to make any specific comments
on any aspects of it. We are doing a review. I am open-minded
to looking at all these, and I look forward to issuing a
report, and we would be more than happy to come back and update
you once we have done more work on it.
Senator Reed. Let me, recognizing your answer, put on the
record two other issues which I would like you to give
particular attention, and I will put it in the form of a
question, understanding that your response would probably be
similar to your initial
response. Do you support the FDIC's authority to claw back
compensation from executives and directors substantially
responsible for the failure?
Mr. Mnuchin. I would say as a general matter I think that
that is a good policy that has been instituted. So, again, it
is something we will review, but, yes, I generally support
that.
Senator Reed. Would you support the statutory mandate that
taxpayers shall bear no losses from the exercise of any
authority under OLA?
Mr. Mnuchin. Again, I would say that that is an objective,
but, again, I would reserve comments, specific comments, until
we complete the review. Obviously, we do not want to put
taxpayers at risk in any way, and that is one of the reasons we
are looking at all the core principles.
Senator Reed. Mr. Secretary, the tax plan is rather terse
in details, but it suggests that some of the highest-income
Americans would receive significant tax cuts, and the majority
of the tax relief to the remaining Americans would be rather
minuscule or certainly small. And there is a possibility that
in the proposal there could be indeed some increases on
individual families or individual taxpayers.
Are you committed now to ensuring that there will be no
increase on families or individual taxpayers of less than
$250,000 a year? And I am picking that as kind of a reference
point, but are you committed to something like that?
Mr. Mnuchin. Let me just say that, obviously, tax reform is
something that we are working on with the House and the Senate.
But I can assure you that the President's objective and my
objective is that we create a middle-income tax cut and that we
do not raise taxes on the middle-income. If anything, the
opposite. We are trying to create a middle-income tax cut.
Senator Reed. Would that tax cut be equivalent to the tax
cut enjoyed by the very richest Americans, people who make
about--the 1 percent, highest 1 percent?
Mr. Mnuchin. Again, obviously, we are working on the
details. One of the things we have done is we have proposed
getting rid of almost every single deduction, which is
something that is used by the rich, in return for a slight
reduction in taxes. And our objective is that 95 percent of
Americans will not need to use itemized deductions and will be
able to fill out simplified tax returns. And we look forward to
working with you as we progress on the details.
Senator Reed. Thank you, Mr. Secretary.
Chairman Crapo. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. And, Mr.
Secretary, thanks for joining us. Good to see you again.
I do want to take a moment to compliment you on the
extraordinary accessibility. You have been before groups of us,
members of the Finance Committee. I have lost track of the
number of times you have been on the Hill to get input on the
various issues in your brief. You have been available by phone.
You have hosted meetings at the White House. And that is a very
welcome change from the previous regime, and I am grateful for
your accessibility and responsiveness.
I also want to commend you for reiterating the goal that we
should be striving to create an environment in which we can
sustain growth that is above 3 percent. I think that is
entirely achievable, and it is a very important goal. So thanks
for mentioning that.
As a quick follow-up to the comments from the Senator from
Rhode Island, I would just like to underscore that as you do
this review of the OLA and the OLF, I hope we will keep in mind
that this very convoluted construct, which, at the end of the
day, contemplates a taxpayer-funded bailout through the OLF of
a failed bank, it is a creature of the fact that we do not have
an adequate resolution mechanism in bankruptcy. And some of us
have been working for some time on legislation that would give
us the confidence that we could resolve even a very large,
complex firm in bankruptcy so that we would not need to put
taxpayer funds at risk indirectly through the OLF, nor all of
these very prescriptive punishment mechanisms that the FDIC
would subjectively decide to impose, of which the Senator from
Rhode Island mentioned a few.
In this general topic, I wanted to address one of the
egregious problems with the FSOC, which you chair now, and it
has to do with the designation of these too-big-to-fail firms,
the SIFI designation. It strikes me there are several obvious
problems with the way that had been run, and I am hoping to get
your reassurance it is going to be run differently.
Some of the things I have objected to is a completely
opaque process where a prospective designee would have no idea
the criteria by which they would be designated. Second is a
complete lack of a defined so-called stringent regulation,
which is the Dodd-Frank-prescripted punishment for being
designated; no clear off ramp; no mechanism by which you could,
once designated, change your business practices so that you
could be relieved of the designation. And even firms like asset
managers had to worry about being designated, and asset
managers, as you know, do not intermediate credit risk. They do
not fund themselves with deposits. They do not have the kind of
risk profile that banks have.
So my question for you is: Can you assure us that under
your leadership the FSOC is not going to launch a whole new
wave of designations and is not going to be run in this very
opaque fashion? And could you share with us how you do intend
to lead the FSOC since it does exist in statute?
Mr. Mnuchin. Sure. Well, again, I take my responsibility of
Chair of FSOC very seriously, not only on the designation
issue, but it is also a very important forum where we can talk
about issues across the regulators. Cybersecurity is something
that I am very focused on, and we are working at FSOC and other
areas with the regulators.
Specifically on your question, the President has signed an
Executive order where we are reviewing the FSOC designation
process. Again, it is early in that work, but I will tell you I
do support the concept of transparency, and I do believe that
if a company is being designated, that they should understand
what would be required to be de-designated if they want to de-
risk their business. So, yes, generally in regulation, I
believe that there should be transparency.
Senator Toomey. Thanks. And then just quickly on the CFPB,
I remain deeply concerned that the way this entity was
structured has left it completely unaccountable, and it behaves
as an unaccountable regulator in many ways. The House Financial
Services Committee had to take extraordinary steps to even
discover the nature of their processes in their regulation of
indirect auto lending, despite the fact that the statute
forbids them to regulate auto lending. They continue to fail to
produce a timeline that we have requested to explain their
involvement in the discovery of the Wells Fargo abuses, where
it appears that the CFPB jumped in at the end to take credit
for what others had done. And Director Cordray has still yet to
respond to QFRs that I submitted to him over a year ago. I
think this lack of responsiveness and accountability is the
logical consequence of an entity that even a court has
determined is unconstitutional in its construct.
I hope you would agree to work with us to change the
governance of this entity, make it subject to appropriations
and appropriate congressional oversight.
Mr. Mnuchin. Yes, we would work with you on that.
Senator Toomey. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. Mr. Secretary,
welcome.
Mr. Mnuchin. Thank you.
Senator Menendez. The President spent a great deal of time
on the campaign trail highlighting those neighborhoods and
communities throughout the country that seldom reap the
benefits of economic expansion but are reliably and
disproportionately burdened by economic downturns. And in
responses to my questions for the record after your
confirmation hearing, you said, ``I share your commitment to
bring back jobs to these communities that have been so gravely
affected by economic conditions for which they had no part in
creating. If confirmed, I will work with you to make sure the
poorest and rural areas of America are no longer left behind,''
which was heartening to hear.
So, with that, let me ask you about community development
financial institutions (CDFIs), the private community partners
that have stepped up for the better part of a century to inject
capital, create jobs, provide mortgage credits, small business
loans, banking services in those forgotten communities.
In 2016 alone, CDFIs made over 39,000 loans and investments
totaling more than $3.6 billion, financed over 11,000 small
businesses and over 33,000 affordable housing units.
So explain to me, how is it possible to reconcile the
President's promises and your commitments with the
Administration's plan to eliminate the community development
financial institution from the very foundation on which these
investments are made possible?
Mr. Mnuchin. Sure. Well, let me first again say I am
committed to work with you on helping these communities. In
traveling with the President during the campaign, I had the
opportunity to see a lot of this, and I also had the
opportunity at OneWest to see this where previous loans had
been made improperly by IndyMac.
In regards to your question on CDFIs, as you know, the
President's budget has as a priority to make sure that we
reinstitute proper spending for the military. The President is
very concerned that we have not made those proper investments
over the last number of years, and that that required a huge
investment on the part of the Government. So we had to make
difficult decisions in where we would try to save money on
other areas.
While I share some of your concerns with the CDFIs, we had
to look at this across a lot of different priorities. It is an
area where this market is mature and there is private capital
that will come in and the banks do lend. But I do share your
concerns on this.
Senator Menendez. Well, let me respond to that, because I
believe in a strong defense. We spend more than the next seven
countries combined. And we can do better, but not at the cost
of everything that makes America worthy of fighting for and
dying for, and not at the cost of millions of Americans who
languish in an economic situation for which none of us
generally would want to live in.
And when I looked at the budget justification that was put
out by the Administration, the justification proposed in the
budget outline as to why it should be zeroed out is not even an
accurate description of the program's statutory purpose. It
said that this was to ``jump-start an industry.'' That was not
the case. It was created to promote access to capital and
promote economic growth in economically distressed areas.
So we obviously disagree on the value of the program
because in my mind, when there are more than 50 million
Americans living in communities with high percentages of adults
who are not working and many who have no high school degree,
every block has a few vacant homes, and incomes are stagnant,
these communities desperately need investments that will allow
them to start small businesses, create jobs, purchase homes.
This is why I thought I was going to find common ground with
the Administration, but zeroing out, for example, CDFIs, even
in your desire to do national defense, does not make any sense
on behalf of the very people who we supposedly want to defend.
We want to defend, but we also want to create economic
opportunities.
So even the banking industry, the ABA and the ICBA, said it
best in their letter to Congress requesting full funding. They
said CDFIs work in the exact communities that were the focus of
this conversation, they are uniquely positioned to understand
local credit needs.
So as we go into the 2018 fiscal cycle, I hope that you can
be an advocate within the Administration for something that
would meet the President's goal and your own stated goal. And,
you know, I hope to be able to work with you to make that
happen.
Last, I wrote a letter in March to you concerning the real
possibility that the Administration would be forced to deal
with an offer from Russia's state-owned oil company to acquire
critical entity infrastructure in the United States. Last year,
Venezuela's large state-owned oil company, PDVSA, pledged
nearly 50 percent of Citgo shares to Rosneft as collateral for
its loan. I received your
response on Friday evening and, frankly, it does not say
anything. It just recites relevant statutes and standard CFIUS
procedures.
So my question is: Would it concern you, Mr. Secretary, if
Venezuela's state-owned oil company defaults on the debt, and
as a result, Russia's state-owned oil company exercised a near-
majority ownership stake if they have not purchased additional
shares in the open market? They may have, the possibility being
the majority owner. With 48 U.S. petroleum product terminals, 3
refineries in 3 different States, 9 pipelines throughout the
country, wouldn't that be something that would concern you?
Mr. Mnuchin. Well, let me just be very clear in stating
this. This is an issue that I am aware of, not just from your
letter but from other people who have raised the concern. I can
assure you that this, like any other national security issue,
will be reviewed at CFIUS, and at the appropriate--where
national security issues are also discussed in other
confidential settings. And at the appropriate time, I would be
more than--as issues progress, on a classified basis we would
be more than happy to have a confidential discussion.
Senator Menendez. Well, I look forward to that.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Scott.
Senator Scott. Thank you, Mr. Chairman. It is good to see
Mr. Tillis here with us today. Everyone is giving him thumbs
up, so it is good to see you healthy here.
[Applause.]
Senator Scott. That is why I do not run at 8 a.m. in the
morning, however. Excuse me. We will talk to you later.
Mr. Secretary, it is good to see you here as well. Like
you, I had a past professional life. I spent about 20 years in
the insurance industry. Now, that may not be as cool as making
``The LEGO Batman Movie,'' but it is germane to my question.
I was pleased to see the President call for you to review
the FSOC's nonbank SIFI designation authority. I think
examining the transparency, the due process, and likelihood of
distress associated with these designations is good public
policy. At the end of the day, insurance companies are not
banks, and they should not be treated as such.
Under existing law, FSOC includes an independent member
with insurance expertise. Most FSOC members can have their
vacancies on the Council filled by whoever takes their place.
The law specifically allows that. Unfortunately, such a
provision does not exist for the independent member with
insurance expertise.
When the current insurance expert's 6-year term ends, there
will be no one there to take his place and no voting member
with any insurance expertise. Do you believe that Congress
should address this discrepancy between the vacancies of the
FSOC members? And if so, how would you suggest that we do so?
Mr. Mnuchin. First of all, let me just say I have had the
opportunity to meet with him several times. I do think it is
very important that we have someone on the FSOC that represents
and has experience in the industry, knowledge. I would be happy
to work with you on that issue. We are aware that his term is
coming up, and if you or anybody else have suggestions for us
for someone to replace him, we would be happy to listen to
that. But I share your concern, and we want to make sure that
we keep that spot on FSOC.
Senator Scott. I assume that when you make your
presentation to the President on your review, that you would
perhaps bring that issue up to the President as well?
Mr. Mnuchin. Yes.
Senator Scott. I want to thank Chairman Crapo and Ranking
Member Brown who have both committed to solving this issue as
well. So I think if we work as a Committee, we can solve this
discrepancy that is unusual and certainly not practical.
Thank you.
Chairman Crapo. Thank you.
Senator Tester.
Senator Tester. Thank you, Mr. Chairman and Ranking Member
Brown, and thank you for being here, Secretary Mnuchin. I
appreciate your presence at this hearing.
Senator Moran and I have a community bank reg relief bill
called the CLEAR Act. Have you had a chance to take a look at
that at all?
Mr. Mnuchin. I have only looked at it briefly, but I would
be happy to get together with you and go through it.
Senator Tester. OK. The reason I bring that up is that it
is a bipartisan bill. There are a number of Democrats that are
willing to work with you and Republicans that are willing to
work with you to try to get some common sense reg relief for
community banks, and if you could take a peek at that and get
back to us, I would like that a lot.
Mr. Mnuchin. I would be more than happy to do that, and I
can assure you that one of the things that will be in the
report to the President is relief for community banks.
Senator Tester. Thank you.
There is a bill out there called the Marketplace Fairness
Act. It deals with requiring small businesses to collect sales
tax on behalf of other States and local governments when
selling goods over the Internet. Are you familiar with that
bill?
Mr. Mnuchin. I am familiar with the bill.
Senator Tester. Do you or the President have a position on
that bill?
Mr. Mnuchin. I have not discussed it with the President, so
I do not know his view. I think this is something that we
seriously need to look at, and I share certain concerns of
yours on it.
Senator Tester. How about a national sales tax in general?
Is that something that the Administration supports?
Mr. Mnuchin. We have had no discussions on a national sales
tax. It is not something that we are inclined to do.
Senator Tester. OK. Recently, you along with NEC Director
Cohn announced a one-page tax plan and a briefing. The document
is not specific, but that is OK. Nonpartisan experts have said
that this plan could cost $5.5 trillion. I do not think any of
us here think that that is a good idea, saddling the kids with
additional debt. I think even Senator McConnell has recently
said the plan cannot add to the debt.
Could you commit that this plan, this tax relief plan,
would not add to the debt?
Mr. Mnuchin. First of all, let me assure you that this
plan--we would never propose a plan that we thought would cost
$5 trillion. OK? Only specific parts of the plan were released,
so I do not know how it could be responsibly scored. And what I
have said repeatedly is that any plan we put forward we believe
should be paid for with economic growth.
Now, I am concerned as to whether some of the models will
attribute enough growth in dynamic scoring, but when we present
the details, we will present how we think it should be paid
for.
Senator Tester. I would just--a couple things. First of
all, the budget that the President put out--and, quite frankly,
Senator Menendez talked to part of it, but it does not bode
well for rural America. So if we are talking about economic
growth and rural America to pay for a tax plan based on the
budget that the President laid out, we have got some huge
problems. I am just telling you it is not going to happen with
that budget. I will just be quite honest with you.
The other thing I would say is that I am very suspicious of
dynamic scoring because it has been done before. It is not the
first time we have been here. And oftentimes, through dynamic
scoring, the end product looks really good, but then when
reality hits, it is not that way at all.
So if you are concerned about the debt--and I do believe
you are, by the way--I would just ask this needs to be done
very prudently.
Mr. Mnuchin. I can assure you that I am very concerned
about the debt, and I will give you my 10-second commercial on
the debt limit, which we do need to raise, and I look forward
to working with all of you on that.
Senator Tester. And we look forward to working with you on
that, too.
GSE reform has been brought up several times. Do you
support a 30-year fixed-rate note?
Mr. Mnuchin. I do indeed.
Senator Tester. OK. And you talked several times about
protecting taxpayers, and I think that is a solid. Would your
support for that go away if, in fact, there was some taxpayer
risk with the GSE rebuild?
Mr. Mnuchin. Well, again, I think that the 30-year mortgage
has been a fundamental part of our----
Senator Tester. Yes, no doubt.
Mr. Mnuchin.----mortgage finance for as long as most people
can possibly remember.
Senator Tester. It is a big deal.
Mr. Mnuchin. Again, if we end up with a scenario where we
need some type of explicit guarantee, I would expect that it
would be paid for, and I would expect that it would hopefully
never be hit, no different than there is an FDIC Insurance Fund
or an FHA Insurance Fund.
Senator Tester. OK, OK. The FSOC underwent a number of
changes related to transparency and the designation process.
You have talked about some of them: notifying companies when
they move between stages, making public the calculation for
Stage 1 evolution, providing more information to companies as
they go through their annual review.
Would you support codifying those changes into law?
Mr. Mnuchin. Again, we are looking at recommendations, but
I think that is one of the things we will look at and
potentially recommend.
Senator Tester. OK. Thank you very much.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Shelby.
Senator Shelby. Mr. Secretary, thank you for your
willingness to serve. You bring unique experience from the
private sector to the Office of Treasury. You know well that we
need meaningful bank reform. You have been in the banking
business.
A lot of us have pushed for overall and comprehensive bank
reform, but it seems to me that a lot of the smaller banks and
regional banks that, to my knowledge, having been here 31 years
on this Committee and Chairman three times, that they do not
pose a systemic risk to this country, you know, the small banks
and regional banks.
So do you support in concept and would you work with us to
try to bring some meaningful fundamental bank reform to our
system?
Mr. Mnuchin. Absolutely. And I think that regional banks
and community banks are critically important to lending. These
are the banks that know the communities, know what is 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.
Senator Shelby. And, sir, aren't they mainly the banker for
the small- and medium-sized businesses in this country which
are the job creation machines?
Mr. Mnuchin. They are indeed.
Senator Shelby. On the tax reform, which we are all
interested in and we have talked about, we talk about the
corporate rate, 35 percent is too high. Of course, nobody pays
35 percent, as we know. But I have brought this up with the
Administration several times. A lot of us have. Most of the
small- and medium-sized businesses that we are talking about in
this country are taxed under Subchapter S of the IRS Code, and
that is the pass-through. Is that correct?
Mr. Mnuchin. That is.
Senator Shelby. So if we are talking about tax relief for
the biggest of the biggest, what are some of your proposals or
what are you working on--you have got a lot of smart people
working on this--for the small businesses and so forth? Because
I for one would not want to support a big reduction just for
the biggest of the biggest and do nothing for our basic base
and job creation small- and medium-sized businesses. Are you
working in that area?
Mr. Mnuchin. Yes, thank you, Senator. We share your
concerns, and I have referred to this in the plan as a
``business rate'' as opposed to a corporate rate. We need to
figure out and we have a large team working on how we would
deal with pass-throughs.
But I also just want to emphasize that we are committed to
making sure that rich people do not use pass-throughs as a
loophole to pay lower rates. So we do want small- and medium-
sized businesses to have the benefit of lower rates, but we
will make sure that, you know, not every single accountant,
lawyer, and doctor who should be paying higher personal rates
sets up an LLC or a pass-through to get around the system.
Senator Shelby. But, again, this is the backbone of our
economy, is it not?
Mr. Mnuchin. It is, and we are working hard on how we
create growth in that part of the economy.
Senator Shelby. I do not want to put you on a calendar
right now, but as you flesh this out and you get into the weeds
on this, I hope you will be briefing us. I know the Finance
Committee has jurisdiction over this, but we have more than a
passing interest in all of it.
Mr. Mnuchin. Absolutely, and we will be more than happy to
come back and brief you and your staff on this.
Senator Shelby. Thank you very much.
Chairman Crapo. Thank you, Senator Shelby.
Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman. And welcome, Mr.
Secretary.
Mr. Mnuchin. Thank you.
Senator Heitkamp. This is your first appearance in front of
this Committee, and I could not agree with you more. One of the
demands of the American public and the responsibility of
Washington, DC, is to encourage economic growth. That can solve
a lot of our problems as we go forward. And so I want to talk a
little bit about the Ex-Im Bank. It is not a big surprise to a
lot of people on this Committee that I will be raising it.
In 2014, Ex-Im Bank's last fully functioning year, the Bank
supported 164,000 jobs across the country. That is compared to
about 52,000 jobs in 2016. That is because we did not have a
quorum.
In 2015 alone, three Chinese export credit agencies
financed a total of $500 billion. The potential there is that
those could have been markets that we were accessing, but we
are not getting access to today.
Do you believe that the Ex-Im Bank is a critical tool for
enabling American manufacturing competitiveness?
Mr. Mnuchin. I do. I have actually spent a lot of time
looking at this, and I am concerned that, without more members
on it, they can only make loans up to $10 million. I think that
the board should obviously look at credit risk and everything
else, but the Ex-Im Bank is an important tool, and the
President has proposed adding new members.
Senator Heitkamp. One of the great fears that we have is
that the suggestion of the leadership of the Ex-Im Bank going
to former Representative Scott Garrett, who really is not just
a critic of the Bank and a reformer, I think he is someone that
we are very concerned would not advance the interest of the
Bank and does not believe in the mission of the Bank, not just
reforming the Bank.
Do I have your commitment to work on a bipartisan basis to
forward leadership in the Bank that would, in fact, make sure
that the Bank is fully functioning and that these credits
actually come before the board for up-or-down approval?
Mr. Mnuchin. I am sorry. I just want to make sure I
understood your question. Is it on----
Senator Heitkamp. My question is: If, in fact, Scott
Garrett's name is advanced to lead the Bank as Chairman, we are
deeply concerned that many of these credits that are--you know,
$30 billion worth of manufacturing today will not even see the
light of day because the head of the Bank has the ability to
set the agenda for the board. And so it is very important
that--you know, I quite honestly do not care if Mr. Garrett is
on the board, but I do care if he is setting the agenda for the
Ex-Im Bank.
And so my commitment to you--or my question to you is: Are
you willing to work on a bipartisan basis so that we can move
these nominees as expeditiously as possible without getting
into the weeds on someone that many of us suspect might be a
saboteur of the Bank?
Mr. Mnuchin. Yeah, I mean, I cannot comment on his specific
situation. He was proposed by the President. I would say I can
assure you that the President is interested in making sure that
the Ex-Im Bank can lend. We have had lots of business people
come in and talk about this, and it is something that Director
Cohn and I are deeply involved in.
Senator Heitkamp. OK. I would tell you that I raised this
issue as early as December with the President and was grateful
to hear that he was supporting the Bank. But as we move
forward--we are already in May, looking to June--we do not have
nominees yet, and the nominees that have been proposed I think
cause great hesitation on our part. And so we will leave it
there.
