Mnuchin's Senate Testimony Eclipsed by Trump's Comey Saga

(Bloomberg) -- Steven Mnuchin will be overshadowed during his first congressional testimony as Treasury secretary on Thursday by a deepening political crisis at the White House that threatens his aspirations for tax and regulatory overhauls.

President Donald Trump’s firing of FBI director James Comey and the aftermath is beginning to color all business in Congress, especially after the emergence on Tuesday of a memo Comey wrote in which he said Trump tried to end an investigation of links between his associates and the Russian government. Democrats have raised the specter that Trump attempted to obstruct justice, an impeachable offense.

Mnuchin’s testimony before the Senate Banking Committee was previously scheduled, and he is unconnected to the Comey controversy. In his prepared remarks, the Treasury secretary focused on familiar administration goals of easing Wall Street regulations, passing what he’s called an historic tax overhaul and revisiting trade deals. But the questions he faces -- especially from Democrats -- will likely venture into less comfortable topics.

Democrats may ask Mnuchin whether he’s loyal to the president or to the country, after reports -- denied by the White House -- that Trump asked Comey for his personal loyalty at a private White House dinner in January. Senator Sherrod Brown, an Ohio Democrat, declined to say whether he’d ask Mnuchin about his loyalty. He doesn’t want the secretary to prepare an answer, he said.

Outraged Democrats

The committee’s Democrats demonstrated their outrage over the unfolding Comey saga on Tuesday during a nomination hearing for lower-level Treasury appointments. Senator Brian Schatz of Hawaii asked the nominees where their loyalties lay: with the American people and the law, or the Republican party and the White House. Brown professed shock that he and his colleagues felt obligated to pose the question.

“I hope you’re not put in that position but the first 120 days or so of this president suggests that you might be,” Brown said.

Democrats also asked the nominees if they knew whether Russian President Vladimir Putin owns assets in the U.S.

“There may come a time when you’re asked to do something that is not in the interest of the American people and that is not in the interest of our checks and balances system in the Constitution and that will in fact jeopardize our national security,” Senator Heidi Heitkamp, a Democrat from North Dakota, warned the nominees at Tuesday’s hearing.

Senator Mark Warner, a member of the banking panel and senior Democrat on the Intelligence Committee, said he will withhold support for the nominee for Treasury’s undersecretary of terrorism and financial intelligence unit, Sigal Mandelker, until the agency’s criminal investigation office provides documents related to Trump and his team’s dealings with Russia. The Intelligence Committee is probing ties between the president’s associates and the Russian government.

Jeopardized