I wrote you a letter on May 11th--you should have received
it by now--about the Central States Pension System. These are
good Americans, the kind of Americans that the President talks
about every day, who worked very hard, negotiated and bargained
for a pension and health care, and yet they are being told in
many cases in my State that their pensions will be reduced 70
percent. Now, we were able to, I think, reject--Treasury
rejected a plan that was submitted.
Where are you at with reviewing Central States? And how do
you see this moving forward?
Mr. Mnuchin. So, again, let me just comment on--I do recall
this is something that you mentioned at my meeting and
confirmation. I am a lot more familiar today on this issue than
I was beforehand.
At Treasury, we perform an important function when people
make applications on these, but it is not a subjective
function. It is a function of we go through and run tests. I
share your concerns, and we look forward to working with you
and others. It is a complicated issue.
Senator Heitkamp. It certainly is, and I look forward to
your response to the May 11th letter. Thank you, Mr. Secretary.
Senator Shelby. [Presiding.] Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
Mr. Secretary, we appreciate the opportunity to visit with
you today. I would like to talk about just a couple of items.
I would like to go back to an insurance-related issue, if I
could, and that has to do with the U.S.-EU Covered Agreement.
We may be getting into the weeds a little bit on it, and if you
would like to take it for the record, that would be fine. I am
curious. There are different types of insurance carriers that
do business in the United States. Some do business in Europe as
well. They all want to be able to--or at least a number of them
want to be able to do business both within the European market
but also within the United States market. Some only do business
here. A lot of our property/casualty carriers do, but they have
reinsurance connections with the European market.
Their concern in many cases--there is a little bit of a
discrepancy between some of the reinsurers who want to
basically have full access and capability to do business in all
of the EU markets, and because of that, there was a covered
agreement that was created, one in which we have a temporary
seat basically in this decisionmaking body. But property/
casualty carriers on our side of the ocean have some real
concerns about what the impacts are of being included in this
Covered Agreement, which leaves a number of different areas
unanswered with regard to it.
Some of my friends on the other side of the aisle suggested
in our last meeting with Treasury officials that when I
indicated it was kind of like passing a law to find out what is
in it, that I was going back to Obamacare and that I did not
need to do that at this time. But this Covered Agreement which
is there leaves some real unanswered questions for a number of
our property/casualty carriers that are doing business within
the United States, but who may be subject to some of the
requirements found under the Covered Agreement in the future.
Would you just simply--number one, I will submit a question
specifically to you for the record on it, but would you commit
to work with us and get back with us on taking a second look at
what is in that Covered Agreement, whether or not it really is
in the best interest of most of the carriers that do business
within the United States market today?
Mr. Mnuchin. I will. And I would just comment this is
another area that I am actually a lot more familiar with than
when I first came during my hearing. We have had several
internal meetings where I have been briefed on this. We have
actually reached out to industry, and we are aware of--there
are people who support it and people who do not support it. The
agreement specifically, this is something we do in conjunction
with the U.S. Trade Representative, and now that the Trade
Representative has been confirmed, we will be close to making a
decision. But we would be more than happy to reach out to you
and hear your views before we make that final decision.
Senator Rounds. Thank you. I just think some of the
questions which they have asked really do deserve to be able--
we should be able to get an answer to them one way or another
before we actually get into this.
Mr. Mnuchin. I can assure you we will, and this is
something I am familiar with.
Senator Rounds. All right. Thank you, Mr. Secretary.
Also, in following up a little bit on Senator Shelby's
discussion in terms of the tax rates and so forth and the fact
that a lot of our job creators are not C corporations, they are
S corporations, and so forth, but they all come back down to a
private tax rate or an individual tax rate. I am just curious.
You know, we have a lot of discussion here about tax reform.
Within a 74,000-page tax bill, some of those pages giveth and
some taketh away when every time we talk about simplification
we can have people that get hurt and people that have an
advantage or that receive an advantage. When we start talking
about doing that, and particularly if we are doing this, there
are going to be individuals who will lobby hard against not
allowing some of the deductions to be removed, even if there is
a lower tax rate, once they have done the calculation in their
own situation.
While we want to see a simplification, and I think a lot of
people out there would love to see that happen, there is also a
concern that, as the President would suggest, it is truly time
to prime the pump similar to the way that it occurred during
the Kennedy administration and during what was a very
successful Reagan administration where we refueled the economy.
Part of that has got to be regulatory reform, but the second
part is actually allowing a few more dollars to remain with
individuals so that they can reinvest back into businesses as
well.
When we get right down to it, are we stuck with only a
program which is revenue neutral, meaning that we basically are
going to take away as much as we give back? Or could we
actually consider some sort of a downpayment perhaps on a tax
plan in which we allow for a reduction in actual taxes
collected so that that can be reinvested back in the economy in
a very small nature, perhaps as in a bill that I am suggesting
and one that I will be introducing in which we take our basic
tax rate for those individuals at 10 down to 8, from 15 to 13,
from 25 to 23, from 30 to 28, from 35 to 33, from 39 to 37. It
is not a huge expense, and yet it may very well impact those at
the very bottom a little bit more than those at the top, and it
would be a downpayment to the American public clearly
indicating that there are additional resources that they can
invest back into business and basically back into the economy.
Mr. Mnuchin. Well, the President and I fundamentally
believe that tax reform is critical to growing the economy and
getting back to sustained economic growth. We look forward to
working with you. I think different people will have different
views as to under what scenarios it should be revenue neutral.
As we have heard today, some people believe in dynamic, some
people believe in static. The President does believe that we
need to create economic growth and that we are willing to have
lower tax revenues in the short term if that will create
economic growth.
I think as I have said, the difference between 2 percent
and 3 percent GDP is roughly $2 trillion over a 10-year period
of time. That is a lot of money, and economic growth will help
us deal with a lot of other complicated economic issues we
have.
Senator Rounds. Thank you, Mr. Secretary.
Thank you, Mr. Chairman.
Chairman Crapo. [Presiding.] Thank you, Senator.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. Thank you, Mr.
Secretary, for your service.
Recently, I sent you a letter together with many of my
colleagues on this Committee objecting to your decision to put
Keith Noreika in charge at the OCC by using a maneuver that
evaded Senate confirmation. As you well know, the OCC serves as
the chief banking regulator overseeing over 2,000 banks, and
Mr. Noreika has spent most of his career working very closely
to protect the interests of those banks.
I appreciate the letter I got back yesterday. It raised
some additional questions, and I am going to be sending you
another letter to ask you to respond to the following
questions:
Why were you willing to install him as head of the OCC
before his ethics pre-vetting has actually been certified so
that the American public can know whether or not conflicts
exist now that he is in charge, at least for now, of regulating
2,000 banks?
And, second, your letter indicated that Mr. Noreika's
special temporary 130-day status allows him to avoid President
Trump's ethics pledge, and I am going to want to know whether
that would allow him to immediately leave the OCC and lobby or
work on behalf of big banks. And I am also interested in
whether all this means that you will be presenting a nominee in
the next 130 days. So I am going to send you a letter to ask
for your follow-up on that.
I want to ask you a question about tax policy, and I agree
with my colleagues who have said that if we are going to do tax
reform--and I think tax reform can work, can be an important
step--that we should focus on middle-income tax relief and not
another round of tax breaks for the very wealthy and special
interests.
In fact, Mr. Secretary, last November you agreed with that
statement, and I quote what you said in November: ``Any
reduction we have in upper-income taxes will be offset by less
deductions, so there will be no absolute tax cut for the upper
class.'' That is what you said.
Now, Senators Reed and Tester have asked you questions
about the tax reform plan that you are thinking of submitting
or will be submitting. I have a question related to a tax cut
plan that is already in progress that you and President Trump
have strongly endorsed, and that is the House health care plan,
which, according to the Congressional Budget Office, has $900
billion in tax cuts, including $270 billion in tax cuts that go
to higher-income families, and the analysis of that tax cut is
that millionaires will get on average $50,000 a year in tax
cuts. And that is because what we did in the Affordable Care
Act was we applied capital gains and net income taxes, Medicare
taxes, on very high income individuals on their investment
income so they could help shoulder their share of the Medicare
Trust Fund.
That totally violates--totally violates--the standard you
set forward in November, doesn't it?
Mr. Mnuchin. Let me just first----
Senator Van Hollen. It is really a yes-or-no question, Mr.
Secretary.
Mr. Mnuchin. The first question you asked I wanted to
respond to, which was on the Comptroller of the Currency, the
OCC. So, yes, it is our intention--we actually have someone who
the President has approved that is going through the FBI
vetting process. I think as you know, unfortunately, with all
the candidates, this is a time-consuming process. But we do
hope that there will be somebody who is cleared and somebody
who will go through a Senate confirmation process. So this was
in no way an attempt to put someone in who would not be going
through. This is someone who is in on an acting basis.
On your second comment, I have only been partially involved
in the health care. That is not really in my priority area of
responsibility. My comments are really more focused on tax
reform and, yes, the President's intent is that there is a
middle-income tax cut, and that is our major focus----
Senator Van Hollen. Mr. Secretary, my question was it is a
fact that the healthcare bill, so-called healthcare bill that
passed the House has $900 billion in tax cuts, combined with
almost $900 billion in cuts to Medicaid and some to Medicare.
So a huge pillar of this is tax cuts. And isn't it the case
that the provision that gets rid of the Medicare tax on
investment income flatly contradicts your test that any
reduction we have in upper-income taxes will be offset by less
deductions so there will be no absolute tax cut for the upper
class? Isn't it an absolute tax cut for millionaires? Yes or
no.
Mr. Mnuchin. Again, my comments were focused on tax
reform----
Senator Van Hollen. Mr. Secretary, this is tax policy. It
is a tax--Mr. Chairman, I think it--what has been interesting
about this healthcare debate is that you have got this major
tax change masquerading under the cover of health care. Why is
there a big tax cut in a healthcare bill? You are the Secretary
of the Treasury. You deal with tax policy.
Mr. Mnuchin. Again, I think the idea was that that tax was
hurting investment and jobs in this country, and that, again,
that was part of the healthcare repeal. So, yes, factually,
that tax will help people who are investing money back into the
economy and will create jobs.
Senator Van Hollen. All right, Mr. Chairman. It flatly
contradicts your statement of no absolute tax cuts for the
upper class. It is a flat contradiction.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Perdue.
Senator Perdue. Thank you, Chair. Mr. Secretary, thank you
for being here.
Mr. Mnuchin. Thank you.
Senator Perdue. I appreciate you being willing to step up
and do this, and it is nice to have a private sector guy in
here trying to figure this out.
I want to go to the debt and the portfolio. We have got
about $20 trillion of debt all in. That is about a third of all
sovereign debt in the world. It is about 200 total debt--200
trillion of total debt in the world. But one out of every three
Government debt dollars that are out there are ours.
We have also got the largest debt balance sheet in history,
and the question is: During this period of low interest rates,
about a little over 50 percent, I think, are 3 years or less in
maturity, while the United Kingdom has about 48 percent of
their bond portfolio is 20 years or longer.
So my question is: Is this something that you guys are
taking a look at? And do you plan to go a little longer while
interest rates are still in somewhat of a low environment?
Mr. Mnuchin. It is. It is something that I have talked
about. We are studying ultra-long bonds, which would be 50-year
bonds or even longer. We have been working with the Treasury
Borrowing Advisory Committee, which is comprised of outsiders,
to advise us on what the market is for that. And it is
something that we will consider as we look at debt management.
No decision has been made, and we are seeking guidance as to
the demand.
Senator Perdue. All right. Thank you.
Let us move to Basel III. Can we talk about that for a
second?
Mr. Mnuchin. We can.
Senator Perdue. It is part of your job, as I understand it.
You know, it looks to me like that we are unilaterally way
ahead of our other signatory partners in Basel III in terms of
our capital reserve requirements. It looks to me like as a
business guy that for small banks and community banks, regional
banks, that they are inordinately hampered by the cost of
compliance and also by this reserve requirement.
Is there any attempt in your future priorities to look at
what we are doing regarding our future commitments to Basel III
and what we can do to get the other partners in Basel III to
line up and at least catch up with us in terms of the
commitment of the safety for banks?
Mr. Mnuchin. There is, and I have had conversations most
recently when I was at the G-7 in Bari with other board
governors and other finance ministers about Basel III, and it
is something that we will be looking at as part of the
President's Executive order.
Senator Perdue. But no decision is taken yet regarding it?
Mr. Mnuchin. No decisions have been taken, and I think as
you know, Chairwoman Yellen is--the Fed is the one who
technically participates in Basel, but it is something that we
are looking at.
Senator Perdue. Thank you. I met with her this week and
talked about that, and we talked about the fact that we have
got somewhere around $6 trillion of liquidity, U.S. liquidity,
that is really not at work in the economy today, between the
Russell 1000 balance sheets that have a very strong liquidity
position, probably the strongest ever, a few trillion dollars
in the bank balance sheets because of this capital reserve
requirement, and then also the unrepatriated U.S. profits.
Let me move to growth just for a second, because the
capital investment is one that I think is a part of our future
in terms of getting the economy moving again. It looks to me
like--the GAO has said that--or CBO has said that 1 percent of
GDP growth is about $3 trillion over a decade in terms of
Federal impact on the Federal budget. But yet we tend to talk
in the Senate about spending cuts or tax increases as a
bilateral conversation, and yet growth really is very rarely
talked about because it is an esoteric term here in the Senate.
But I know that is job one for you guys.
Can you talk about how to balance those and relative to--
the 800-pound gorilla in the room, relative to our deficit
spending, and that is, mandatory expenses, and how the
President and how the Administration sees fiscal policy now
marrying up with the monetary policy of our future?
Mr. Mnuchin. Well, let me just comment. You did talk about
repatriation, and that is something that we are looking at as
part of tax reform, because there are literally trillions of
dollars sitting offshore. It is not a surprise. With the
highest corporate tax rate, worldwide taxation, and this
concept of deferral, why would U.S. companies bring money back?
So as part of tax reform, we do hope that there are literally
trillions of dollars that come back. And as it relates to the
other economic issues, we look forward to continuing to talk to
you about them.
Senator Perdue. But the corporate tax rate also puts U.S.
companies at risk for foreign companies who have a lot of
liquidity who can come in and make an acquisition of a U.S.
company and basically use the tax arbitrage to basically pay
for that acquisition. Is that not correct?
Mr. Mnuchin. They can indeed, and I hear that almost every
day as I meet with business leaders reminding me of that,
particularly U.S. companies who feel like they are at risk of
getting taken over and at risk of having the jobs moved outside
of the United States. We have an uncompetitive system that we
need to fix.
And I would also just comment there are several economic
reports that over 70 percent of the corporate tax burden is
actually borne by the workers. And for far too long, workers in
this country have not had wage increases. That is something
that we clearly saw when we met with hundreds of business
leaders across the country and something we are focused on.
Senator Perdue. Thank you for that.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman. Secretary Mnuchin,
good to see you again.
Mr. Mnuchin. Nice to see you.
Senator Warner. I do not want to belabor the point that
Senator Van Hollen was making, but I would just add, beyond the
fact that the healthcare legislation, which I strongly oppose,
offered a massive tax cut for folks like you and me, it also--
and I say this as a former Governor--is really just a transfer
of obligation from the Federal Government, which used to share
in the Medicaid responsibility, to the States. It is an $830
billion transfer of responsibility back to the States.
Now, the States can cut their Medicaid, or they can end up
resulting in dramatic tax increases to continue to pay for that
Medicaid, which will slow the kind of growth that Senator
Perdue and I would like to see.
So I really hope--I know today is tax reform, but the
healthcare debate really is going to influence how many of us
approach the tax reform debate, because whether it comes from
repatriation, when it comes to these other issues, I want to
work with you.
Mr. Mnuchin. I appreciate that.
Senator Warner. But we have got to do it in a way that is
at least deficit neutral and does not follow up on something
that, frankly, does not do the best for health care, does not
disproportionately benefit folks like you and me, and,
candidly, is simply a transfer of responsibility to the States.
I want to move to two other topics in my time. One is, as
you are aware, I am up to my eyeballs in the issue around the
Russia investigation, and it is, I have said repeatedly, maybe
the most important thing I will ever do in public life. Senator
Burr and I have asked the Treasury Department for cooperation,
particularly from the FinCEN division, on getting appropriate
documents that will be part of our investigation. I am happy to
see that we received some of those documents yesterday, and we
are reviewing them. My understanding of how we query that big
data is going to require some collaboration. And I just would
like to ask you at this hearing that we will have your
commitment, your personal commitment, that you will continue to
work with this bipartisan committee and bipartisan
investigation in a way so that we can get to the bottom of it
and get the facts out to the American public.
Mr. Mnuchin. Yes, you have my assurance, and I did meet
with my general counsel and review and make sure we were being
responsive to you on that.
Senator Warner. I appreciate that, because this is an area
of enormous interest, and this particular area in terms of, in
a sense, following the money is something that is terribly
important. So I appreciate that, and I will try to hold you to
it.
Actually, I think somebody else raised this issue, but I
want to take you through at least a hypothetical in terms of
the kind of orderly liquidation authority in Title II of Dodd-
Frank, Title II which my good friend Senator Corker and I spent
a lot of time on it, the one part of Dodd-Frank that actually
got 80 votes.
The hypothetical is this: If we have a large $1 trillion-
plus SIFI institution headquartered in the United States and
operating across the world with multiple subsidiaries, if it
runs into a credit crunch and the rest of the financial
industry stops doing business with this SIFI, and it therefore
fails, in order to have an orderly failure and wind-down, would
you agree that shareholders need to be wiped out in that SIFI
institution?
Mr. Mnuchin. Again, it is hard to respond to a hypothetical
situation, but----
Senator Warner. But the normal course would be----
Mr. Mnuchin. Yes, but----
Senator Warner.----if the institution got into trouble and
we do not want to have a taxpayer bailout, you would want to
have, first of all, the shareholders wiped out, right?
Mr. Mnuchin. Again, let me just comment on that it is hard
to comment on a hypothetical----
Senator Warner. But if a large institution is failing, I
would think you would want, based upon earlier comments, and
everybody else's comments, you would want the shareholders
wiped out----
Mr. Mnuchin. I would----
Senator Warner.----you would want the creditors to take
some losses.
Mr. Mnuchin. I would expect----
Senator Warner. You would want the management fired.
Mr. Mnuchin. I would expect that shareholders would be
wiped out before the Government was risked. I am only saying
that it is a hypothetical situation. There could be situations,
OK, where, for various regulatory reasons, Title I and Title II
may not be appropriate.
Senator Warner. I guess what I believe is that if you wipe
out the shareholders, wipe out the management, end up having
the creditors take the loss, and you have still got a liquidity
issue, you need some backstop there. And I believe that, while
not perfect by any means, the orderly liquidation process we
set up in Title II makes the most sense. And I just find--I
know my time is running out here, but back when we had your
confirmation, we talked about this. I referenced the fact that
the National Bankruptcy Conference, which is composed of
bankruptcy judges and lawyers, believes ``orderly liquidation
authority under Title II should continue to be available, even
if the Bankruptcy Code is amended.''
I just hope that as you go through this process--I know you
are reviewing Title II. If there are ways to improve--but some
folks who are characterizing Title II as a bailout I think
are--frankly, it is not accurate. And there is a recoupment
clause, as you know, for any of that liquidity that may be
needed in the short term.
So thank you. I know we are going to have more conversation
on this, but I wanted to at least put this out for further----
Mr. Mnuchin. Yes, and thank you. And let me just assure
you, we have not reached any conclusions on this. So this is
something we are looking at. We have not reached a conclusion.
And I do share your concern and the concern others Senators
have expressed. The current Bankruptcy Code does not work for
financial institutions, and liquidity is a serious concern as
to even if we went through a bankruptcy process.
So I look forward to continuing to work with you on this.
Senator Warner. Thank you.
Chairman Crapo. Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. Good morning, Mr.
Secretary. For your benefit and mine, I am going to ask you to
encapsulate your answers within 30 seconds. If you could, we
can cover more ground.
A few months ago, the Chairwoman of the Federal Reserve was
with us, and she was asked what, if anything, the community
banks and credit unions defined as less than $10 billion in
assets did wrong in 2008, and she said, ``Nothing.'' Do you
agree with that?
Mr. Mnuchin. I do.
Senator Kennedy. Would you support a bill that would
eliminate community banks and credit unions defined as less
than $10 billion in assets from supervision under Dodd-Frank?
Mr. Mnuchin. That is likely going to be one of the
recommendations that we make when we come out with the report.
Senator Kennedy. Because if you do that, it is not as if
the community institutions are not going to still be regulated.
Is that not accurate?
Mr. Mnuchin. That is correct. They would be regulated by
their primary regulator, which would make sense.
Senator Kennedy. OK. Do we still have financial
institutions in America that are too-big-to-fail?
Mr. Mnuchin. I do not believe that anything is too-big-to-
fail. Some of them may be too big to succeed.
Senator Kennedy. Do we still have financial institutions in
America that are so big that if they did fail, it would have a
substantial, reprehensible, if you will, impact on the American
economy?
Mr. Mnuchin. It could.
Senator Kennedy. OK. Do you think Dodd-Frank has eliminated
that risk?
Mr. Mnuchin. Again, I would just make the comment that it
is very fact-specific as opposed to being hypothetical.
Senator Kennedy. OK. If those financial institutions that I
just referenced had more capital, would that help them?
Mr. Mnuchin. I believe right now that the large financial
institutions actually have plenty of capital.
Senator Kennedy. But if they had more, it would make them
safer, wouldn't it?
Mr. Mnuchin. Well, more is obviously always better than
less, but the question is, if more is stopping them from
lending, that is concerning.
Senator Kennedy. OK. My question is not meant to suggest my
thinking about this. I honestly want your opinion. What do you
think about Glass-Steagall?
Mr. Mnuchin. Glass-Steagall, we do not support a separation
of banks from investment banks. We think that that would have a
very significant problem on the financial markets, on the
economy, on liquidity. And we think that there are proper
things that potentially we could look at around regulation, but
we do not support a separation of banks and investment banks.
Senator Kennedy. OK. Why is our productivity growth so low,
in your opinion, in our economy?
Mr. Mnuchin. I think that is a complicated question that is
going to take a lot more----
Senator Kennedy. You have got a full 30 seconds.
Mr. Mnuchin.----than 30 seconds, but I will be happy to
come back and talk to you about it. I think----
Senator Kennedy. Can you just give me the CliffsNotes
version?
Mr. Mnuchin. I think it is a multi-factor issue. It is a
combination of regulatory issues. It is a combination of job
training issues. It is a combination of tax issues. I think
there are a lot of issues that is leading to lower
productivity.
Senator Kennedy. Now, if we could increase productivity
growth from 1 percent to what I think is normal, 2 percent,
wages ought to go up, right?
Mr. Mnuchin. That is true, and we would create huge growth
in GDP.
Senator Kennedy. OK. Once again, this is a question, not a
suggestion. Do you think it is possible to do legislation to
incent businesses to do more profit sharing so that it is a
win-win, the idea being that it would increase profits for the
entity as well as incent workers to work harder and, therefore,
make them more productive and make their wages go up?
Mr. Mnuchin. I think there has been very successful
scenarios of companies with profit sharing, but I support
leaving that to private industry to decide what is best. I do
not support legislation for that.
Senator Kennedy. OK. I have got 30 seconds. Could you tell
me why GDP growth is so anemic?
Mr. Mnuchin. You know, I listen to a lot of economists tell
me why we are in a secular situation and give me all the
reasons. I have repeatedly said that may be the case, but we
are going to do everything. I think fundamentally we need to
grow GDP and our focus is a combination of tax reform,
regulatory relief, and renegotiating trade agreements that will
create sustained economic growth.
Senator Kennedy. Thank you, Mr. Chairman. Thank you, Mr.
Secretary.
Chairman Crapo. Thank you.
Senator Warren.
Senator Warren. Thank you.
I want to go back to your remarks about Glass-Steagall. As
you know, the original Glass-Steagall was put in place to
divide commercial banks and investment banks. The law was
repealed in 1999, which created the too-big-to-fail banks like
Citigroup and JPMorganChase that got so large. And since then,
there have been many proposals, including my own bipartisan
bill, with Senators McCain, Cantwell, and King, for a 21st
century Glass-Steagall that would break up the banks and
modernize the wall between commercial banking and investment
banking.
Now, I want to look at the history of this. The President
and this Administration have said repeatedly that they support
a 21st century Glass-Steagall. It was in the Republican Party
platform. Donald Trump said it specifically a few weeks before
the election. You said, ``We need a 21st century Glass-
Steagall,'' at your confirmation hearing. And now you have just
said exactly the opposite.
You know, in the past few months, you and the President
have had a number of meetings with big banks' CEOs and
lobbyists. Is that the reason for the reversal on Glass-
Steagall?
Mr. Mnuchin. No, not at all. There actually was not a
reversal. So----
Senator Warren. It was not a reversal?
Mr. Mnuchin. No. Let me just explain. So the Republican----
Senator Warren. I am ready.
Mr. Mnuchin.----platform did have Glass-Steagall. We during
the campaign--and I had the opportunity to work with the
President on this--specifically came out and said we do support
a 21st century Glass-Steagall.
Senator Warren. Yes.
Mr. Mnuchin. Which is that means that there are aspects of
it, OK, that we think may make sense. But we never said before
that we supported a full separation of banks and investment
banks.
Senator Warren. I am sorry----
Mr. Mnuchin. If we had said that, we would have--we would
have----
Senator Warren. Let me just stop you right there, Mr.
Secretary.
Mr. Mnuchin. You are not letting me finish.
Senator Warren. Yeah, I am not because I really have to
understand what you have just said. There are aspects of Glass-
Steagall that you support, but not breaking up the banks and
separating commercial banking from investment banking? What do
you think Glass-Steagall was if that is not right at the heart
of it?
Mr. Mnuchin. Again, I am well aware of what Glass-Steagall
was, and as you may know, the original concern about Glass-
Steagall was actually about conflicts, not about credit risk.
And if we had supported a full Glass-Steagall, we would have
said at the time that we believed in Glass-Steagall, not a 21st
century Glass-Steagall. We were very clear in differentiating
it.
Now, I now realize that I had not----
Senator Warren. Could I ask you to answer----
Mr. Mnuchin.----realized that your bill was named ``The
21st Century Glass-Steagall,'' so----
Senator Warren. Yes, and has been for 3 years now.
Mr. Mnuchin. I apologize that I was not aware of that, so
we were----
Senator Warren. But I still have not heard the answer to my
question. What do you think Glass-Steagall was if it was not
separating commercial banking from investment banking--from
ordinary banking?
Mr. Mnuchin. Again, the fundamental part of Glass-Steagall
was, as you have just outlined, the separation of investment
banking from commercial banking, because people were concerned
about conflicts in issuing securities.
Senator Warren. And how do you separate without breaking up
the big banks that have integrated these two things?
Mr. Mnuchin. Again, the integration of commercial banking
and investment banks has gone on for a long period of time.
That is not what caused the problems during the financial
crisis. And if we did go back to a full separation, you would
have an enormous impact----
Senator Warren. So----
Mr. Mnuchin.----on liquidity and lending to----
Senator Warren. So let me----
Mr. Mnuchin.----small- and medium-sized businesses.
Senator Warren. So let me get--let me get this straight.
Let me get this straight. You are saying that you are in favor
of Glass-Steagall, which breaks apart the two arms of banking--
--
Mr. Mnuchin. No, I said----
Senator Warren.----regular banking and commercial banking,
except you do not want to break apart the two parts of banking.
This is like something straight out of George Orwell. You are
saying simultaneously you are in favor of breaking up the
banks--that is what Glass-Steagall is.
Mr. Mnuchin. I have never said we are in favor of breaking
up the banks and separating. If we had, it would have been very
simple----
Senator Warren. OK. Let me try it one more time----
Mr. Mnuchin. We would not have----
Senator Warren. We are going to run out of time here, but I
have to try this one more time. What does it mean to be in
favor of 21st century Glass-Steagall if it does not mean
breaking apart these two functions in banking?
Mr. Mnuchin. You know what? I would be more than happy to
come see you----
Senator Warren. No, I----
Mr. Mnuchin.----and follow up and talk about this.
Senator Warren. Just tell me what it means.
Mr. Mnuchin. Had we--we never came out and----
Senator Warren. Just tell me what it means----
Mr. Mnuchin.----said we should separate banks----
Senator Warren. Tell me what----
Mr. Mnuchin.----from investment banks----
Senator Warren.----21st century Glass-Steagall means if it
does not mean breaking apart those two functions. It is an easy
question--or an impossible question.
Mr. Mnuchin. It is actually a complicated question----
Senator Warren. I will bet.
Mr. Mnuchin.----because there are many aspects of it. OK?
The simple answer, which we do not support, is breaking up
banks from investment banks. We think that would be a huge
mistake. But, again, I am more than happy to listen to your
ideas on it. You obviously have strong views, and I would be
happy to follow up and listen to you.
Senator Warren. This is just bizarre, the idea that you can
say, ``We are in favor of Glass-Steagall, but not breaking up
the''----
Mr. Mnuchin. We never said we were in favor of Glass-
Steagall. We said we were in favor of a 21st century Glass-
Steagall. It could not be clearer.
Senator Warren. ``We are in favor of a bill that is called
`Breaking up the banks, only do not break up the banks.' ''
Thank you, Mr. Chairman. This is crazy.
Chairman Crapo. Senator Tillis.
Senator Tillis. Well, the good news is you are going to be
able to finish your answers because I am going to drill down on
this. I have some other questions that, if time allows, I will
get to. But isn't it kind of fair to say that the 2008
financial crisis demonstrates that nondiversified companies
like Lehman, AIG, Washington Mutual had the most significant
economic failings?
Mr. Mnuchin. I am sorry. What was your question?
Senator Tillis. In other words, the nondiversified
institutions seemed to be most susceptible in the 2008 crisis.
Mr. Mnuchin. Yeah, well, I mean, in the case of AIG, they
were diversified. They just took a massive amount of risk that
they never should have taken, and the same with Lehman and
others. So I think I agree with you.
Senator Tillis. Would you just go back? And you were saying
that breaking up of the banks would have an enormous impact.
Can you give me an idea of what that would look like?
Mr. Mnuchin. Again, when we are talking about breaking up
the banks, I think what you--one, there are people who just
think banks are too big and that they should be broken up into
smaller banks. I would say our view is that what we should be
doing is supporting and making sure that community banks and
regional banks can grow so we do not just end up with big
banks.
I think if you are talking about separating investment
banking from commercial banking, that is completely different
than the concept of breaking up big banks.
Senator Tillis. I agree, and that is what I am referring
to. You touched on community banks, and I know in your opening
statement that you referred to community banks. I did hear you
refer to regional banks earlier. And I know in the CLEAR Act
that I believe is cosponsored by Senators Tester and Moran, a
concern that I have there is whether or not we are hitting the
right target for where we are talking about regulatory relief
based on institution size.
Do you have any thoughts on when you are providing
regulatory relief what that would look like, how you would
actually structure it so you could provide that targeted relief
to, I think, banks or financial institutions that may be a
little bit larger than is targeted in the CLEAR Act?
Mr. Mnuchin. I agree with that completely, and when we come
out with the report, that will be one of the recommendations.
Senator Tillis. Do you have any sense and rough order of
magnitude what that would look like?
Mr. Mnuchin. I think that generally there are people who
believe that we should raise the $50 billion limit
considerably, and as you have said, there are people who
believe that we should raise the $10 billion limit. So we are
looking at both of those. But we believe that there should be a
greater differentiation. Banks that have $50 billion do not
play the same risk as a bank that has $750 billion or $2
trillion.
Senator Tillis. What other regulations or provisions of
Dodd-Frank do you feel should be revisited beyond what we have
just talked about for mid-sized and regional banks? And,
specifically, I think it was Senator Menendez that was talking
about trying to get to the folks that need access to loans to
be able to invest, the mid-sized and smaller businesses I guess
primarily. But what other areas should we be looking at or what
other areas are you going to give us as feedback for where we
should be prioritizing any other provisions of Dodd-Frank?
Mr. Mnuchin. Well, I look forward--in the next couple of
weeks, we will be delivering the extensive report, and we will
be more than happy to come and sit down with the Committee and
go through the recommendations. It will be quite detailed.
Senator Tillis. Good. We are looking for that because I
think we need leadership from the Administration to focus our
efforts so that we can get to bipartisan reforms. I do not
think--I mean, there are a lot of singles and doubles that we
can hit if we get a very clear indication from the
Administration what will be well received and what we can get
bipartisan support for regulatory relief. But I think that we
have to have explicit recommendations. I am looking forward to
getting those detailed recommendations as quickly as possible
so that the Chair can continue his good work trying to get
bipartisan support.
I only have about 35 seconds remaining. In 35 seconds--or I
guess you can go over a little bit--can you tell me what
direction we should take or what the Administration thinks we
should take on GSE reform?
Mr. Mnuchin. Yeah, I mean, I think----
Senator Tillis. And not waiting for us to come up with
something, but giving us an outline?
Mr. Mnuchin. Yeah. So this is something that, you know, we
will come back in the second half of the year and make
recommendations to you.
Senator Tillis. Will it be as extensive as the report we
are expecting on the----
Mr. Mnuchin. I think we would like to kind of give a clear
outline as to what our recommendation would be, and, obviously,
we need to work with Congress. And I do view this as something
that needs to be done on a bipartisan basis. But, yes, just
like we are doing on the core principles, we will be reaching
out to many different groups, specifically consumers,
specifically realtors, people who need access to capital,
mortgage bankers, and we will come back with a specific
suggestion.
Senator Tillis. Thank you, Mr. Secretary.
Mr. Mnuchin. Thank you.
Chairman Crapo. Senator Cortez Masto.
Senator Cortez Masto. Thank you, Mr. Chair.
Secretary Mnuchin, I represent Nevada and for 8 years there
was the Attorney General, and I have to say I have been sitting
here listening to your comments, and I have some concerns. And
let me just start off by saying I give everybody the benefit of
the doubt. Even as Attorney General, it was about working for
the betterment of people in our community, making sure
everybody was coming together to work together. And I am
concerned about how--what I have seen, some of the responses
and the dancing around that you have done here to some of the
questions. And the only other time I had that opportunity to
hear that was from some bankers and Wall Street executives who
were in my conference room as Attorney General during the worst
foreclosure crisis we have ever seen. And the one thing they
said to me was, ``Well, we are all doing it, and if you are
going to come after me, you are going to have to come after all
of us.'' And you know what I did? I went after them. And this
is my concern: I am still hearing the same kind of dance,
looking for the betterment of people instead of businesses and
big corporations, instead of looking out for homeowners and
consumers and seniors and servicemembers. So let me start off
with this question because this is why I am concerned.
You recently spoke at a conference of executives where the
cheapest ticket to attend cost $12,000, and you joked, and I
quote, you said, ``You should all thank me for your bank stocks
doing better.'' I am sure you do not feel that way today. But
this remark came during a discussion of your efforts to roll
back Wall Street
reform, including under an Executive order signed by President
Trump, before a roomful of powerful Wall Street executives.
Well, let me just tell you this: While you are working to
undo those financial protections, I am still hearing from
constituents in my State who are suffering. And let me just
quote you some of what I am hearing from them based on your
actions and what we are seeing from this Administration.
Ruby from Reno said, ``This bill needs to stay in effect.
The regulations are needed now more than ever as you cannot
depend on the big banks to just be honest.''
We have Susan from Elko: ``Please do not weaken the
financial regulations that were meant to prevent a repeat of
the financial collapse that led to the Great Recession. It will
only hurt the middle class.''
Katherine from Sparks said: ``Appalling that the
regulations monitoring banks would be lowered. Stand against
the Executive order and rolling back Wall Street reform.''
Why doesn't President Trump's Executive order that rolls
back the Wall Street reform mention consumer or investor
protection even once? Why doesn't it direct you to consider the
financial needs of borrowers, students, servicemembers,
seniors, homeowners? What are you doing to ensure that you are
looking out for those best interests? And who are you
surrounding yourself with so that you just do not hear from
executives but you also get the perspective of homeowners and
victims of that 2008 collapse? Because I have not heard today
anything that you have said that is looking out for the
interests of the people that I just talked about.
Mr. Mnuchin. Well, I can assure you we are interested in
looking out for all those people, and this is not about----
Senator Cortez Masto. And what are you doing specifically--
--
Mr. Mnuchin.----rolling back reform. On homeowners, on the
mortgage side, we are absolutely looking at people who do not
have proper access to mortgage credit. We are looking at all
different aspects, and this is not about rolling back
regulation for big banks. This is about making sure that small-
and medium-sized businesses, homeowners, have access to proper
credit. That is what we are focused on to grow this economy.
Senator Cortez Masto. Well, let me tell you my concerns.
First of all, I am troubled by the people you are bringing into
the Treasury. Press reports suggest that you are advocating for
the appointment of another OneWest executive to head the Office
of the Comptroller of the Currency, our regulator entrusted
with overseeing more than 2,000 national banks. And your senior
counsel, whom you hired to run housing finance policy, was
instrumental in managing the line of credit for Morgan Stanley
to New Century, a toxic subprime lender that went bankrupt in
2007. As Attorney General, I sued for this very conduct, and
this conduct was the subject of a $2.6 billion Justice
Department settlement in 2016.
Do you have anyone on your leadership team that has
advocated for borrowers or worked on behalf of homeowners?
Mr. Mnuchin. Absolutely. First of all, we absolutely are
very interested in protecting borrowers and homeowners. It is
very critical to everything that we are doing. And this is
something that is going to be a big focus of the Treasurer when
she starts, who has lots of experience, having worked at the
Small Business Administration and also having come up the ranks
through UPS and managed a big part of their business. And a big
part of her focus will be on community outreach and making
sure--and I am sorry you feel that way about our appointments
at the Treasury. I think we have an enormously incredible
staff. We have an incredible career staff. We have lots of
people inside the Treasury who have been with us that have
tremendous experience. And I think as you may know, I started
loan modifications at IndyMac, and that is something that we
were very proud of.
Senator Cortez Masto. I do not have enough time, and I do
not want to go through that, because I think we are going to
disagree on what you did to help homeowners in Nevada with
OneWest. But let me just say this: I hope I am wrong. I hope
that you prove me wrong and you are out there advocating and
the people around you are going to be advocating for the very
constituency that I just talked about. Because I will tell you
what: Right now I have not heard any specifics with middle-
class tax breaks; I have not heard any specifics on how you are
going to address the very people that I just talked about.
Talking in absolutes and without bringing specifics into the
conversation concerns me.
And so I am looking for very specific information, so I
hope that you have that and we will have the ability to work
together.
Mr. Mnuchin. OK. Well, I will contact your office, and I
look forward to getting together with you and your staff, and
we will come over and talk about how we appreciate the issues
in Nevada and the housing issues. And I will follow-up in the
next couple of weeks to come and see you.
Senator Cortez Masto. Thank you.
Chairman Crapo. Senator Schatz.
Senator Schatz. Thank you, Mr. Chairman.
Mr. Secretary, thank you for being here. I have some
questions about your tax proposals, and the first is a process
question. There are basically two paths for the Administration
and for the Congress in terms of tax policy, whether or not you
are going to move through reconciliation, which requires 51
votes, or whether you are going to move through the regular
order for legislation, which would require 60 votes and, of
course, would result in a bipartisan product.
So the first question is: Do you intend to work through
reconciliation or through the regular order?
Mr. Mnuchin. Well, I mean, that is a decision for the
Senate. What I would say is I hope that we can get bipartisan
support for tax reform. As we have outlined, middle-income tax
cuts, making businesses competitive, creating jobs----
Senator Schatz. So I have a----
Mr. Mnuchin.----and I hope the Democrats support that.
Senator Schatz. Mr. Secretary, I have a lot of questions,
so I just--and they are mostly about process, so yes or no or a
quick sentence would be great. Do you have any more details
since this piece of paper was released on April 26th?
Mr. Mnuchin. We have a large team of people that is
working. Yesterday I met with the Finance Committee. We are
having outreach to lots of different people, and we expect in
the near term to have something with a lot more details.
Senator Schatz. So is it fair to say--I mean, I am looking
at your proposal and media reporting around it. Yes or no, is
it accurate to say that the plan cuts the corporate tax rate,
cuts the pass-through rate, reduces the top marginal tax rate
for individuals, eliminates the AMT, and eliminates the estate
tax?
Mr. Mnuchin. That is correct.
Senator Schatz. OK. So I think it was 2 days ago or maybe
3, Leader McConnell made a statement that tax reform must be
paid for. Is that the view of the Administration?
Mr. Mnuchin. Again, it will be paid for through growth, so
yes.
Senator Schatz. I just--sorry, my colleague got a chuckle
out of that. I am trying not to. But I guess the question I
have--and let us just be really blunt here. I understand your
position, which is essentially tax cuts pay for themselves. But
I think what I am hearing is that you are not concerned with
the sort of formal processes that determine whether or not, at
least in the context of the legislative branch, something is
paid for. You are basically asserting not just through dynamic
scoring, which is a new technique of measuring the impact of
legislation that the Congress adopted over the last 4 or 5
years. But you are saying: You know what? We are just going to
ignore CBO and just hope, allege, assert that tax cuts always
generate more revenue and pay for themselves. And that is----
Mr. Mnuchin. No, that is----
Senator Schatz. But that is a change in the way the tax
policy is being made.
Mr. Mnuchin. Again, let me just comment, that this is math.
So, you know, you can create models. As we have seen during the
financial crisis, sometimes models work, and sometimes models
do not work.
Senator Schatz. But are you going to rely on the math of
CBO or are you going to generate your own arithmetic?
Mr. Mnuchin. Again, what I have said, OK--and let me just
be clear. The tax reform is something that obviously the
Administration is driving forward but needs the support of the
House and Senate. I believe that we will have three scores: a
static score, a dynamic score per the process with Joint Tax,
and we will----
Senator Schatz. And then your score?
Mr. Mnuchin. We will likely have developed out of
Treasury--we have over 100 people--a different view of growth
and show those numbers. And when it is voted on----
Senator Schatz. You are going to have, as you say, a static
score, a dynamic score, and then a Treasury score?
Mr. Mnuchin. Again, what I would say is there will be a
Joint Tax score, and there will be a score that shows what we
believe the impact is. That is correct.
Senator Schatz. So Senator McConnell also said that a
border adjustment tax would not pass the Senate. My view is
that the same is true for a value-added tax. And I guess as I
am looking at the so-called loopholes that you are looking at
closing, without a VAT or a BAT, you are just not going to be
able to generate the revenue to do tax reform. So my concern is
that either you are going to try to jam a VAT or a BAT through,
or you are basically not doing tax reform, you are doing tax
cuts unpaid for with sort of a little bit of spin on the ball.
So could you just allay my concerns that you actually--I
understand we may have a different view of the revenue impacts
of tax cuts. That is an interesting and legitimate conversation
to have. But you cannot possibly believe that we do not need to
generate some revenue to make up for the holes that we are
creating in the Tax Code.
Mr. Mnuchin. First of all, we absolutely believe that we
have to generate revenue, and that is why, again, we are trying
to create----
Senator Schatz. So if not a VAT and a BAT, then where?
Mr. Mnuchin. Can I just answer?
Senator Schatz. Sure.
Mr. Mnuchin. So we absolutely believe we need to generate
revenue. We are very concerned about the debt, OK? And we will
go through the math and show you. Clearly, in the case of
business taxes, there are many, many companies that pay much
less than the 35-percent rate. And there are many companies
that leave foreign profits offshore. This is all about
broadening the base.
And in regards to the BAT, we have said to Chairman Brady
in its current format that it does not work, although we will
look at something else if they want to present----
Senator Schatz. I am over time. I would just like to make
one final comment with the permission of the Chairman.
Chairman Crapo. Briefly.
Senator Schatz. And I apologize. What concerns me is that
it seems to me that you are very sure about where you want to
cut taxes and you are very vague about how you want to generate
the revenue to make up for those tax cuts, and that is a
dangerous position to be in, because all the things that you
are sure you want to do mostly benefit the wealthiest among us,
and all the things that are very vague and may be done in
secret and in private are the things that may be harming most
of our constituents. And that is my deep and abiding concern
about this process.
Thank you.
Mr. Mnuchin. Well, there is nothing that will be done in
deep and secret. When the tax bill is generated, it will have
all the specifics, and it will have the distribution, and there
will be complete transparency in the process.
Chairman Crapo. Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman. I just want to
follow up and support the comments of my colleague Mr. Schatz
that what is actually happening is the appearance that we will
be making those working-class families, the ones who are
struggling the most are going to be the ones whose funds go
away from to help the richest among us.
We find ourselves with $20 trillion now, $20 trillion in
debt, and we were going to dynamically score our way out of $20
trillion in debt for the last 30 years, and we just find that
the pile gets bigger and bigger and bigger. And I laughed one
time when somebody said to me about the dynamic scoring, I
said, ``Well, then
theoretically, if we go to zero, we should have more money than
we ever dreamed of in history,'' because as the tax rates go
lower and lower and lower, we theoretically have more income
coming in.
And so one of my greatest fears as I look at the tax
reform, as I look at where we are going, as I look at the
budget that goes forward, we have budgets that dramatically
increase spending in areas and tax reform that has huge cuts.
And I think all you are doing is just adding to the deficit,
which is incredibly irresponsible to the children of this
country.
Mr. Mnuchin. Well, I can assure you we have no interest in
doing that, and the fact that the deficits and the national
debt went from $10 trillion to $20 trillion is something we are
very concerned about. And, again, as I have said before, if we
make cuts, this is going to be about broadening the base and
paying for it.
Senator Donnelly. But we have heard that before, and you
have seen in various times where the deficit just increased
when we----
Mr. Mnuchin. Well, actually, the time we had a surplus
under Clinton and Secretary Rubin was where the economy grew
incredibly, which nobody expected. They never thought they were
going to and they could not have predicted that type of
revenue. This is all about how we need to create economic
growth, and I hope that is something that everybody in this
room----
Senator Donnelly. And then we had the follow-on tax cuts
after that----
Mr. Mnuchin.----will work with us on it.
Senator Donnelly.----that blew up the deficit as well. So,
you know, there were specific tax cuts that occurred after that
that increased the deficit. But I also want to talk about
outsourcing, and the President has talked about how this is one
of his biggest priorities, is stopping outsourcing. My State,
Indiana, is where Carrier is. It is where Rexnord is. It is
where these workers who did an amazing job creating the best
products in the world were summarily fired for no reason other
than $3-an-hour wages in Mexico. And I was disappointed to see
that the recent tax proposal did not have any provisions that
addressed outsourcing in regards to things such as clawing back
tax breaks for companies that moved jobs overseas or
incentivizing companies to invest in our communities.
And when I met with President Trump--I met with him at the
White House and told him about an end-outsourcing bill I have--
he was very, very supportive of this. And so what I would like
to get is any specific policies that you are working on now in
a tax reform package to address this outsourcing; to
incentivize that, keeping jobs here; to claw back any tax
breaks that go to companies that are moving jobs overseas. I
would love the details of that.
Mr. Mnuchin. OK. Well, first of all, let me say I would be
happy to get together with you and go over your ideas on
outsourcing. I can assure you that the President is----
Senator Donnelly. And the good part is I laid them out to
the President, and he told me he was 100 percent behind them.
Mr. Mnuchin. I will get together with you, and we will go
through them. I can assure you the President is very concerned
about jobs leaving this country. I think that you know one of
the main reasons why he wants to renegotiate NAFTA in the case
of Carrier and others, you know, he personally picked up the
phone and made calls. And we are very concerned about that
and----
Senator Donnelly. And we have supported all of those
efforts.
Mr. Mnuchin. In all of my trips overseas, I have told my
counterparts we expect free and fair trade and better trade
deals, and that for too long American workers have been hurt by
jobs leaving this country, whether it is because we have an
uncompetitive tax system or whether we have bad trade deals.
And the President has talked about the concept of reciprocal
deals and reciprocal taxes.
Senator Donnelly. I am about out of time, but I want to ask
you about one more subject: currency manipulation. For a long
time, we have suffered in Indiana. We have seen products dumped
on our shores. We have seen steel dumped in our State and
around our country, and currency manipulation has been a big
part of that.
The President promised to label China a ``currency
manipulator.'' China has been able to rack up a huge trade
surplus because of artificially keeping their currency low over
the years at the expense of our companies. And in your
testimony, you state that the Treasury Department found no
major trading partner currently meets the criteria to be
considered a currency manipulator, including China.
I guess the question is: What happened?
Mr. Mnuchin. Again, first of all, thank you, because we did
a lot of work. I brought the report----
Senator Donnelly. I am very impressed, and it has very
attractive graphics.
Mr. Mnuchin. Page 13----
Senator Donnelly. But the President told us that he said
China was a currency manipulator. What happened?
Mr. Mnuchin. Page 13, we specifically reference, OK,
China's intervention for roughly a decade, OK? And there is no
question that they did. This is for a very specific period of
time. We went through a very specific test. If anything, during
this period of time China has used their currency reserves to
go the other direction, which is actually good for American
workers. And I have had very specific conversations with my
counterparts that we will continue to monitor this behavior
very carefully.
I am glad you like the graphs.
Senator Donnelly. Very attractive. I am a lot more
concerned about the currency manipulation, though.
Thank you, Mr. Chairman.
Mr. Mnuchin. So are we, I can assure you.
Chairman Crapo. Thank you, Senator.
And, Secretary Mnuchin, a vote has been called. The
questioning has concluded. Senator Shelby wants to make one
brief statement, and then actually Senator Brown wants to make
I guess a statement and a couple of real quick questions, and
then we will be wrapped up.
Senator Shelby.
Senator Shelby. Mr. Secretary, we appreciate your
appearance and your candor here today. You are a breath of
fresh air. We want you to stay that way.
I want to pick up on the Export-Import Bank and the
question by the Senator. I believe that the two nominees by the
President, former Congressmen Garrett and Bachus, are good
appointments. I do have some fundamental differences with the
role of the Bank. A lot of us do. I had 2 days of hearing when
I was Chairman of the Committee to try to reform the Bank
because, if my numbers are about right, what I have been told--
you would know offhand--about $2 trillion of our exports each
year, a little more than that, and only about 1 percent or 1.5
percent or something used the
Export-Import Bank, and that we all know that the Bank is used
primarily, as far as the numbers, by one or two big companies.
A lot of us believe that is corporate welfare. You know,
that bothers us. I would hope that the Administration--and the
President talked about this at one time--would look at ways to
reform the Bank. I know that is separate legislation than just
the nominees themselves. I hope you will not close your eyes to
that because you know a lot about the private market.
Mr. Mnuchin. Not only would I not close my eyes, I would
welcome working with you and the Committee. But we do support
reopening the Bank for more than $10 million loans. But we also
have a team at Treasury who has worked and will work with you
on making sure that it is not just for two large companies.
Senator Shelby. But the majority of the Republicans in the
Senate a year or so ago voted against reauthorizing the Bank
because we could not get real meaningful reform. So that would
be a priority, I think, for a lot of us. Maybe not all of us.
Mr. Mnuchin. We are willing to work with you on that.
Senator Shelby. Thank you.
Chairman Crapo. Senator Brown.
Senator Brown. Thank you, and I wanted 30 seconds to
address what Senator Shelby just said. The blemish on this
Committee and this Committee's stonewalling last year affected
economic growth because we did not have a functioning Export-
Import Bank, as you just said, Mr. Secretary, for over $10
million.
A couple of real quick questions. I know there is a vote
called on the floor. Are you aware, Mr. Secretary, of any White
House--these are really housekeeping measures that the Chairman
and I sometimes do. Are you aware of any White House guidance,
formal or informal, urging Administration officials not to
respond to or to delay in responding to Democratic Senators?
Mr. Mnuchin. I am not.
Senator Brown. OK. Thank you for that.
You committed to Chairman Hatch you would respond to
Finance Committee members' questions. Will you commit to
responding to Members in both parties of this Committee in a
timely manner to all requests for information?
Mr. Mnuchin. Yes, I will.
Senator Brown. Good. Thank you.
And the last question is a little longer, but I hope you
can do it quickly. Are Treasury and FHFA working together to
prevent another draw on Treasury by the GSEs? If so, how are
you doing that?
Mr. Mnuchin. I am sorry. What was the question?
Senator Brown. I am sorry. Are Treasury and FHFA, Mel Watt
and you, working together to prevent another draw on the
Treasury by the GSEs? And if so, how are you going to do that?
Mr. Mnuchin. No, my conversations with Mel Watt have been
specifically, one, around the dividend, and that we believe the
dividend payment should be paid; and, two, that we are willing
to work with him and with Congress on housing reform. Those are
the conversations we have had.
Senator Brown. OK. Thank you for that.
Thank you, Mr. Chairman.
Chairman Crapo. OK. Thank you.
Senator Warren has come back, and she wants to briefly ask
a few questions. We will do that, and then we will be done.
Senator Warren. OK, and I will not ask about Glass-
Steagall. I will ask about something else.
I want to ask about the tax proposal that the
Administration released a few weeks ago. It proposed slashing
the rate on all pass-through entities--partnerships, LLCs, S
corporations--to 15 percent. So I just want to take a look for
a minute at who that benefits.
Seventy percent of all income from pass-through entities
goes to the top 1 percent of taxpayers. That is households
making more than $450,000 a year. And according to an analysis
this week from the nonpartisan Tax Policy Center, this pass-
through change would put over $1 trillion in the pockets of the
top 1 percent of households while 95 percent of middle-income
households would receive zero in tax benefits from it.
So other than creating new tax deductions for yachts, it is
hard to come up with a more targeted tax cut that goes to the
rich other than this cut on the rate on pass-throughs.
So, Secretary Mnuchin, with working families struggling to
make ends meet, why is this Administration giving the ultra-
wealthy this massive tax cut?
Mr. Mnuchin. So I can assure you--and I have said this
repeatedly--we are not going to allow all pass-throughs to get
that rate. We are going to make sure that small- and medium-
sized businesses have the benefit. But we will put procedures
in place--and I specifically said this--to make sure that
people who should be paying higher taxes do not use pass-
throughs to arbitrage the
system.
Senator Warren. If I can just understand, there are two
parts to your answer that I just want to make sure I am
understanding what you are saying. Are you saying people who
currently receive pass-through under your proposals may not
receive pass-through in the future?
Mr. Mnuchin. Again, the concept is that there will be a box
that you have to check that says, ``I am eligible for the
business tax,'' which is----
Senator Warren. OK, and are you----
Mr. Mnuchin.----15 percent, and there will be
qualifications around that. So, no, it is not----
Senator Warren. Will that shrink up the number of people
who receive it now? Because right now--I am not talking about
new people coming in--it is $1 trillion in tax breaks to the
top 1 percent.
Mr. Mnuchin. Trust me, we have run the numbers, OK? And
despite the fact that lots of people have asked me these
questions, we are sensitive to the deficit and everything else.
And you are correct, if we let every single pass-through
holder, that would be purely arbitraging the system----
Senator Warren. It is currently a pass--I am not changing
it. Currently a pass-through----
Mr. Mnuchin. Yes, that is correct. We are not----
Senator Warren. You are not going to do that.
Mr. Mnuchin.----going to allow every single pass-through,
and specifically, people who are making lots of money will not
be able to use pass-throughs. There will be criteria as to
whether you are eligible for the business tax if you are a
pass-through. It will not be available for everyone.
Senator Warren. And you are going to limit this to small
businesses?
Mr. Mnuchin. Small and medium-sized businesses, yes.
Senator Warren. OK, limited to that. That is what I wanted
to understand.
Thank you very much for the indulgence, Mr. Chairman. Thank
you.
Chairman Crapo. Thank you very much.
And now the questioning has concluded, and, Secretary
Mnuchin, the hearing is concluded. Before I hit the gavel,
though, I just want to thank you for your openness and your
work with the Committee. I mirror what Senator Toomey said. You
have been very willing to give us your time, both in formal
hearings as well as in private meetings with the Senators of
this Committee and of other committees, and I appreciate your
outreach to us.
Thank you very much for being here.
Mr. Mnuchin. Thank you. A pleasure.
Chairman Crapo. The hearing is adjourned.
[Whereupon, at 12:14 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF STEVEN T. MNUCHIN
Secretary, Department of the Treasury
May 18, 2017
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
it is an honor to appear before you today for the first time as
Treasury Secretary. During my confirmation hearing I promised to work
with Congress to create and maintain prosperity for all Americans. I
want to reaffirm that commitment to you today.
Let me begin by discussing the Treasury's recent report on the
foreign exchange policies of our major trading partners. Ensuring that
American businesses, consumers, and workers face a level playing field
is one of the essential components of this Administration's agenda.
When foreign governments engage in currency manipulation, it makes the
playing field uneven, which is why we regularly monitor these
practices.
After careful study, the Treasury Department has found that no
major trading partner met the criteria for currency manipulator during
the current reporting period. We will continue to follow this important
issue and have established a ``Monitoring List'' of economies that
warrant close attention. This list comprises: China, Germany, Japan,
Korea, Switzerland, and Taiwan.
Additionally, we are committed to rethinking our foreign agreements
and trading practices to ensure that they are both free and fair to
American businesses and workers. In my discussions with the IMF and the
finance ministers of the G-20 I have emphasized this goal and will
continue to do so.
Turning to our domestic economic agenda, it has been more than 30
years since we have had comprehensive tax reform in this country.
Combined with often imprudent regulations crafted in the midst of
crisis, the engine of American prosperity has slowed. I believe that a
goal of 3 percent GDP or higher economic growth is achievable if we
make historic reforms to both taxes and regulation.
There are about 100 people working at the Treasury on the issue of
tax reform. It is our goal to bring meaningful relief to middle-income
Americans and make American businesses competitive again. We will do
this all while simplifying the system.
On regulatory reform, Treasury is preparing its initial report in
response to the President's Executive Order on ``Core Principles for
Regulating the United States Financial System.'' These Principles
provide a roadmap for the Administration's approach to financial
services regulation. We have taken a systematic approach in our work by
meeting with a variety of stakeholder groups to hear what works, what
does not work, and what can be improved. Our initial report will
contain recommendations to provide relief for community banks and make
regulations more efficient, effective, and appropriately tailored.
Housing finance reform is another priority of mine. This has been
an unresolved issue for far too long and one we are committed to
fixing. We will ensure that there is both ample credit for housing and
that we do not put taxpayers at risk. This Committee has done extensive
work on this along with your work on community financial institution
regulatory relief. My hope is that we can partner on both of these
issues. I look forward to working with the Congress to develop a
solution.
Finally, another area that is crucially important to Treasury is
our commitment to combating terrorist activities and financing. We have
announced a number of sanction actions against individuals and entities
associated with destabilizing regimes like Syria, Iran, and North
Korea. This work is essential to the Administration's efforts to
continue to keep Americans safe.
The first few months of this Administration have been significant.
We have been working hard at the Treasury to develop and implement
policy that will allow the economy to grow. This will make the dream of
prosperity once again a reality for all Americans.
Thank you and I look forward to answering your questions.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM STEVEN T.
MNUCHIN
Q.1. As requested at the hearing, please provide me a complete
list of all meetings you have had with stakeholders, including
industry, financial regulatory agencies, advocates, and others
about the Core Principals Executive Order and Housing Financing
Reform. Please indicate which meetings you attended and which
meetings were only attended by Treasury staff.
A.1. I participated in the meetings with large banks and
community banks. I planned to participate in the consumer
advocate meeting but was unable to due to a scheduling
conflict. While not specifically related to the Executive
order, I have met with advocate groups where the Core
Principles were discussed. I have chaired two Financial
Stability Oversight Council (FSOC) meetings and have met with
almost all of the heads of financial regulatory agencies at
least once, both within the context of the FSOC meetings and
outside of those meetings. All of these groups are outlined
below. A complete list of all stakeholder engagements lead by
Treasury staff was sent to your office on June 2.
Consumer Advocates
Advancing the Seed
Archimedes Institute
California Association for Micro Enterprise Opportunity
Centro de Vida Church
Christ Our Redeemer Church
Connect Authentically
Impact Southern California Community Development Corporation
Instituto de Avance Latino Community Development Corporation
Latino Coalition for Community Leadership
Los Angeles Latino Chamber of Commerce
Macedonia Community Development Corporation
National Asian American Coalition
National Diversity Coalition
OASIS Center International
Operation HOPE
Orange County Interdenominational Ecumenical Council
Templo Calvario Community Development Corporation
US-Sino Friendship Association
Industry Groups
Banc of California
Bank of America Corporation
Bank of Bennington
Barclays US LLC
Bank of New York Mellon Corporation
Cape Cod Five Mutual Company
Capital One Financial Corporation
Cardinal Bank
Cedar Rapids Bank and Trust Company
Centric Financial Corporation
Century Bank and Trust Company
Citigroup Inc.
Citizens Financial Group, Inc.
Credit Suisse Group AG
Deutsche Bank AG
EagleBank
First National Bank of Elkhart
FirstCapital Bank of Texas
German American Bancorp
Goldman Sachs Group, Inc.
Grand Rapids State Bank
HSBC North American Holdings
JPMorgan Chase & Co.
MainStreet Bancshares, Inc.
Morgan Stanley
Northwest Bancshares, Inc.
PNC Financial Services Group, Inc.
Royal Business Bank
Santander
Security Bancorp, MHC.
State Street Corporation
TD Group US Holdings
First State Bank
The Peoples Bank Co.
Union State Bank of Everest
U.S. Bancorp
UBS Group AG
Wells Fargo & Company
Windsor Federal Savings Bank
Regulators
Commodity Futures Trading Commission
Consumer Financial Protection Bureau
Federal Reserve Board of Governors
Federal Deposit Insurance Corporation
Federal Housing Finance Agency
FSOC Independent Member with Insurance Expertise
National Credit Union Administration
Office of the Comptroller of the Currency
Securities and Exchange Commission
Q.2. At the hearing, you stated that the OneWest management
team flagged problems at Financial Freedom for HUD. However,
the Department of Justice credited Sandra Jolley for bringing
the problems to the attention of Federal officials, and even
gave her a whistleblower award. Can you clarify whether you or
OneWest management self-reported the problems before Ms. Jolley
raised them? Please provide the Committee with supporting
documentation.
A.2. I no longer have any affiliation with CIT or OneWest Bank.
Specific questions regarding this matter are best directed to
CIT, which acquired OneWest in August 2015.
Q.3. During your confirmation process, I asked you about
solutions for housing finance reform. At the time, you said
that the GSES need capital. Has that changed and if not, how do
you propose they build capital given the terms of the preferred
stock purchase agreement?
A.3. The $258 billion of undrawn capacity under the Senior
Preferred Stock Purchase Agreements (PSPAs) gives the
marketplace confidence that the GSEs will remain solvent and
continue to provide liquidity and stability to the mortgage
market. However, the GSEs' prolonged conservatorship has been
an unresolved issue for far too long and one we are committed
to fixing. I look forward to working with the Congress to
develop a solution.
Q.4. At the time Mr. Noreika's appointment as Acting
Comptroller of the Currency, he was representing Ant Financial,
a Chinese company that is currently under review by CFIUS.
What, if any, conversations did you or your staff have with Mr.
Noreika about his representation of Ant Financial while you
were vetting him to serve as Acting Comptroller? Separately,
have you or your staff spoken with him as part of the CFIUS
review? Do you believe that there are any conflicts of
interests by having conversations about a job position, as the
same person is representing a foreign company that is being
reviewed by you as part of the CFIUS process?
A.4. In line with its statutory confidentiality restrictions,
Treasury does not discuss cases before the Committee on Foreign
Investment in the United States (CFIUS), including whether or
not any case has been filed with CFIUS. Treasury would not
engage with OCC on CFIUS matters that do not involve a company
subject to OCC regulation or that provides goods or services to
the OCC. Although Mr. Noreika identified the clients he
represented in the last 2 years during his ethics vetting
process, we are not aware of any conversations with Mr. Noreika
specific to Ant Financial during any part of this process. As a
Government employee, Mr. Noreika must recuse from participating
in any particular matter involving specific parties in which a
recent former client or employer is or represents a party.
Q.5. In a world where cyberattacks against U.S. companies and
Government agencies to acquire Americans' personal identifiable
information (PII) are a frequent occurrence, what steps is the
Treasury taking to protect Americans against these risks? Are
you concerned about acquisitions of U.S. companies by foreign
companies that may make it easier for the foreign governments
to gather personal data on American citizens, including
servicemembers? Do you consider foreign access to Americans'
PII a national security threat? How will CFIUS consider these
types of potential risks?
A.5. Treasury has identified cyber threats as one of the most
pressing economic, financial stability, and national security
risks and made financial sector cybersecurity and resiliency a
top policy and operational priority. Effectively executing
Treasury's mission and responsibilities to improve the security
and resilience of the U.S. financial system requires a ``whole-
of-Treasury'' approach.
As it relates to the protection of PII within Treasury's
internal systems, Treasury has established a Cybersecurity
Enhancement Account (CEA) that has specific line items
dedicated to enterprise-wide operational cybersecurity
improvements. This includes enhancing capabilities such as data
loss/leakage protection (DLP) and encryption of data in
transit/at-rest for our high value assets, many of which
process large amounts of personally identifiable information.
Treasury collaborates with other agencies to help ensure our
cybersecurity protections are properly calibrated and effective
against today's cyber threats.
With limited exceptions, the private sector owns and
operates the critical financial services sector infrastructure
that Treasury seeks to help protect as a part of its
cybersecurity mission. Thus, Treasury's work depends on
partnerships with various stakeholders, including private
sector institutions and representatives, and other Government
partners to enhance the security and resilience of the U.S.
financial services sector.
Treasury's Investment Security Office is responsible for
the implementation of Treasury's responsibilities as Chair of
CFIUS. CFIUS has, for many years, considered the collection of
sensitive personal data of American citizens--including data
specific to servicemembers and other Government employees, as
well as more general bulk customer data--as a factor in its
national security reviews. New commercial innovations in recent
years have increased the ease with which data can be collected,
stored, aggregated, and accessed, presenting new national
security considerations. CFIUS will continue to consider
potential foreign access to sensitive personal data in its
analysis of the threats, vulnerabilities, and national security
consequences of the transactions under its review. And where
such considerations constitute a national security risk, CFIUS
will continue to either mitigate such risk, or--when the risk
cannot be sufficiently mitigated--recommend to the President
that he block or suspend the transaction.
Q.6. You said during the hearing that you take your
responsibility as Chair of the Financial Stability Oversight
Council (FSOC) very seriously. In that role, you said that you
are focused on cybersecurity. What other risks to the financial
system concern you and what steps are you taking, as the Chair
of FSOC, to address these risks?
A.6. The FSOC will fulfill its responsibilities to monitor
risks to U.S. financial stability, including by focusing on
areas such as cybersecurity, market liquidity, housing finance
reform, and global economic and financial developments, among
other areas. We are happy to work with you and your staff to
discuss areas of particular interest in more detail.
Q.7. Under section 4 of the Bank Holding Company Act, the
Secretary of the Treasury has some authority to participate in
establishing restrictions upon merchant banking. At your
confirmation hearing you committed to looking into financial
holding companies' involvement in merchant banking activities
and that you would work on it. What are you doing to address
this issue?
A.7. In February, the President signed an Executive order that
tasks Treasury with reporting on the extent to which existing
laws, regulations, and other Government policies promote or
inhibit the Core Principles for financial regulation set forth
in the Executive order. As part of this process, we are
considering a broad set of financial regulations that affect
banks' investments and other activities. In its initial report
under the Executive order, addressing the regulation of
depository institutions, Treasury did not propose new
restrictions on the merchant banking activities of financial
holding companies, but will continue to assess whether
regulations are consistent with the Core Principles described
in the Executive order. Financial holding companies are
permitted by statute to
engage in merchant banking activity. The Treasury Secretary and
the Federal Reserve Board have authority to issue joint rules
implementing this authority, and they jointly issued merchant
banking rules in 2001.
Q.8. Last week, you told Senator Toomey that you want to work
with Congress to appropriate funds for the CFPB. Supporters of
CFPB oppose this change because it would be used to starve the
agency of resources, resulting in less protection for
consumers. The President's budget appears to confirm this
strategy. It shows $6.8 billion in savings from reducing
funding for CFPB. Is it possible to have $6.8 billion in
savings without zeroing out the CFPB's entire budget? If it is
possible, please explain. If it is not possible, why did you
testify that you wanted to appropriate funds for the CFPB when
the Administration's position is that the agency should receive
no funding?
A.8. The Budget proposes to restructure the Consumer Financial
Protection Bureau (CFPB), limit the CFPB's mandatory funding in
2018, and provide discretionary appropriations to fund the CFPB
beginning in 2019. This would yield $6.8 billion in mandatory
savings over the budget window. Subjecting the reformed CFPB to
the appropriations process would provide the oversight
necessary to impose financial discipline and prevent future
overreach by the CFPB. Under this proposal, the President's
Budget for fiscal year 2019 and each subsequent year would
include a request for appropriations to fund the reformed
agency within the discretionary
totals.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR TOOMEY FROM STEVEN T.
MNUCHIN
Q.1. I was pleased to see President Trump announce his
intention to nominate a reform-minded individual to head the
Export-Import Bank. Under former Congressman Scott Garrett's
leadership, I expect that the Export-Import Bank will better
protect taxpayer dollars and give greater consideration to the
potentially disruptive impact of its activities on domestic
companies and American consumers. I look forward to learning
more about Congressman Garrett's plans at his confirmation
hearing.
Prior to providing the bank's board with a quorum, the
Administration should also share with the Committee what
reforms it would like to see implemented at the Export-Import
Bank. Please describe what, if any, reforms you view as
appropriate. In particular, what steps can the bank take to
better protect taxpayers, understand its impact on domestic
competition, and better quantify subsidies that it provides to
customers? Finally, how does the Administration plan to engage
with our major trading partners to negotiate an end to trade-
distorting export credit financing as required by Sec. 55002 of
the FAST Act (P.L. 114-94)?
A.1. The Administration is focusing its current efforts on
restoring EXIM's board quorum so that EXIM has a leadership
team in place to continue implementing reforms in the Export-
Import Bank Reform and Reauthorization Act of 2015. Treasury
looks forward to working with the White House and Congressman
Garrett following his confirmation to discuss future additional
reforms to ensure EXIM is better protecting taxpayer dollars.
The Administration is negotiating the reduction of export
credits among our major trading partners through the
International Working Group on Export Credits (IWG). The IWG,
comprising major OECD and non-OECD providers of Government-
backed export credit support, aims to establish a set of
disciplines on official export financing in order to reduce
subsidies and market distortions, and promote a level playing
field for exporters.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM STEVEN T.
MNUCHIN
Q.1. I'd like to discuss the Trump administration's trade
policy, given the Treasury Department's policy and advisory
role in this area.
Q.1.a. How does the Treasury Department estimate a 45 percent
tariff on Chinese goods would impact the U.S. economy?
A.1.a. My top priority is to boost U.S. economic growth and our
trade policy should support that effort.
We are engaging the Chinese intensively through our 100-day
action plan and have established the Comprehensive Economic
Dialogue to remove unfair trade barriers. We are making
important progress and wish to continue to engage China
constructively.
We have not made any decisions about possible tariff
measures, but we reserve the right to protect the U.S. economy
against trading partners that maintain unfair trade practices.
Q.1.b. How does the Treasury Department estimate a 20 percent
tariff on Mexican goods would impact the U.S. economy?
A.1.b. My top priority is to boost U.S. economic growth and our
trade policy should support that effort.
We look forward to modernizing NAFTA and engaging
constructively with our Canadian and Mexican counterparts to
maintain the existing benefits of the agreement while
addressing outdated aspects and improving the agreement overall
to the benefit of U.S. workers, farmers, ranchers, and firms.
Q.1.c. The Treasury Department recently declined to label any
major U.S. trading partner a currency manipulator. Is the
Treasury Department concerned that labeling a major U.S.
trading partner a currency manipulator would spark a trade war?
A.1.c. There has been a trend in the last 2 years toward
reduced currency intervention by key trading partners.
However, it is critical that this not represent merely an
opportunistic response to shifting global macroeconomic
conditions--in particular changes in capital flows which have
created depreciation pressures on many emerging market
currencies--but a durable policy shift away from foreign
exchange policies that facilitate unfair competitive advantage.
Treasury is committed to aggressively and vigilantly
monitoring and combating unfair currency practices.
Q.1.d. How does the Treasury Department expect a trade war with
China to impact the U.S. economy?
A.1.d. We are not planning a trade war with China.
Q.1.e. How does the Treasury Department expect a trade war with
Mexico to impact the U.S. economy?
A.1.e. We are not planning a trade war with Mexico.
Q.1.f. Mexico has reportedly been exploring ways to reduce corn
imports from the United States, including by opening up trade
with Brazil or Argentina. Is there a risk that the
Administration's rhetoric on trade will drive other countries
to explore other import markets?
A.1.f. We seek to maintain the benefits of NAFTA while it is
modernized. This includes the benefits that have accrued to
U.S. farmers and ranchers. We expect that Mexico will continue
to see the United States as an important source.
Q.1.g. Should the United States always adhere to its WTO
obligations?
A.1.g. The Administration is in the process of reviewing our
trade agreements, including the WTO agreements. As part of our
trade agreement review, the United States is examining how we
can make the WTO more effective and hold trading partners
accountable.
Q.1.h. Under what circumstances should the United States ignore
its WTO obligations?
A.1.h. The Administration is in the process of reviewing our
trade agreements, including the WTO agreements. As part of our
trade agreement review, the United States is examining how we
can make the WTO more effective and hold trading partners
accountable.
Q.1.i. The Trump administration is reportedly taking steps to
begin the process to renegotiate NAFTA. What steps should be
taken to ensure that these negotiations result in a successful
new agreement, instead of the dissolution of NAFTA?
A.1.i. We are just beginning the process of NAFTA
modernization, including through the congressional notification
and consultation process. The Administration is focused on
getting a better deal for American workers, farmers, ranchers,
and firms. We believe this is possible to achieve with these
important trading partners.
Q.1.j. Would dissolving NAFTA be preferable to maintaining the
current version of NAFTA?
A.1.j. Our relationships with Mexico and Canada are strong and
we believe that we can work together to get a fair deal while
maintaining the existing benefits.
Q.1.k. How would the dissolution of NAFTA impact the U.S.
economy?
A.1.k. We are working toward a modernization of NAFTA that will
benefit the U.S. economy.
Q.1.l. What trade agreements are the Trump administration
considering renegotiating? How would the Administration rank
the importance of each renegotiation?
A.1.l. President Trump signed an Executive order tasking the
Department of Commerce and the United States Trade
Representative (USTR) with conducting a performance review of
all our existing international trade agreements.
Q.1.m. What trade agreements are the Trump administration
considering pursuing during its first term? How would the
Administration rank the importance of each potential agreement?
A.1.m. The President has already made clear some of his top
trade priorities including modernization of NAFTA. We are
seeking to negotiate a number of bilateral deals with key
trading partners, and we look forward to consulting Congress on
trade priorities.
Q.2. I'd like to explore the Treasury Department's views on
China.
Q.2.a. To what extent is China's currency convertible into
currency from other countries?
A.2.a. Your question identifies a statutory factor that the
Department of Commerce must consider under Section 771(18)(B)
of the Tariff Act of 1930 as part of its review of a country's
designation as a nonmarket economy.
As you know, in March 2017, the Department of Commerce
initiated a new inquiry to review China's designation as a
nonmarket economy, and that review is ongoing.
Q.2.b. To what extent are wages in China set by the free
market?
A.2.b. Your question identifies a statutory factor that the
Department of Commerce must consider under Section 771(18)(B)
of the Tariff Act of 1930 as part of its review of a country's
designation as a nonmarket economy.
As you know, in March 2017, the Department of Commerce
initiated a new inquiry to review China's designation as a
nonmarket economy, and that review is ongoing.
Q.2.c. To what extent are foreign companies and investors
allowed to freely invest in China?
A.2.c. U.S. investors have noted significant obstacles to
investing in China, due to regulatory hurdles and restrictions
that China places on foreign investment. The Administration is
engaging with China to promote fair and open access to Chinese
markets for American companies.
Q.2.d. To what extend does the Chinese government own or
control the means of production within the country?
A.2.d. Your question identifies a statutory factor that the
Department of Commerce must consider under Section 771(18)(B)
of the Tariff Act of 1930 as part of its review of a country's
designation as a nonmarket economy.
As you know, in March 2017, the Department of Commerce
initiated a new inquiry to review China's designation as a
nonmarket economy, and that review is ongoing.
Q.2.e. To what extent does the Chinese government control the
allocation of resources and firm decisions over prices and
outputs within the country?
A.2.e. Your question identifies a statutory factor that the
Department of Commerce must consider under Section 771(18)(B)
of the Tariff Act of 1930 as part of its review of a country's
designation as a nonmarket economy.
As you know, in March 2017, the Department of Commerce
initiated a new inquiry to review China's designation as a
nonmarket economy, and that review is ongoing.
Q.2.f. China continues to advance the Regional Comprehensive
Economic Partnership (RCEP), a regional multilateral trade
agreement in the Pacific that includes our current free trade
agreement (FTA) partners, South Korea and Australia, as well as
Japan, a potential FTA partner. According to the Congressional
Research Service, should the RCEP move forward in its current
form, the ``United States would face higher tariffs in RCEP
markets.''\1\
---------------------------------------------------------------------------
\1\ U.S. Congressional Research Service, The United States
Withdraws from the TPP, Report IN10646, February 13, 2017.
---------------------------------------------------------------------------
Has the Administration expressed concern that many of our
trading partners could run to RCEP markets under trade rules
set by China? What actions is the Administration taking to
secure our trade interests in the Pacific after the withdrawal
from TPP?
A.2.f. Trade, including with countries in the Pacific region,
is a very high priority for the Administration, and we are
actively considering next steps on reviewing ways to improve
our trade relations with key partners. While we have withdrawn
from TPP, we remain fully committed to strengthening our
economic relationships across the Asia-Pacific region.
Q.2.g. The Administration announced that the United States will
soon have access to China's $2 billion beef market. Nebraska
has one of the largest and most innovative beef industries in
the Nation and welcomes the opportunity to compete in China.
When does the Administration expect negotiations to be
finalized?
A.2.g. We sent the first shipment of beef to China on June
19th. The 100-day period runs through July 16, 100 days after
the conclusion of the Presidential Summit in April.
Q.3. I'd like to discuss the current state of the economy.
Q.3.a. What portion of currently unemployed, underemployed and
discouraged workers will have to retool their skill set to
enter a new sector of the economy to become fully employed?
A.3.a. The Administration is committed to making sure that the
American economy continues to generate jobs. One factor that
helps bring people back into the labor force and particularly
into more highly skilled jobs is the availability of education
and training opportunities.
A 2016 study conducted by the Pew Research Center concluded
that since 1980, employment has been expanding at a faster pace
in jobs that require higher levels of education, training, and
experience. The study also reported on views about training and
education among the employed and unemployed. It found:
LEmployment in occupations requiring average to
above-average education has risen by about two-thirds
since 1980, while employment in jobs requiring below-
average education and training has increased by only
one-third since that year.
LAmong those who are unemployed but looking for
work, about one-quarter have reported that they took a
class or received extra training in the past year to
help them obtain a job.
LOf those who did not obtain additional training,
two-thirds reported that they could not afford to do
so, while one-third did not know this type of training
was available.
LAmong those who are unemployed but looking for
work, only about half feel that they have the education
and training needed to obtain the kind of job they
want.
The Administration believes that some of the jobs that have
moved overseas can be brought back to the United States. In the
manufacturing sector, where employment has fallen by nearly
one-third since 2000, workers may need to retool to fill those
jobs. In a 2015 report from the Manufacturing Institute, seven
out of 10 manufacturing executives reported shortages of
workers with adequate technological skills.
Annual BLS data for 2016 show that 94.4 million persons
were counted as ``not in the labor force.'' Only 224,000 of
that total number, or 0.2 percent, indicated that they were
outside the labor force specifically because they were in
school or obtaining training.
Q.3.b. Will this percentage of unemployed, underemployed, and
discouraged workers that must enter a new sector increase in
the future?
A.3.b. The U.S. labor market is considered one of the most
dynamic in the world, constantly adapting to changing economic
conditions. The U.S. economy has created an average of 162,000
jobs monthly since the start of 2017 and solid jobs growth is
expected to continue. Tight labor market conditions are likely
to pull more workers from the sidelines and into the economy.
That said, it is difficult to project precisely how
employment among prime-age workers will evolve and to which
sectors such workers will gravitate. The fact that job growth
is fastest in sectors requiring higher levels of education
implies that unemployed, underemployed, or discouraged workers
will likely need the right education and training in order to
enter a new sector.
Q.3.c. What is the average age of an unemployed or
underemployed worker that decides to leave the workforce
altogether instead of seeking to retool their skill set and
enter a new sector?
A.3.c. Annual data from the Bureau of Labor Statistics show
that in 2016, among those not in the labor force who also
indicated that they ``do not want a job now,'' 58.8 percent of
the group was 55 years and older, 23.8 percent was 25 to 54
years, and 17.5 percent was 16 to 24 years.
It is difficult to say definitely whether, or in what
numbers, persons from any of these groups might elect to re-
enter the work force, whether in the same sector or a new one.
Presumably, the decision to leave the workforce altogether,
versus obtaining additional skills, would depend upon the cost
of required training. For example, of the three occupations
with the highest projected changes in employment through 2024
(personal care aides, registered nurses, and home health
aides), training requirements vary widely. To become a
registered nurse would require extensive and expensive training
for a period of years, whereas the other two occupations would
require only short-term training and licensing, all at much
less cost.
Q.4. I'd like to explore your views on artificial intelligence
and automation. This March you were asked about artificial
intelligence at an event hosted by Axios. You said, ``I think
that [it] is so far in the future--in terms of artificial
intelligence taking over American jobs--I think we're, like, so
far away from that.'' You then went on to say that this issue
was ``[n]ot even on [your] radar screen.'' As recently as 6
months ago, the Obama White House published a report by Jason
Furman of the President's Council of Economic Advisors on
``Artificial Intelligence, Automation, and the Economy.''
According to the report, ``[a]ccelerating artificial
intelligence capabilities will enable automation of some tasks
that have long required human labor. These transformations will
open up new opportunities for individuals, the economy, and
society, but they have the potential to disrupt the current
livelihoods of millions of Americans.''
LCan you elaborate on what positive and negative
impacts, if any, the increasing artificial intelligence
and automation of routine work tasks will pose to the
economy over the long-term, particularly for wages and
employment?
LHow long will it take for these risks to come to
significant fruition?
LWhat sectors of the economy will benefit the most
from automation?
LWhat sectors of the economy will benefit the least
from automation?
LWhat--if any--policy solutions are the Treasury
Department exploring in order to respond to
intelligence and automation?
A.4. I was specifically referring to artificial intelligence
not the impact of technology and robotics on the economy. In
general, technological innovations allow the economy to better
use its existing resources, allowing us to produce more output
with the same inputs. While higher output is desirable, there
is no guarantee that the economic gains from adopting new
technology are widely shared, which means that some, maybe
most, workers are worse off even though the economic ``pie''
has gotten bigger. Technology brings labor market disruptions
that are both good and bad, and the policy challenge will be
addressing those distributional consequences.
Given the difficulty in predicting how jobs will change and
who will ultimately be helped and harmed by technology, prudent
public policy should try to position the labor force as a whole
to make the best use of technology while addressing any
distributional problems that arise from the adoption of new
technologies. Humans will likely still have a relative
advantage in tasks that involve, for example, social
interactions, physical dexterity, or human judgment, so the
jobs that adapt to new technologies will have humans emphasize
those types of tasks while technology complements them.
However, employment in jobs that do not include such tasks may
decline significantly, and then it falls to policymakers to
determine whether and how to help displaced workers. Human
capital development, for both future workers and those who are
displaced by technology, would help mitigate some job losses by
allowing workers to adapt to the newly demanded jobs.
Q.5. I'd like to explore your views on deficits and the debt.
Q.5.a. During Federal Reserve Chair Yellen's February 14, 2017,
Senate Banking Testimony, Chair Yellen told Senator Corker that
``fiscal sustainability has been a long-standing problem . . .
and the U.S. fiscal course, as our population ages and
healthcare costs increase, is already not sustainable.'' Do you
agree?
Q.5.b. In correspondence with me last year, Chair Yellen told
me that ``fiscal policymakers should soon put in place a
credible plan for reducing deficits to sustainable levels over
time.'' Do you agree?
Q.5.c. What level of deficits and debt would the Treasury
Department consider sustainable over the long-run?
Q.5.d. What metrics would the Treasury Department consult in
order to evaluate the impact of the U.S.'s debt and deficit
levels? What levels must these metrics reach in order for the
U.S. debt and deficit to be sustainable?
A.5.a.-d. Chair Yellen's testimony is consistent with analysis
and conclusions presented in the annual Financial Report of the
U.S. Government (FRUSG). Since the introduction in the fiscal
year 2010 FRUSG of reporting on long-term fiscal projections
(i.e., fiscal sustainability reporting), the reported
conclusion in each successive year's report has remained
unchanged--that ``the projected continuous rise in the debt-to-
GDP ratio indicates that current policy is unsustainable.''
This conclusion is consistent with the Congressional Budget
Office's (CBO's) and Government Accountability Office's (GAO's)
projections.
The fiscal sustainability analysis presented in the FRUSG
is prepared by OMB and Treasury in accordance with Statement of
Federal Financial Accounting Standards (SFFAS) 36,
Comprehensive Long-Term Projections for the U.S. Government.
The analysis considers projected deficits and debt as a
percentage of gross domestic product (GDP) assuming current law
and policy continue unchanged over the projection period. As
such, the analysis is considered to be based on projections,
not predictions, and is intended to assist readers of the FRUSG
in assessing whether future budgetary resources of the U.S.
Government will likely be sufficient to sustain public services
and to meet obligations as they come due.
Reducing the deficit to levels that are sustainable over
time is critical. SFFAS 36 states, ``While many experts agree
that some level of public debt is reasonable and acceptable,
there is no universally agreed upon `sustainable' percentage of
debt to GDP. However, all experts agree that a continually
increasing level of debt to GDP is not sustainable.''
In accordance with SFFAS 36, the FRUSG discussion of long-
term fiscal projections or fiscal sustainability focuses on
trends in deficits and debt as a percentage of GDP. Chart E
from the fiscal year 2016 FRUSG presents the trend in Public
Debt as a percentage of GDP (debt to GDP ratio) from 1940
through 2016. As can be seen from Chart E, the debt-to-GDP
ratio has varied widely over time. While the FY-end 2016 debt-
to-GDP ratio was reported as 77 percent, that ratio was as high
as 106 percent in 1946, shortly following the end of World War
II.
Q.5.e. Assuming current policy and current demographic trends,
how will population aging impact the U.S. fiscal situation over
the next 10 years?
A.5.e. As the population ages, a larger share of individuals
will retire and exit the labor market. As a result, tax
receipts and payments will be lower. In addition, as the
population ages, more individuals will become eligible to
receive Social Security and Medicare benefits, which will
result in increases in Government spending.
Q.5.f. Assuming current policy and current demographic trends,
how large does the Treasury Department expect the shortfall to
be between retiring workers and new entrants into the
workforce, over the next 10 years?
A.5.f. The 2016 Annual Report of the Social Security Trustees
projected that by 2022, there will be 2.6 workers per Old-Age,
Survivors, and Disability Insurance (OASDI) beneficiary. By
2027, the 2016 Annual Report of the Social Security Trustees
projected that there will be 2.4 workers per OASDI beneficiary,
approximately 17 percent lower than the 2015 number of covered
workers to OASDI beneficiaries (2.8) and approximately 28
percent lower than the 2007 number of covered workers to OASDI
beneficiaries (3.3). While the definition of ``covered
workers'' and ``OASDI beneficiaries'' are not exactly
equivalent to ``new entrants'' and ``retiring workers,'' these
projections of a declining number of covered workers to OASDI
beneficiaries suggest that the gap between the number of new
entrants and retiring workers will increase. (see https://
www.ssa.gov/oact/tr/2016/lr4b3.html).
CBO projects that the labor force participation rate will
decline from 62.8 percent in 2017 to 61.0 percent in 2027 and
to 59.3 percent in 2047. CBO, however, notes that without the
effects of the aging of the population, the labor force
participation rate would remain roughly constant over the next
30 years. (see https://www.cbo.gov/sites/default/files/52480-
appendixa.pdf.)
Q.5.g. What policy changes are the Treasury Department
considering to address the impact of population aging on our
fiscal situation?
A.5.g. The Administration's budget proposal identifies
potential policy solutions to many of these issues. Treasury is
also investigating policies to increase labor force
participation and increase savings. Treasury looks forward to
working with the Congress to address these issues.
Q.5.h. How would the Treasury Department evaluate the economic
impact of an unfunded $1 trillion infrastructure spending
package?
A.5.h. The Administration continues to work and develop policy
proposals relating to infrastructure. The impacts of these
policy proposals will depend on a number of details regarding
the state of the economy and the proposal itself. Examples
include: how close the economy is to full employment, monetary
policy, the types of projects undertaken and the efficiency of
public investment, and the extent of private sector
participation. Treasury looks forward to working with the
Congress on infrastructure policy proposals.
Q.6. Australia has created a Standard Business Reporting regime
(SBR) that allows a firm to complete one filing to comply with
multiple regulatory disclosure requirements. This has
extensively reduced the amount of required data fields, saving
the Australian economy more than a $1.1 billion annually by one
estimate.\2\ Is a similar SBR system possible in the United
States? (DF)
---------------------------------------------------------------------------
\2\ See https://www.xbrl.org/sbr-savings-in-australia-soar/.
A.6. Treasury agrees that more needs to be done to minimize
duplicative data reporting. A number of recommendations on
reducing regulatory burdens are identified in Treasury's first
report pursuant to Executive Order 13772 (``Core Principles for
---------------------------------------------------------------------------
Regulating the United States Financial System'').
Q.7.a. According to research from the Economic Innovation
Group, the new startup rate is near record lows, dropping by
``half since the late 1970s'' and the total number of firms in
the U.S. dropped by around 182,000 from 2007-2014.\3\
---------------------------------------------------------------------------
\3\ See: Trump's quiet economic crisis, Glickman, Steve (February
27, 2017), available at: http://www.foxnews.com/opinion/2017/02/27/
trumps-quiet-economic-crisis.html; citing: Dynamism in Retreat,
Consequences for Regions, Markets & Workers, Economic Innovation Group
(February 2017), available at: http://eig.org/dynamism.
---------------------------------------------------------------------------
Is the Treasury Department concerned about this decline in
new starts and broader economic consolidation?
A.7.a. The number and age of firms in the economy are not
systematically monitored by the Treasury Department. However,
Treasury is interested in the forces that contribute to
productivity growth because it links closely to higher
standards of living and well-being in the United States. In
this context, the decline in the rate of startup firms may be
noteworthy because they are essential to the firm churning
process that helps to reallocate labor and capital to more
productive uses, and contributes to innovation and productivity
growth. There is evidence that new firms are more physically
productive than either incumbent or exiting firms, on
average.\4\ Young firms also have higher innovation intensities
than mature firms (larger ratio of R&D spending to sales).\5\
---------------------------------------------------------------------------
\4\ Foster, Lucia, John Haltiwanger, and Chad Syverson, 2008,
``Reallocation, Firm Turnover, and Efficiency: Selection on
Productivity or Profitability?'' American Economic Review 98: 394-425.
\5\ Acemoglu, Daron, Ufuk Akcigit, Nicholas Bloom, and William
Kerr, 2013, ``Innovation, Reallocation, and Growth,'' NBER Working
Paper 18993.
---------------------------------------------------------------------------
The declining number of aggregate firms is not necessarily
cause for concern from an economic perspective. Consolidation
often reflects the growth of more efficient firms which gain
market shares in part by replacing less productive firms. When
capital flows toward high productivity investment opportunities
and results in consolidation, this consolidation contributes to
economic dynamism and productivity growth.
Q.7.b. What--if any--policy solutions are the Treasury
Department exploring in order to respond to these challenges?
A.7.b. Treasury continues to examine ways to ensure that young,
innovative firms have access to capital to support their growth
and sustainability. Over the years, Treasury has administered a
number of programs that provided capital to financial
intermediaries that support new and existing small businesses
across the country. For example, two Treasury Department
programs established by the Small Business Jobs Act of 2010
have helped to boost small businesses' access to capital. The
Small Business Lending Fund provided $4 billion to community
banks to enable them to increase small business lending at a
time when credit markets were severely constrained. The State
Small Business Credit Initiative injected nearly $1.5 billion
in a range of State financing programs (including venture
capital for innovative startups) to help small businesses to
enter and compete in their local markets.
In addition, as Treasury reviews the regulatory landscape,
we will assess the general approach to regulation and
supervision of the primary sources of small business credit.
Regulatory requirements and compliance relevant to small
business lending should not have an adverse impact on small
businesses and the communities they serve. Reducing regulatory
burden, particularly for community banks, which provide nearly
half of all small business loans, would help promote capital
access for small businesses and, more broadly, support economic
growth and job creation in the United States.
Q.8. I'd like to inquire about the Treasury Department's
various sanctions efforts:
Q.8.a. Secondary sanctions are theoretically effective because
they force a firm to choose between accessing the U.S.
financial system and engaging in prohibited activities. Is the
U.S. financial system dominant enough for this strategy to
work?
A.8.a. Yes.
Q.8.b. Does Treasury have the capabilities to track or fight
against ransomware that uses cryptocurrency, and if not, is it
in the process of developing said capabilities?
A.8.b. Treasury leverages its regulatory tools and technical
expertise to help protect our financial system from illicit
cyber activity, including ransomware. Under the Bank Secrecy
Act (BSA), FinCEN regulates as money transmitters, virtual
currency exchangers, administrators, mixers and other
individuals or entities engaged in virtual currency money
transmission, subjecting them to anti-money laundering and
countering the financing of terrorism (AML/CFT) obligations,
including registration, compliance, recordkeeping, and
reporting requirements. The information required, together with
FinCEN's analysis of suspicious activity reports (SARs)
relating to virtual currency activities, helps support law
enforcement investigations targeting ransomware attacks and
other cybercrimes and track their illicit proceeds. In
addition, to address the transnational nature of virtual
currency transactions, the Office of Terrorist Financing and
Financial Crimes (TFFC) has led global efforts to encourage
other countries to regulate virtual currency exchangers,
administrators, and other virtual currency businesses, pursuant
to international AML/CFT standards. However, a new generation
of privacy-enhancing cryptocurrencies and more
sophisticated mixers provides significantly greater anonymity
in virtual currency transactions and is not amenable to
currently available network analytic tools, presenting a
potential challenge to
future sanctions implementation.
I will ensure Treasury has the capabilities to address
cybercrime and the abuse of virtual currencies, including by
appropriate regulatory responses and by working with
interagency and private
sector partners to develop and implement more powerful analytic
tools, and will strengthen those capabilities where needed.
Treasury will also actively support similar efforts by foreign
counterparts.
Q.8.c. What challenge does block chain pose to future
sanctions, and does Treasury have the capabilities to meet
those challenges?
A.8.c. Blockchain technology and other financial technology
offer numerous potential innovations that could provide many
benefits to the financial sector, its customers, and the
broader economy. In implementing these new technologies, we
expect all relevant parties to continue to follow all
appropriate regulations, including those related to sanctions.
Q.8.d. What challenge does bitcoin pose to future sanctions,
and does Treasury have the capabilities to meet those
challenges?
A.8.d. A new generation of privacy-enhancing cryptocurrencies
and more sophisticated mixers provides significantly greater
anonymity in virtual currency transactions and is not amenable
to currently available network analytic tools, presenting a
potential challenge to future sanctions implementation.
Treasury is actively working to improve its capabilities to
address new challenges, including in the sanctions context. We
will continue addressing this issue, including by appropriate
regulatory responses and by working with interagency and
private sector partners to develop and implement more powerful
analytic tools.
Q.8.e. Does Treasury have the necessary resources and
capabilities to conduct a North Korean leadership asset hunt,
as the North Koreans are adept at developing shell companies
and other methods of hiding money?
A.8.e. North Korea is a top priority, and I am ensuring
Treasury uses all its tools and authorities to fully implement
the President's objective of a denuclearized Korean peninsula.
Additionally, Treasury continues to use its strong
relationships with allies and partner countries to achieve this
Administration goal.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM STEVEN T.
MNUCHIN
Q.1. Student Loan Servicing: In April, Secretary DeVos
rescinded guidance for student loan servicers that was based on
joint principles developed in consultation with the Department
of Treasury and the Consumer Financial Protection Bureau. Was
the Department of Treasury consulted before this decision was
made? Given the Department of Treasury's involvement with
administrative wage garnishment, tax refund offsets, and other
collection tools for defaulted student loans, what role should
the Department of Treasury play in setting standards for
student loan servicing?
A.1. Treasury was not consulted regarding the recently revised
servicing requirements for the Federal student loan servicing
contract or the rescission of the July 2016 servicing guidance.
Treasury has worked with the Department of Education and an
interagency group on standards for Federal student loan
servicing,
including the Federal student loan servicing guidance issued by
Education in July 2016. Treasury continues to monitor Federal
student loan servicing issues and provides expertise where
appropriate.
Q.2. Tax Loophole: The Administration's one-page tax plan
promises to ``eliminate tax breaks for special interests.''
Each year, corporations accused of illegal behavior settle out
of court with the Federal Government and then take advantage of
a tax loophole to deduct millions of dollars in settlement
costs from their tax bills. My bipartisan bill with Senator
Grassley, the Government Settlement Transparency and Reform
Act, would close this loophole and ensure these settlement
costs in the future aren't tax deductible. Would you support
this bipartisan proposal as a part of overall tax reform?
A.2. The Government Settlement Transparency and Reform Act
largely codifies current law under I.R.C. 162(f) and creates
a new mandatory reporting and disclosure requirement for
certain Government settlements. The Treasury Department and IRS
would welcome these types of proposals and other changes to
reduce complexity and disputes related to the deductibility of
Government settlement costs.
Q.3. Tax Reform: The Administration's stated goals for tax
reform are to primarily provide tax relief for the middle class
and to balance tax cuts for the wealthiest Americans by
eliminating most itemized deductions in favor of a larger
standard deduction. Yet many middle-class families,
particularly first-time home buyers with children, rely on a
combination of exemptions and deductions in order to manage
their finances and provide for their families. Will the
Administration commit that it will not, under any
circumstances, endorse an overall tax reform package that
increases the overall tax bill for any taxpayer making under
$250,000 per year?
A.3. The President's stated goal in tax reform is to provide a
tax cut to the middle class. I fully support that goal and am
working with the Congress to achieve that goal. Until an
agreement is reached, I cannot pledge specific outcomes on
select taxpayer groups.
Q.4. IRS Data Retrieval Tool: The removal of the IRS data
retrieval tools has made completing the FAFSA more difficult,
putting the neediest students at risk of not successfully
completing the form or any additional verification process, and
therefore, losing access to student financial aid. For
borrowers, it could mean losing access to income-driven
repayment plans, increasing the likelihood of default. What is
the Department of Treasury doing to get this vital tool back
online? What steps are being taken to ensure that security
enhancements do not create new barriers for low-income students
or struggling student loan borrowers to access the assistance
they are entitled to? How are the Departments of Education and
Treasury sharing the responsibility and costs for a solution to
the data retrieval tool problem?
A.4. Treasury and Education are working together to make
changes to the FAFSA frontend and Data Retrieval Tool (DRT)
backend such that a secure, fully functional system can be
reactivated by October 2017. While at one point Treasury and
Education considered an interim technical solution that would
allow the system to be reactivated sooner, it came with the
potential that low-income students or struggling student loan
borrowers might be unable to access the assistance to which
they are entitled. Treasury and Education continue to work to
determine the cost allocation for the changes required, noting
technical solutions will be implemented on each Department's
respective information systems.
Q.5. Office of Financial Research: The Office of Financial
Research (OFR) was established to support the work of the
Financial Stability Oversight Council, and in particular, to
help FSOC and its member agencies identify risks before they
snowballed into another financial crisis, like the last one,
that hit working class families particularly hard. The OFR is
intended to be a data driven, deeply analytical, and apolitical
research organization that speaks truth to power, and like the
proverbial canary in the coal mine, serves as an early warning
system while there is still time to avert disastrous
consequences. Mr. Secretary, do you see value in keeping such
an early warning system?
A.5. Treasury is reviewing the OFR's structure and authorities
pursuant to Executive Order 13772 (``Core Principles for
Regulating the United States Financial System'') and Executive
Order 13781 (``Comprehensive Plan for Reorganizing the
executive branch''). As part of these reviews, Treasury is
taking a close look at the OFR's role.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM STEVEN T.
MNUCHIN
Secretary Mnuchin, Section 4(h)(ii) of the Covered
Agreement seems to set forth prescriptive criteria for a group
capital assessment that the United States must adopt in order
for the European Union to live up to its side of the agreement.
In calling for ``preventive'' and ``corrective'' measures to be
a part of the group capital assessment, I fear the European
Union is attempting to export EU-style group-level regulation,
which is at odds with our legal entity regulatory system in the
United States.
Q.1. Is it Treasury's position that the European Union intends
to accept the final version of the NAIC's group capital
calculation in whatever form ultimately adopted by the NAIC?
A.1. In March, I directed that before the United States makes
any decisions regarding the U.S.-EU covered agreement, Treasury
should hear from interested parties. Treasury has undertaken a
series of meetings with interested stakeholders and Members of
Congress to gather feedback on the agreement and provide
updates regarding the Administration's decisionmaking process.
Treasury is currently considering next steps in consultation
with USTR. Treasury welcomes your input on this matter.
Q.2. Without reopening negotiations on the agreement itself,
will Treasury commit to seeking a formal exchange of letters
with the European Union to accompany the ratification of the
Covered Agreement, explicitly clarifying that Section 4(h)(ii)
does not commit the United States to creating a new group
capital requirement?
Short of an exchange of letters with the European Union,
are there assurances that Treasury can give to Congress that
Section 4(h)(ii) does not commit the United States to creating
a new group capital requirement?
A.2. In March, I directed that before the United States makes
any decisions regarding the U.S.-EU covered agreement, Treasury
should hear from interested parties. Treasury has undertaken a
series of meetings with interested stakeholders and Members of
Congress to gather feedback on the agreement and provide
updates
regarding the Administration's decisionmaking process. Treasury
is currently considering next steps in consultation with USTR.
Treasury welcomes your input on this matter.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM STEVEN
T. MNUCHIN
Q.1. Two weeks ago, in testimony before this Committee, FHFA
Director Watt warned that if either of the Enterprises
experience losses next year, be it operational or the result of
accounting adjustments, they will likely need to draw on their
lines of credit at the Treasury due to the capital buffers
being drawn down to zero at the end of this year. Director Watt
warned that the impacts of such a draw could be significant,
impacting liquidity in the secondary market and ultimately
making it more expensive for families to purchase homes. As
Director Watt explained, his preferred method to address this
issue is to work with you to amend the agreements between
Treasury and the Enterprises to allow them to keep a small
capital buffer to ensure small losses do not require a draw.
Director Watt told us he has had that conversation with you.
LIn your opinion, what would be the potential market
impacts, both to the secondary market and for
borrowers, if either of the Enterprises are in a
position that requires a draw on the Treasury next
year?
LDo you agree with Director Watt's assessment that
an Enterprise draw on the Treasury could have
significant market impacts, both to the secondary
market and ultimately for borrowers?
LDuring the hearing last week, you said your
``conversations with Mel Watt have been specifically,
one, around the dividend, and that we [the
Administration] believe the dividend payment should be
paid; and two, that we are willing to work with him and
with Congress on housing reform.'' What assurances can
you provide that the Administration is committed to
avoiding a draw?
A.1. Currently $258 billion of undrawn capacity remains
available to the GSEs under the Senior Preferred Stock Purchase
Agreements (PSPAs), which serves as a backstop against future
GSE losses. This support gives the marketplace confidence that
the GSEs will remain solvent and continue to provide liquidity
and stability to the mortgage market. As long as taxpayers are
at risk for losses at one or both of the GSEs, they should be
fully compensated for their extraordinary support that they
have provided and
continue to provide. The Administration is committed to housing
finance reform more broadly and supports Congressional efforts
to this end.
Q.2. The Administration's budget relies on a savings of $6.8
billion over 10 years from ``restructuring the Consumer
Financial Protection Bureau.'' Given the fact that the CFPB's
fiscal year 2017 budget is $636 million--essentially one-tenth
of the proposed savings--these so-called savings would
effectively reduce the Bureau's annual budget to zero. This is
a less of a ``restructuring'' and more of a full-throttled
obliteration of the Bureau.
LHow does the Administration plan to ensure fair
markets for consumer financial products and to enforce
Federal laws that protect hard-working families from
unfair and predatory practices in the mortgage
industry, by credit card issuers, by student loan
companies, and so forth, if the CFPB has no funding?
A.2. I strongly support robust consumer financial protection. I
also believe that the CFPB should be funded through the annual
Congressional appropriations process like most Federal
agencies. Congress' power of the purse serves as an important
check to ensure that Federal agencies exercise their power
responsibly and spend taxpayer dollars wisely.
Q.3. In January 2016, the U.S. Patent and Trademark Office
granted a license to allow Cubaexport to renew an expired
trademark registration for Havana Club rum. Cubaexport is an
entity wholly owned by the Cuban government, and this decision
reverses a longstanding policy that had denied Havana Club
rights to Bacardi LLC in the United States. Despite repeated
inquiries, the Office of Foreign Assets Control has yet to
provide a satisfactory and legally sound answer for this
decision which in effect rewards the Castro government that
continues to oppress its people and deny them basic human
rights.
Previously, when making licensing decisions, OFAC has
relied upon Section 211, which determines ``whether the
applicant has obtained the consent of the original owner of the
stolen mark or the latter's bona fide successor-in-interest to
register or renew that mark.'' Since Havana Club was illegally
confiscated from the Jose Arechabala Company (JASA), this
decision to award the trademark to Cuba raises serious concerns
about intellectual property policy implications.
LAre you planning to uphold OFAC's decision to award
the trademark to the Cuban government? Or will you
commit to reviewing and clarifying why OFAC departed
from precedent and declined to apply Section 211?
A.3. Neither Treasury's OFAC nor the Department of State has
taken any position on ownership of the Havana Club trademark,
which we understand is the subject of ongoing litigation before
the U.S. District Court for the District of Columbia in the
case captioned Bacardi & Co. Limited v. Empresa Cubana
Exportadora de Alimentos y Productos Varios. Instead, OFAC
issued a specific license authorizing Cubaexport to engage in
all transactions necessary to renew and maintain the Havana
Club trademark at the USPTO. OFAC took this action after
consulting with the
Department of State, as it often does when processing license
requests with foreign policy implications. The Department of
State evaluated the referral in light of a number of factors,
including U.S. policy with regard to trademark rights
associated with confiscated property, and recommended that OFAC
issue the requested specific license.
With respect to Section 211 of the Omnibus Consolidated and
Emergency Supplemental Appropriations Act, 1999, OFAC agrees
that it limited the applicability of a general license in its
regulations that had broadly authorized the registration and
renewal of trademarks in which Cuba or a Cuban national has an
interest. Section 211 does not address OFAC's specific
licensing authority, however. Finally, as you are aware, the
Trump administration is continuing its review of our Nation's
foreign policy with respect to Cuba.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM STEVEN T.
MNUCHIN
Q.1. Can you outline for me and for the Banking Committee what
your agenda is for housing finance and GSE reform? Do you think
there should be an explicit Government backstop? Do you believe
we should create a new entity as we consider how to move out of
the conservatorship for Fannie and Freddie? If so, what does
this new entity look like? Does having two GSEs make sense--is
that anachronistic? Do they presently compete against each
other? Does consolidation make sense? Can you outline how you
and the Treasury Department envision housing finance reform and
the core principles that you would like to see? What role do
you think FHFA should have in crafting policy objectives for
GSE reform?
A.1. Housing finance reform is a priority of the Treasury and
of the Administration. We are working across the Administration
on developing housing principles and engaging with stakeholders
inside and outside the Government in advance of providing
recommendations.
Q.2. You have stated publicly that a top priority of yours in
the housing space is taxpayer protection. Private capital is
essential to safety and soundness and, in the end, taxpayer
protection. What are you going to do to raise all available
forms of capital in the housing system to protect taxpayers?
How much capital do Fannie and Freddie need to protect
taxpayers from bailouts over the full housing cycle?
A.2. The GSEs remain in Federal Housing Finance Agency (FHFA)
conservatorship, leaving taxpayers at risk for any capital
shortfalls per the commitments provided through the Preferred
Stock Purchase Agreements. Our housing finance policy should be
clear and should be designed to provide financing for
homeowners and owners of multi-family units. Additionally, it
should increase private sector participation and protect
taxpayers. Treasury continues to study this issue and engage
with stakeholders inside and outside the Government in advance
of providing recommendations.
Q.3. The HERA statute that governs the GSE Conservatorship
specifically mandates that they be ``placed into a sound and
solvent condition.'' There has been a lot of debate over
whether or not FHFA should suspend the dividend payments to
Treasury and whether or not this prohibits the GSEs from
building enough capital. Hypothetically, if FHFA suspended the
dividend payments, is there a level that the GSEs could reach
in terms of sufficient capital to prevent a future draw from
Treasury?
A.3. Currently, $258 billion of undrawn capacity remains
available to the GSEs under the Senior Preferred Stock Purchase
Agreements (PSPAs), which serves as a backstop against future
GSE losses. This support gives the marketplace confidence that
the GSEs will remain solvent and continue to provide liquidity
and stability to the mortgage market. As long as taxpayers are
at risk for losses at one or both of the GSEs, they should be
fully compensated for their extraordinary support that they
have provided and continue to provide.
Q.4. The AIG re-capitalization was structured in a way that
protected taxpayers and brought risk capital in to purchase the
Government shares. Is this not a successful model for the GSEs?
A.4. Housing finance reform is a priority of the Treasury and
of the Administration. We are working across the Administration
on developing housing principles. Treasury continues to study
this issue and engage with stakeholders inside and outside the
Government in advance of providing recommendations.
Q.5. A recent academic paper estimated that Treasury's warrants
for stock of Fannie and Freddie were worth $80 to $90 billion
dollars if the GSEs build capital? Do you think they should
build capital? How do you attract different sources of capital
for the GSEs? How will this help the taxpayer?
A.5. Currently, $258 billion of undrawn capacity remains
available to the GSEs under the Senior Preferred Stock Purchase
Agreements (PSPAs), which serves as a backstop against future
GSE losses. This support gives the marketplace confidence that
the GSEs will remain solvent and continue to provide liquidity
and stability to the mortgage market. Our housing finance
policy should be clear and should be designed to increase
private sector participation and protect taxpayers. Treasury
continues to study this issue and engage with stakeholders
inside and outside the Government in advance of providing more
detailed recommendations. As long as taxpayers are at risk for
losses at one or both of the GSEs, they should be fully
compensated for their extraordinary support that they have
provided and continue to provide.
Q.6. The HERA statute passed in 2008 strengthened regulation of
the mortgage space and gave FHFA the same strong safety and
soundness powers that other Federal financial regulators have
and its predecessor OFHEO lacked. What new safety and soundness
powers do we need to ensure no more bailouts in the mortgage
space? What additional powers should Congress bestow upon FHFA?
A.6. We support FHFA's efforts to reduce risk to taxpayers
during the GSEs' conservatorship, including efforts to transfer
part of the credit risk from the GSEs to the private market as
well as oversee the reduction of the GSEs' investment
portfolios. Treasury
continues to study this issue and engage with stakeholders
inside and outside the Government in advance of providing
recommendations.
Q.7. The $5 trillion dollar GSE bond market is the second most
liquid in the world after U.S. Treasuries. Several GSE reform
proposals redo the ``plumbing'' for this market by having new
entities do the mortgage securitization and guarantee
functions. Does this pose a risk to the secondary mortgage
market, and how will this impact the consumer's ability to get
a mortgage?
A.7. We are working across the Administration on developing
housing principles and engaging with stakeholders inside and
outside the Government in advance of providing recommendations.
Q.8. Some GSE reform plans take parts or functions of Fannie
and Freddie and give them to the Government to operate. Given
our recent disastrous experience with the Federal student loan
program, why should we trust the Government to run mortgages?
A.8. Treasury continues to study this issue and engage with
stakeholders inside and outside the Government in advance of
providing recommendations.
Q.9. Beyond the housing system, what are you doing to attract
global capital into the United States? If we are going to have
economic growth in our country beyond the 2 percent, don't we
need additional investment in the United States? How is
Treasury and the White House incentivizing global investment in
the United States, and how does the lack of action on health
care, tax reform, immigration reform, and the like implicate
the consideration of global investors when evaluating how they
are going to invest in the United States? Can you discuss how
U.S. economic growth implicates the growth of other foreign
sovereigns and the consequences to our future generations if we
do not address the aforementioned issues?
A.9. The Administration is putting in place plans to reach 3
percent economic growth to ensure the United States becomes an
even more attractive place to invest. These plans include
regulatory reform, trade reform, and tax reform. Failure to
increase the rate of U.S. economic growth through such policies
would imperil the economic prospects of future generations and
may lead to a loss of competitive advantages currently enjoyed
by the United States.
Q.10. Can you discuss the underlying assumptions in the recent
budget proposal from the White House? The budget assumes that
we are going to have economic growth at 3 percent or greater
over a 7-year period and that tax reform will be deficit
neutral--can you discuss both of these and how you envision
Congress working toward those goals?
A.10. The President's 2018 Budget follows from the central
assumption that all of the President's policy proposals will be
enacted. The Administration's proposals for simplifying taxes,
cutting regulation, building infrastructure, reforming health
care, and boosting domestic energy production are expected to
improve the supply side of the U.S. economy and spur faster
growth.
The Administration's economic growth assumptions are
optimistic but not unprecedented. The Obama administration's
initial policy-based forecast for its first 5 years in office
was 0.5 percentage point higher than the comparable CBO
forecast at the time; the Reagan administration's policy
forecast was 1.4 percentage points higher. The Trump
administration's policy forecast for first 5 years is 0.8
percentage point above CBO's.
The rate of GDP growth is expected to increase gradually to
3.0 percent by 2020 and then remain at that level for the
duration of the forecast window. The Administration projects a
permanently higher trend growth rate as a result of its
productivity-enhancing policies and a greatly improved fiscal
outlook.
Although demographic headwinds are playing a role in slower
growth, the main culprit is weak productivity growth. Over the
years 1948 to 2007, average annual productivity growth was 2.3
percent. From 2011-2016, it was 0.5 percent annually (real
output per labor hour in nonfarm business sector). A return to
the productivity growth seen from 1995 through 2005--when it
averaged 2.8 percent annually--would bring U.S. economic growth
very close to rates reflected in the Budget.
The 2018 Budget shows what robust, sustained economic
growth combined with significant fiscal consolidation could
achieve by 2027.
I have stated that the 2018 Budget should be looked at as a
``preliminary document'' when it comes to tax reform because it
would be ``premature'' to provide detailed fiscal projections
based on initial policy principles and before a full-blown
legislative effort. I have noted that ``ultimately the numbers
will be completely transparent.''
The White House has committed to making the Federal
Government ``lean and accountable to the people'' while
ensuring that national security and public safety are
paramount. The 2018 Budget offers one possible course of action
for fulfilling those promises. It presents a set of major
initiatives that would reduce Federal expenditures by more than
$3.5 trillion over the next 10 years. If all of these cuts were
pursued and if the tax reform were deficit neutral without
accounting for feedback effects, then the Federal Government
would run a surplus by 2027 and the debt-to-GDP ratio would
decline from 77.4 percent this year to 59.8 percent in 2027.
The Budget incorporated the growth benefits of the tax reform
as one element of the $2.1 trillion ``effect of economic
feedback'' and made the assumption that the overall tax reform
would be revenue-neutral before accounting for economic
feedback. As the specifics of tax reform become more available,
we may wish to revisit the revenue projections.
We look forward to working with Congress on reforms that
will foster faster growth and improve the country's fiscal
outlook.
Q.11. I know the Administration is in the process of issuing
multiple reports on a host of issues. One issue that I
repeatedly hear about is the Volker Rule and Leveraged Lending
Guidance. Are both of those issues going to be addressed in the
Treasury's reports and can you commit to giving explicit
recommendations to Congress on how we should address these
issues?
A.11. Treasury's response to the President's Executive Order on
Core Principles for Regulating the United States Financial
System includes recommendations on these issues.
Q.12. Can you give me your opinion on Whistleblowers and
Whistleblower protections?
LFederal law requires the Government to provide a
reward to a Whistleblower of a percentage of all
collected revenues in a successful prosecution.
However, and potentially to the detriment of this
program, the IRS has continued to limit rewards to a
percentage of the back taxes collected. Can you explain
to me why the IRS' actions have not comported to that
of the statute?
A.12. The Department of the Treasury and the Internal Revenue
Service (IRS) are committed to administering the Whistleblower
Program in a manner that is both fair for potential
whistleblowers and effective for the IRS in detecting
underpayments of tax and violations of the internal revenue
laws. The Treasury Department and the IRS recognize the risks
faced by whistleblowers and support legislation to provide
legal protections to whistleblowers from retaliation by
employers, much like those protections accorded under other
whistleblower award programs.
Section 7623(b) requires the IRS to pay whistleblower
awards if the whistleblower meets certain statutory
requirements. These mandatory awards are equal to a percentage
of the ``collected proceeds (including penalties, interest,
additions to tax, and additional amounts).'' I.R.C.
7623(b)(1). The scope of the term ``collected proceeds'' is not
limited to just ``back taxes'' because the statute clarifies
that ``collected proceeds'' ``includes penalties, interest,
additions to tax, and additional amounts.'' The legal
interpretation of the full scope of the phrase ``collected
proceeds'' is currently the subject of litigation, and
therefore, we cannot provide any additional comment on this
matter. The Treasury Department and IRS would, however, welcome
any discussion with your office aimed at supporting the
effectiveness of the Whistleblower Program.
Q.13. In a speech you delivered on March 24th, you identified
cybersecurity as a primary concern with respect to financial
markets. A concern from some market participants is that
financial regulators are issuing rules or guidance that is not
harmonized and that is so prescriptive that it limits an
entity's ability to respond to dynamic cyber threats. What are
your plans to promote regulatory harmonization and principle-
based cybersecurity regulations?
LHow will the Treasury use FSOC to coordinate and
harmonize cybersecurity roles among financial
regulators?
A.13. In response to the increasing threat posed by malicious
cyber activity, Federal and State financial regulators have
undertaken significant steps to develop regulatory guidance and
examination tools related to cybersecurity. Effectively
coordinating regulatory approaches to defining, regulating, and
evaluating cybersecurity risk management practices among
agencies will bolster the common goal of mitigating cyber risk
within the sector and enhancing the sector's resiliency.
Treasury believes cybersecurity risk
management is an important topic and is actively working on
several efforts related to regulatory harmonization.
The FSOC has highlighted the importance of cybersecurity
across the financial services sector, as well as the potential
risk to
financial stability posed by cybersecurity failures. The 2016
FSOC
Annual Report recommended that as financial regulators adopt
approaches to cybersecurity supervision, they endeavor to
establish a common risk-based approach to assess the
cybersecurity and resiliency of the firms they regulate. The
FSOC noted that, informed by their regulatory and supervisory
process, individual regulators could leverage that common risk-
based approach to address any unique statutory and regulatory
requirements, as well as any distinct cybersecurity risks
presented by the segments of the financial sector they oversee.
To further the recommendations outlined by FSOC, Treasury
has supported regulatory coordination on several fronts. The
Financial and Banking Information Infrastructure Committee
(FBIIC) serves as a useful venue for coordinating approaches
among agencies with different statutory authorities and
Treasury believes the FBIIC should be the focal point to drive
domestic regulatory harmonization efforts. Within the FBIIC,
Treasury has supported efforts to promote the National
Institute of Standards and Technology (NIST) Cybersecurity
Framework as a common lexicon for regulatory agencies to
incorporate into their supervisory efforts; expand and complete
efforts to map existing regulatory guidance to reflect and
incorporate appropriate elements of the NIST Framework; and
advance work as to whether cybersecurity examinations could be
further coordinated. Internationally, Treasury has also
encouraged further collaboration and partnership through the G-
7 Cyber Experts Group in the financial area.
Q.14. What is the Treasury Department's plan for providing
meaningful regulatory relief for mid-sized and regional banks
to help them deploy capital and make loans to help grow
business and infrastructure?
A.14. Treasury agrees that mid-sized and regional banks are key
to the financial system. Treasury supports efforts to right-
size regulations to address actual risks posed to the financial
system rather than the current one-size-fits-all regulatory
model. Treasury's response to the President's Executive Order
on Core Principles for Regulating the United States Financial
System makes recommendations to reduce regulations that are
inappropriately applied to the business model of these
financial institutions.
Q.15. In your testimony, you indicated that you reject the
notion that some banks are too-big-to-fail, and instead
suggested that some might be ``too-big-to-succeed,'' can you
elaborate on what you mean by that? You also suggested that
large financial institutions have sufficient capital but that
capital buffers have prevented banks from lending. In my view,
using arbitrary asset thresholds to determine if a bank is
risky or should be designated a SIFI ignores the actual risk a
bank may pose to the financial system. Do you believe we should
have thresholds, or should regulators consider the types of
assets held, the interconnectedness of a bank, its
substitutability and its global reach when determining risk?
LI share your goal of trying to spur economic growth
through the elimination of regulations that hinder
lending. If you do not believe that thresholds are
proper at any size, can you outline for me how you plan
on right-sizing regulations and
putting into place a mechanism so that prudential
regulators and institutions have clear rules-of-the-
road with regard to how they will be regulated and how
regulations will be tailored based on the risk-profile
of the institution?
A.15. We believe in appropriate regulation and in ensuring that
taxpayers will not be at risk. At the same time we have to
ensure that banks can lend and provide liquidity. Treasury's
recent response to the President's Executive Order on Core
Principles for Regulating the United States Financial System
includes recommendations to more appropriately tailor
regulations for mid-sized and regional banks so that such firms
can help promote economic growth.
Q.16. As we in Congress continue to work on a specific way
forward on reforming the bank SIFI designation process, and we
think there is quite a bit of agreement on this, what is the
Administration doing to use your existing authority to tailor
the rules that mid-sized and regional banks operate under? As
you know from your time on the board at CIT, the resources
these companies put into the annual capital planning and stress
testing processes, as well as resolution planning, do not seem
to be commensurate with their business models and risk. These
resources could be better used to fuel lending in the economy.
A.16. As noted above, Treasury's recent response to the
President's Executive Order on Core Principles for Regulating
the United States Financial System includes a number of
recommendations designed to improve how regulations apply to
mid-sized and regional banks.
Q.17. Another area in need of significant financial regulatory
reform is within the retirement space. Do you believe that
mutual funds are SIFIs? Such designation would impose
significant regulatory risks to these entities, such as a host
of banking regulations, even though they are already heavily
regulated by the SEC. Is this an area that your financial
regulatory report will address, and will you put forth a
recommendation to Congress to advance a statutory change to
remove mutual funds from the scope of SIFI designation?
A.17. Pursuant to a Presidential memorandum issued on April 21,
Treasury is currently reviewing the FSOC's processes for
designating nonbank financial companies and financial market
utilities. Treasury's goal is to ensure that the FSOC's
processes are transparent, efficient, and effective. Further,
the Presidential memorandum calls for a pause in the FSOC's
designations while we complete our review.
Q.18. What other regulations and provisions of Dodd-Frank do
you feel should be revisited to help mid-sized and regional
banks grow loans and economic activity in communities across
the country?
A.18. Treasury's recent response to the President's Executive
Order on Core Principles for Regulating the United States
Financial
System includes a number of recommendations designed to improve
how regulations apply to mid-sized and regional banks.
Q.19. Have you been briefed on MiFID II and are you aware of
the standards set forth in MiFID II? Are you concerned about
how MiFID II's research rules might affect money managers in
the United States? Data and research suggests that the
implications of MiFID II will be significant among domestic
asset managers, global asset managers, brokers, and the like,
and I am concerned that unless the United States acts there
will be drastic affects for the U.S. research. Can you commit
to working with the SEC in finding a solution to this problem?
A.19. The MiFID II legislative package is very broad and covers
a number of areas, including regulation of trading venues,
market transparency, investor protections, research fees, and
other areas.
Under the terms of MiFID II, research fees and commission
fees must be unbundled. Investment firms must either pay for
research out of their own resources or from a Research Payment
Account controlled by the firm and funded by specific research
charges to clients. MiFID II rules do not apply to U.S. firms
per se, but the limitations they impose on EU-registered
financial services providers could spill over and impact the
ability of U.S. firms to continue to provide research services
to their European clients.
As the effective date of January 3, 2018, approaches,
Treasury remains engaged with our European counterparts to
ensure that the playing field remains level and open to fair
competition. At the same time, Treasury continues to work
domestically with the regulatory agencies, including the SEC,
all of whom are involved in regular dialogue with the European
authorities.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARNER FROM STEVEN T.
MNUCHIN
Q.1. In the past, market participants and regulators have
expressed concerns about the lack of transparency into treasury
securities trading. In fact, FINRA recently passed, and the SEC
approved, a rule requiring the reporting of certain treasury
securities transactions for the purpose of collecting
additional detail about the market. Are there other policies
that you are considering that could promote transparency into
these markets? For example, are there potential systemic
benefits to policies that permit broader market participant
access to the clearing of treasury securities?
A.1. Central clearing for cash Treasury transactions has
existed since the mid-1980s, through the Fixed Income Clearing
Corporation (FICC). FICC's largest member firms are all SEC-
registered brokers and dealers subject to a comprehensive
regulatory regime. Many principal trading firms are not members
of FICC, so their trades are not directly cleared by FICC.
FINRA reporting is expected to capture roughly 90 percent of
Treasury market transactions, covering trades of FINRA members
with non-FINRA members, as is common in the dealer-to-client
market, and trading on major dealer-to-dealer platforms, such
as BrokerTec and eSpeed.
Q.2. In October 2016, the Federal Reserve Bank of New York
hosted a conference on the evolving structure of the U.S.
treasury market. It appeared there was broad consensus that
central clearing of treasury securities activity would have
several benefits: increased transparency, decreased settlement
and operational risk, and more efficient management of
collateral because a CCP would have a more accurate view of the
total exposure of each market participant.
LAre you reviewing this issue as part of your
response to the President's Executive order on
financial regulation?
LDo you believe that increased centralized clearing
of treasury securities would reduce aggregate
counterparty and credit risk in the system?
A.2. Treasury is continuing to study U.S. Treasury market
structure issues, including the potential effects of increased
centralized clearing of Treasury securities. Increased clearing
could reduce counterparty and credit risk. The cost of central
clearing could result in higher auction yields for Treasury
securities, decrease incentives to provide secondary market
liquidity, and increase operational risk due to the creation of
a central point of failure.
Q.3. The longest dated bond Treasury currently floats is the
30-year. The United Kingdom and Canada have floated 50-year
debt, while Japan and Mexico have been able to float 100-year
bonds. Even Princeton University and Goldman Sachs float 50-
year debt. I understand Treasury is currently studying the
issuance of ``ultra-long'' bonds. In light of that, do you
believe that there is adequate appetite for the U.S. to float
50-year Treasury bonds, especially while interest rates are
near historic lows and the United States continues to be a
haven for global investors?
A.3. Treasury regularly issues securities in a wide range of
maturities, from the 1-month bill to the 30-year bond and
studies additional security types in order to achieve the
lowest cost of financing to taxpayers over time. A number of
other sovereign issuers (including Canada, France, Japan, and
the United Kingdom) have sold ultra-long bonds over the past
several years and I believe that we should evaluate whether
issuing at longer-dated tenors would help us to achieve the
lowest cost of financing over time. Benefits of ultra-long
issuance can include: reducing the potential volatility in
Treasury's debt service costs, and lowering Treasury's exposure
to higher interest rate environments as it refinances its debt
portfolio. Treasury has a nearly $14 trillion marketable debt
portfolio. Treasury is assessing the size and depth of the
market and the impact to 30-year issuance in order to evaluate
whether the ultra-long security makes sense for Treasury.
Q.4. I strongly agree with you that we should examine this
issue and see if the United States can lock in lower rates over
a longer period of time. But there is significant pushback from
some market participants, who worry about one-time issuances or
a lack of ``regular and predictable'' issuances. What is your
take on that concern? Could you address it by announcing
quarterly issuances to ensure sufficient demand and a
predictable schedule?
A.4. We continue to study ultra-long bonds and assess market
demand. As part of the May 2017 quarterly refunding process,
Treasury asked the primary dealer community to estimate the
potential volume of demand for ultra-long sovereign issuance
and at what price, relative to our 30-year bond offering, we
could reasonably expect an ultra-long to price. Treasury posed
similar questions to the Treasury Borrowing Advisory Committee,
or TBAC, and analysis from that Committee was posted to the
Treasury website in May. In addition, Treasury has been
reaching out to traditional long-duration institutional buy-
side market participants (pension funds and life insurance
companies) to assess demand for such a product.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARREN FROM STEVEN T.
MNUCHIN
Tax Administration
Q.1. The Higher Education Act allows the Department of
Education to forgive Federal student loans for borrowers with
total and permanent disabilities. In 2016, the Social Security
Administration identified 387,000 Social Security beneficiaries
with Federal student loans who were eligible for such a
discharge due to their ``medical improvement not expected''
diagnosis. The Treasury Department, however, has failed to
issue any guidance on how these Social Security beneficiaries
who are totally and permanently disabled, many of whom are also
veterans, would be taxed on these discharges.
LDo you believe Treasury should exercise the full
scope of its authority to ensure that Social Security
beneficiaries who are totally and permanently disabled
should not be unduly taxed on these student loan
discharges?
LWill you issue guidance clarifying that the General
Welfare Doctrine applies to student loan discharges for
total and permanent disability, consistent with Rev.
Rul. 57-102? Alternatively, will you exercise your
authority under the insolvency exception under 26 USC
108(a)(1)(B) to issue guidance that excludes from
income the student loan discharges for totally and
permanently disabled Social Security beneficiaries?\1\
---------------------------------------------------------------------------
\1\ For a summary of the well-documented insolvency of these
taxpayers, cross-validated by multiple sources of Federal
administrative data, see: https://www.washingtonpost.com/news/grade-
point/wp/2016/12/23/feds-refuse-to-stop-taxing-the-canceled-student-
debt-of-severely-disabled-people/?utm_term=.07ecd4ff1eed.
LWill Treasury instruct the Department of Education
not to issue 1099-Cs to the IRS for these student loan
discharges in order to avoid an extraordinary and
avoidable compliance burden on borrowers who are
totally and permanently disabled and an expensive and
---------------------------------------------------------------------------
unnecessary compliance burden on the IRS?
A.1. The Treasury Department is reviewing student loan issues
generally, and staff from our Office of Tax Policy and our
General Counsel's office recently had a conversation with your
staff regarding these specific student loan discharge issues.
As you know, student loan discharges are subject to income tax
as a result of the Tax Code, which also provides certain
limited exceptions but not any that could provide a blanket
exception for this category of borrower. While it is too early
to commit to any particular approach that the Treasury
Department may undertake, we want to continue working with you
on this important issue.
Q.2.a. In the President's FY2018 Budget released on May 24,
2017, the Administration proposes to increase oversight of paid
tax return preparers, projecting this to raise $439 million
over 10 years.
What prompted the Administration's concerns about paid tax
return preparers?
A.2.a. In 2009, recognizing the growing reliance by taxpayers
on paid tax return preparers and the concurrent impact on tax
administration, the IRS launched a comprehensive review of tax
return preparation. Under 31 U.S.C. 330, the Secretary has
the authority to regulate practice before the IRS. Regulations
under that section, referred to as ``Circular 230,'' regulate
the practice of licensed attorneys, certified public
accountants, and enrolled agents and actuaries. In 2009, IRS
conducted a formal review of its regulation of paid tax return
preparers. After significant consideration and input from
taxpayers, tax professionals, and other stakeholders, Treasury
and the IRS amended Circular 230 to regulate practice of all
paid tax return preparers, including individuals who are
unlicensed and unenrolled. Paid tax return preparers challenged
these regulations in Loving v. Commissioner. The Court of
Appeals for the District of Columbia Circuit determined that
these regulations exceeded the IRS' authority.
Q.2.b. What risks do you see as a result of lax oversight of
these paid preparers?
A.2.b. Paid tax return preparers have an important role in tax
administration because they assist taxpayers in complying with
their obligations under the tax laws. Incompetent and dishonest
tax return preparers increase collection costs, reduce
revenues, disadvantage taxpayers by potentially subjecting them
to penalties and interest as a result of incorrect returns, and
undermine confidence in the tax system.
Q.2.c. Does the Administration already have empirical
documentation of this risk? If so, can you share it with me?
A.2.c. A few studies exist that document the relationship
between paid return preparers and tax return errors and examine
the effect of preparer regulation. A 2006 report by GAO \2\
finds that errors are common among returns prepared by
commercial tax return preparation chains, with some errors
resulting in an over claim of tax refunds of nearly $2,000. We
also direct the Committee to the report that the IRS submitted
to the Committee on Appropriations on the accuracy of returns
prepared by participants in the IRS voluntary program for the
2015 tax season compared to accuracy of returns prepared by the
same population of preparers prior to the 2015 tax season.
---------------------------------------------------------------------------
\2\ GAO (2006), Paid Tax Return Preparers: In a Limited Study,
Chain Preparers Made Serious Errors. Washington, DC: April 2006.
Q.2.d. What additional oversight of paid preparers does the
Administration envision? Will this oversight include increased
transparency of pricing so that taxpayers may compare costs
---------------------------------------------------------------------------
across paid preparers?
A.2.d. The proposal would explicitly provide that the Secretary
of the Treasury has the authority to regulate all paid tax
return
preparers. This proposal would be effective as of the date of
enactment.
Q.2.e. What agencies will you work with to implement this
oversight of paid preparers?
A.2.e. The Internal Revenue Service works closely with the
Department of Justice to enjoin unscrupulous individuals and
entities from preparing tax returns and to prosecute those who
engage in criminal activity.
Q.2.f. What timeline can we expect for this commitment to
increase oversight of paid preparers?
A.2.f. If legislation providing authority to regulate all paid
tax return preparers is enacted, the Treasury Department will
implement such legislation promptly. Until then, the IRS has an
interim program, the Annual Filing Season Program, to encourage
tax return preparers to voluntarily demonstrate that they meet
the minimum standards of competency. To complement the Annual
Filing Season Program, the IRS also has a public education
campaign to encourage taxpayers to make informed decisions when
choosing a paid tax return preparer.
Q.3. In 2015, Congress required that no EITC or ACTC refunds be
issued until after February 15th, even though tax returns are
accepted in January. This new delay spurred a significant
uptick in ``tax-time financial products''--short-term loans to
taxpayers that use the tax refund as collateral and often
conceal the full price of tax-preparation fees that are
directly withdrawn from the tax refund. One survey of
storefront tax preparation chains found that EITC recipients
were charged an average of $400 per return.\3\
---------------------------------------------------------------------------
\3\ Paul Weinstein Jr. and Bethany Patten, The Price of Paying
Taxes II: How paid tax preparer fees are diminishing the Earned Income
Tax Credit (EITC) (April 2016) (online at http://
www.progressivepolicy.org/wp-content/uploads/2016/04/2016.04-
Weinstein_Patten_The-Price-of-Paying-Takes-II.pdf).
LDo you believe taxpayers should lose portions of
their EITC and or ACTC refunds to paid preparers or
tax-time financial products, rather than receiving the
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full value of their refunds?
LWill you commit to assessing the full dollar value
of EITC and ACTC refunds that go to the tax preparation
industry rather than to taxpayers?
LWho have you assigned at the OCC to review the tax-
time financial products offered by the tax preparation
industry?
LWill you, or your delegate, commit to briefing the
Financial
Institutions and Consumer Protection Subcommittee of
the Senate Banking Committee on the Treasury
Department's oversight of tax-time financial products?
A.3. Beginning with refunds paid in 2017, the Protecting
Americans from Tax Hikes Act of 2015 (PATH Act) changed the law
to prohibit payment of refunds with respect to tax returns
claiming the EITC or ACTC until February 15.
In conjunction with faithfully carrying out the laws
enacted by Congress, I am committed to making our tax system as
efficient as possible, while also protecting the integrity of
the system.
In 2015, the Office of the Comptroller of the Currency
(OCC) updated 2010 guidance to outline safety and soundness
measures that national banks and Federal savings associations
(collectively, banks) should follow if they offer tax refund-
related products. Those measures include but are not limited
to, the following: ensuring that the bank maintains sound risk
management policies, procedures, and practices; implementing
effective internal controls and review standards for
advertising and solicitations; and, providing appropriate
disclosures that explain material aspects of the products to
consumers. The Senior Deputy Comptroller for Compliance and
Community Affairs is monitoring the implementation of this
guidance in regard to banks that they supervise; the OCC
indicates that one national bank is currently providing such
products.
I understand that you have requested the Government
Accountability Office examine the use and impact of tax-time
financial products. The Treasury Department will certainly work
with GAO in their research and we would look forward to their
findings.
Q.4. In 1998, the IRS Restructuring and Reform Act directed the
Secretary of the Treasury to develop procedures to implement a
``return-free'' filing system by 2006.\4\ Despite this generous
timeline, the Treasury Department has yet to fulfill this
mandate.
---------------------------------------------------------------------------
\4\ Sec. 2004 of (P.L. 105-206).
LWill you use the full scope of your authority as
Secretary to make tax filing faster, easier, and
---------------------------------------------------------------------------
cheaper for working families?
LWill you fulfill your obligations under the IRS
Restructuring and Reform Act to ``develop procedures
for the implementation of a return-free tax system
under which appropriate individuals would be permitted
to comply with the Internal Revenue Code of 1986
without making the return required under section
6012?''
A.4. A simpler, fairer, and more efficient tax system is
critical to growing the economy and creating jobs. Our
outdated, overly complex, and burdensome tax system must be
reformed to unleash America's economy, and create millions of
new, better-paying jobs that enable American workers to meet
their families' needs. Going forward, we are committed to
continue working with Congress and other stakeholders to
carefully and deliberatively build on these principles to
create a tax system that is fair, simple, and efficient-one
that puts Americans back to work and puts America first.
Q.5. In 2015, Congress directed the Internal Revenue Service to
contract with private debt collection companies for certain
uncollected tax receivables. Although the IRS oversees these
contracts, the Federal Trade Commission is tasked with
overseeing enforcement of the Fair Debt Collections Practices
Act, which also applies to these debt collectors.
LHas Treasury already been in contact with the FTC
about IRS contractor compliance with the FDCPA? Will
you commit to working with the FTC to ensure ongoing
compliance with the FDCPA by these private debt
collection IRS contractors in order to protect taxpayer
rights?
A.5. Section 6306(g) of the Internal Revenue Code provides that
the Fair Debt Collection Practices Act (FDCPA) applies to
private debt collection agencies. As a result, the IRS requires
that, as a condition of receiving a contract with the IRS,
private debt collection agencies must respect taxpayer rights
including, among other things, abiding by the consumer
protection provisions of FDCPA. The IRS and FTC have been in
contact regarding contractor compliance with the FDCPA, and the
IRS has confirmed for the FTC that private debt collection
agencies will not be using robocalls or prerecorded messages as
part of their collection activities. In addition, the Treasury
Inspector General for Tax Administration maintains a hotline
for consumer complaints about private debt collection agencies
or to report misconduct by its employees. The Treasury
Department and IRS take all complaints about private debt
collection agencies seriously and will work with the FTC and
any other relevant agency in the interest of protecting
taxpayer rights.
Q.6.a. In 2016, the Treasury Department issued tough rules to
stop multinational corporations from a whole range of cross-
border tax dodging. These new regulations focused on ``earnings
stripping,'' when foreign companies load up their U.S.
subsidiaries with debt from the foreign parent in order to zero
out U.S. taxes with interest deductions. The rules also cracked
down on ``corporate inversions,'' when U.S. companies merge
with a smaller foreign company in order to claim a foreign tax
residence. On May 15, 2017, the Chamber of Commerce asked you
to withdraw these rules.\5\
---------------------------------------------------------------------------
\5\ https://www.law360.com/articles/924367/chamber-asks-treasury-
to-nix-inversion-estate-tax-rules.
LDo you believe the Treasury Department should
increase tax preferences for foreign owned
multinational corporations by rolling back section 385
---------------------------------------------------------------------------
regulations?
A.6.a. In April 2016, the Treasury Department and the IRS
issued proposed regulations (REG-108060-15) under section 385
of the Code that primarily (i) established threshold
documentation
requirements that ordinarily must be satisfied in order for
certain related-party interests in a corporation to be treated
as indebtedness for Federal tax purposes (documentation rules),
and (ii) treated as stock certain purported debt instruments
that are issued to a controlling shareholder in a distribution
or in another transaction that achieves an economically similar
result (transaction rules). On October 21, 2016, the Treasury
Department and the IRS issued final and temporary regulations
that substantially revised the proposed regulations (81 Fed.
Reg. 72858). In particular, the final and temporary regulations
were limited to apply to U.S. borrowers only and provided
additional rules to exempt certain transactions and types of
U.S. borrowers from application of the regulations.
Earnings stripping through related-party borrowing
generally refers to a borrower that borrows from an affiliate
and thereby incurs deductible interest expense. U.S.
subsidiaries of foreign-parented multinational groups may
engage in earnings stripping by borrowing from related foreign
lenders to arbitrage the tax rate
difference between the interest deduction in the United States
(currently 35 percent) and the interest income in a lower-tax
lending jurisdiction. The United States has statutory limits on
the amount of related-party interest expense that may be
deducted in a tax year under section 163(j) of the Code. The
interest expense limitation under section 163(j) is computed as
a percentage of the U.S. taxpayer's adjusted taxable income.
The transaction rules in the section 385 regulations do not
directly address excessive related-party interest expense in a
manner similar to section 163(j). Rather, the transaction rules
in the section 385 regulations address specific issuances of
new related-party debt that is issued by the purported borrower
to a related party in a corporate distribution (sometimes
referred to as a ``dividend note'').\6\ Also, unlike the
section 163(j) earnings stripping limitations, the transaction
rules in the section 385 regulations recharacterize an issuance
of a purported debt instrument as stock rather than limiting
the amount of deductible interest expense associated with the
purported debt instrument. In other words, the transaction
rules in the section 385 regulations characterize a purported
related-party debt instrument as debt or stock for tax purposes
under certain prescribed circumstances without regard to
whether or not the borrower has excessive related-party
interest expense under the current section 163(j) interest
expense limit.
---------------------------------------------------------------------------
\6\ The transaction rules in the section 385 regulations also apply
to other related party transactions that are described as economically
similar to a distribution and not financing new investment in the
operations of the borrower.
---------------------------------------------------------------------------
On April 21, 2017, President Trump signed E.O. 13789, which
orders the Secretary to immediately review all significant tax
regulations issued by the Department of the Treasury on or
after January 1, 2016, and, in consultation with the
Administrator of the Office of Information and Regulatory
Affairs, Office of Management and Budget, identify in an
interim report to the President all such regulations that: (i)
impose an undue financial burden on United States taxpayers;
(ii) add undue complexity to the Federal tax laws; or (iii)
exceed the statutory authority of the Internal Revenue Service.
The Treasury Department in Notice 2017-38 identified the
section 385 regulations as meeting the criteria of the
President's order. A final report will be issued at a later
time recommending specific actions to mitigate the burden
imposed by the regulations identified in the interim report. No
decision has currently been made on what action will be taken
with respect to the section 385 regulations or the other
regulations identified. In addition, the Trump administration
and the Treasury Department are actively engaged with Congress
on tax reform. As such, the Treasury Department is carefully
considering the section 385 regulations in connection with E.O.
13789, and the statutory earnings-striping limits under section
163(j) in connection with formulating its recommendations for
tax reform.
Q.6.b. You have described anecdotal concerns by U.S. companies
of foreign takeovers. Do you have empirical documentation of an
uptick in foreign acquisitions of U.S. targets relative to U.S.
acquisitions of foreign targets?
A.6.b. United Nations Conference on Trade and Development
(UNCTAD) data on flows of foreign direct investment (FDI) into
and out of the United States are quite variable from year to
year. Outward flows exceeded inward flows each year from 2007
through 2014, though inward flows were larger in 2015. The
widely acknowledged U.S. tax advantages for inbound and
outbound investment compared to U.S. domestic investment by
U.S. persons and nontax reasons for cross-border investment
suggests that this comparison is not definitive on this issue.
Q.6.c. Do you believe relaxing rules on corporate inversions,
so that U.S. companies can merge with foreign companies to
claim a foreign tax residence, helps create American jobs?
A.6.c. Most U.S. public corporate inversions do not involve top
executives moving from the United States to the new country of
corporate residence, but some do. Beyond that, it is not clear
that
corporate inversions reduce U.S. jobs in the short run, but we
know of no convincing evidence that corporate inversions tend
to increase U.S. employment.
Tax Reform
Q.7. As you know, 70 percent of all income from pass-through
entities goes to the top 1 percent of taxpayers.\7\ In your
testimony before the Banking Committee, you stated that not all
pass-throughs would receive the preferential business tax rate
proposed by the Administration and that you would propose
eligibility requirements for the preferred tax rate.
---------------------------------------------------------------------------
\7\ Business in the United States: Who Owns it and How Much Tax Do
They Pay? Michael Cooper, John McClelland, James Pearce, Richard
Prisinzano, Joseph Sullivan, Danny Yagan, Owen Zidar, Eric Zwick, in
Tax Policy and the Economy; Volume 30, Brown. 2016.
LHow will you limit eligibility for the business tax
rate to middle-class taxpayers who receive income from
pass-throughs? Will there be a specific tax bracket for
---------------------------------------------------------------------------
claiming the preferred rate?
LHow will you limit eligibility for this business
tax rate to small- and medium-size businesses?
A.7. There are a number of approaches to limit the preferential
pass-through rate to certain taxpayers and businesses. We are
confident that we can develop effective measures to
appropriately target income that should be eligible for the
preferential rate, and we look forward to working with Congress
to further develop these proposals.
Q.8. The Child Tax Credit (CTC) and the Earned Income Tax
Credit (EITC) are some of our Nation's most effective anti-
poverty programs for working families. Many struggling
families, however, have their refundable tax credits swallowed
up by bankruptcy trustees, undermining the very purpose of
these refundable tax credits. In a survey of consumer Chapter 7
bankruptcy asset cases, bankruptcy trustees took some form of
tax refunds in 65 percent of the asset cases, with an average
capture of $3,404 per asset case.
LIn your tax reform proposals, will you ensure that
the EITC and CTC are protected from creditor
attachment, just like
Social Security benefits and certain retirement
benefits under ERISA?\8\
---------------------------------------------------------------------------
\8\ Dalie Jimenez, The Distribution of Assets in Consumer Chapter 7
Bankruptcy Cases, American Bankruptcy Law Journal, Vol. 83, p. 795,
2009.
A.8. The current treatment of the EITC and CTC is a function of
the Bankruptcy Code, not the tax code. Nevertheless, as a
general matter, we are open to considering all proposals that
meet the Administration's core principles of tax reform.
ISIS
Q.9. Is the Treasury Department taking additional steps to shut
off ISIS from the international financial system and from other
financial networks like money remittance channels and currency
auctions? Does the Department believe that additional authority
from Congress would be helpful in this effort, and if so, what
authority would the Department seek?
A.9. Treasury is leading global efforts to prevent ISIS from
accessing the international financial system. It is sanctioning
ISIS senior leaders, financiers, facilitators, recruiters, and
money services businesses, and has worked closely with Iraqi
authorities to ensure that bank branches within ISIS-controlled
territory in Iraq were completely cut-off from the Iraqi and
international financial systems. Treasury has also helped to
put in place safeguards at the Central Bank of Iraq to deny
ISIS access to U.S. dollar currency auctions and to strengthen
oversight of exchange houses and money transfer companies, key
channels through which ISIS moves funds. Further, Treasury has
worked multilaterally, through bodies like the Counter-ISIS
Finance Group--an integrated part of the broader Defeat ISIS
Coalition--and the Egmont Group of Financial Intelligence Units
and the Financial Action Task Force to share information on
ISIS's finances and its cross-border financial networks, and to
identify opportunities for disruption.
Treasury believes it has sufficient authority from Congress
to counter ISIS's finances.
Iran
Q.10. Iran is still on the Financial Action Task Force (FATF)
blacklist of countries that are a high risk of money laundering
and terrorist financing. Last year Iran made commitments to
FATF to make structural reforms in these areas. Will you work
with FATF to compel Iran to address its money laundering and
terrorist financing problems?
A.10. Yes. Treasury will continue to work within the FATF and
ICRG to hold Iran accountable for AML/CFT deficiencies and
pressure Iran to address those deficiencies.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR KENNEDY FROM STEVEN T.
MNUCHIN
Q.1. Mr. Secretary, as you know, I was a part of a group of
Senators who wrote to you in March urging you to end FSOC's
``too-big-to-fail'' policies by addressing the designation of--
bank ``systemically important financial institutions'' (or
``SIFIs''). There are a number of banks that have been
designated by FSOC as SIFI. There are serious economic
consequences to these decisions, starting with a dramatically
higher level of regulatory burden on the bank that is
accompanied with significantly higher compliance costs. An
annual reevaluation could allow designated financial
institutions an
opportunity to submit a plan with any additional materials
necessary to contest the determination that material financial
distress at the bank, or the nature, scope, size, scale,
concentration, interconnectedness, or mix of the activities of
the nonbank financial company, could pose a threat to the
financial stability of the United States.
As you and your staff begin FSOC reform, have you given
consideration to building an annual reevaluation process of the
designation decisions for banks, to determine how to best
tailor which of the enhanced supervision provisions should
apply to each bank?
A.1. In February, the President signed an Executive order that
tasks Treasury with reporting on the extent to which existing
laws, regulations, and other Government policies promote or
inhibit the Core Principles for financial regulation set forth
in the Executive order. As part of this process, we are
considering a broad set of financial regulations that affect
banks and other institutions. In its initial report under the
Executive order, addressing the regulation of depository
institutions, Treasury recommended that Congress amend the $50
billion threshold under Section 165 of the Dodd-Frank Act for
the application of enhanced prudential standards to more
appropriately tailor these standards to the risk profile of
bank holding companies.
Additionally, pursuant to a Presidential Memorandum issued
on April 21, Treasury is currently reviewing the FSOC's
processes for its designations of nonbank financial companies
and financial market utilities to evaluate, among other things,
whether the existing processes provide for sufficient
transparency and provide entities with adequate due process.
The FSOC remains subject to its statutory requirement to
reevaluate its previous designations of nonbank financial
companies, and we will continue to do so. As part of each
annual reevaluation of a nonbank financial company's
designation, the FSOC invites the company to meet with staff
and to submit information relevant to the FSOC's analysis. For
companies that have contested their designation during the
FSOC's annual reevaluation process, the FSOC has voted on
whether to rescind the designation and provided the company
with a notice explaining the primary basis for its decision.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR VAN HOLLEN FROM STEVEN
T. MNUCHIN
Low Income Housing Tax Credit
Q.1. Mr. Mnuchin, the President's Budget proposes over $7
billion in cuts to affordable housing programs. At the same
time, the proposed reduction on corporate taxes will decrease
the amount of LIHTC equity that can be raised and that will
decrease the number of affordable rental apartments that can be
built or preserved. The LIHTC helps in the financing of the
majority of affordable housing development. In Maryland, the
LIHTC program has produced 58,910 units of affordable housing
and has generated $6.34 billion in local income to the economy.
The combination of decreased funding for affordable housing
programs and decreased utilization of the LIHTC could have
disastrous impacts on the production and rehabilitation of
affordable housing.
Since the budget dramatically reduces funding for
affordable housing programs, is Treasury considering modifying
the LIHTC program in order to help fill some gaps in these
cuts? Has Treasury studied possible impacts of tax reform on
the LIHTC? Is Treasury planning on making any changes to the
program should these corporate tax reductions go into law?
A.1. Created in the 1986 Tax Reform Act and codified in 26
U.S.C. 42, the Low Income Housing Tax Credit (LIHTC)
subsidizes the construction or substantial rehabilitation of
affordable housing units. We look forward to examining the
LIHTC program as part of the Administration's work with
Congress on comprehensive tax reform, including the broader
issue of the tax code's impact on affordable housing.
Office of the Comptroller of the Currency (OCC)
Q.2. Regarding the appointment of Keith Noreika as Acting
Comptroller of the Currency, please respond to the following
questions:
LWhy were you willing to install him as head of the
OCC before his ethics pre-vetting was certified so that
the American public can know whether or not conflicts
exist?
LMr. Noreika's special temporary 130-day status
allows him to avoid President Trump's ethics pledge if
he leaves the OCC in 130 days or less. Does that allow
him to lobby or work on behalf of financial
institutions regulated by the OCC?
LAdditionally please respond to the following
questions related to Mr. Noreika's appointment:
Legal Authority
LCan you describe the authorities of a First Deputy
Comptroller and enumerate the differences between a
First Deputy Comptroller appointed to the position of
Comptroller as opposed to a Comptroller who has been
confirmed by the Senate? Will there be any limits on
his duties and authorities as Acting Comptroller of the
Currency?
LWill Mr. Noreika be serving as Acting Comptroller
or as a counselor from the Department of Treasury?
LAs a ``special Government employee,'' will he be
limited in any capacity from undertaking the duties to
run the agency?
LWill Mr. Noreika have the authority to sign
enforcement orders in his new capacity? If he does not
have this authority, how does the OCC plan on executing
enforcement orders during his tenure?
LWill Mr. Noreika have the authority to close
financial institutions regulated by the OCC? If he does
not have this authority, how does the OCC plan on
closing undercapitalized financial institutions during
his tenure?
LWill Mr. Noreika have the authority to authorize
mergers and approve new charters? If he does not have
this authority, how does the OCC plan on approving
mergers and new bank charters during his tenure?
LWill Mr. Noreika be a voting member of the
Financial Stability and Oversight Council (FSOC)? If he
does not have this authority, how does the OCC plan to
have a voice at the FSOC?
Independence
LMr. Noreika has represented numerous clients in the
financial services industry, including companies with
substantial pending or potential matters before the
OCC. In order to avoid any potential impropriety (or
the appearance of it), is Mr. Noreika required to
recuse himself from any matters which may result in a
conflict or the appearance of a conflict?
LPlease provide a detailed list of any such recusals
that will be required of Mr. Noreika, based upon his
disclosure of financial interests or prior
representation.
LHas Mr. Noreika been granted any exemptions or
waivers related to matters involving his work for
previous clients?
LIs it your understanding that Mr. Noreika will
continue to serve as First Deputy Comptroller following
the nomination and confirmation of Mr. Curry's
successor? Does Mr. Noreika plan to return to his legal
practice after his time at the OCC?
Circumventing Confirmation
LWhen was the last time a Treasury Secretary
appointed someone from outside the OCC to lead the
agency? Please describe the process for installing that
person at the OCC.
LWhy wasn't Mr. Noreika simply nominated for the
position of Comptroller?
LWhat are the Administration's plans for nominating
a new Comptroller of the Currency, and when will the
Senate Banking Committee receive nomination papers for
the nominee?
LWhy didn't the Administration choose an individual
already within the OCC as Acting Comptroller during
this period of transition?
A.2. On May 5, 2017, I appointed Mr. Noreika as a Deputy
Comptroller and further designated him as First Deputy
Comptroller. Mr. Noreika is a leading expert in the regulation
and supervision of national banks and Federal savings
associations. He has deep experience in helping banks operate
in a safe and sound manner, provide fair access to financial
services, and provide credit needed for business expansion and
job growth.
In appointing Mr. Noreika, I exercised my authority,
granted by statute, to ensure continued leadership at the
Office of the Comptroller of the Currency. Specifically, the
National Bank Act authorizes the Secretary of the Treasury to
appoint up to four Deputy Comptrollers of the Currency and to
designate one as First Deputy Comptroller (12 U.S.C. 4). The
Secretary's statutory authority does not limit the pool of
candidates from which the Secretary may make such an
appointment.
By law, the First Deputy Comptroller acts as Comptroller in
the event of a vacancy or absence or disability of the
Comptroller. Specifically, the National Bank Act provides that
``[d]uring a vacancy in the office or during the absence or
disability of the Comptroller,'' the First Deputy Comptroller,
succeeded by the other Deputy Comptrollers, ``shall possess the
power and perform the duties attached by law to the office of
the Comptroller.'' Id. The primary duties of the office of the
Comptroller are set forth in the National Bank Act. (See 12
U.S.C. 1-16, 481-86.) The First Deputy Comptroller is
authorized to perform all duties of the office in the absence
of a Comptroller.
Prior to his appointment, Mr. Noreika underwent a thorough
ethics pre-vetting by the career ethics staff of the Treasury
Department. While serving as Acting Comptroller, Mr. Noreika
will adhere to the same comprehensive ethics and conflict of
interest rules as all OCC employees. He has resigned from his
former law firm and will not engage in any outside employment
activities while serving. He has filed a public financial
disclosure report which will be available upon request once
certified, and he has divested all assets that could pose a
conflict of interest. Mr. Noreika is recused from any
particular matters involving specific parties in which his
former law firm, or a client for whom he provided services in
the last year, is, or represents, a party. This recusal
obligation applies regardless of whether Mr. Noreika was
previously involved in the particular matter at issue. He has
not been granted any ethics waivers or exemptions related to
matters involving his work for previous clients.
The Office of Government Ethics (OGE) has made clear that
the current Administration's ethics pledge, like the previous
Administration's ethics pledge, does not apply to appointees
such as Mr. Noreika who are expected to serve on an interim
basis. Specifically, pursuant to OGE guidance, the Obama
administration and Trump administration pledges do not cover
``special Government employees,'' defined as employees or
officers who are expected to perform duties on fewer than 130
days within a 365-day period. This interim status does not
affect Mr. Noreika's responsibilities as Acting Comptroller.
Mr. Noreika intends to serve until a permanent Comptroller is
confirmed.
The Comptroller of the Currency is appointed by the
President, by and with the advice and consent of the Senate. On
June 6, 2017, the President nominated Joseph M. Otting to serve
in this position. We look forward to working with Members of
the U.S. Senate Committee on Banking, Housing, and Urban
Affairs in its consideration of Mr. Otting's nomination.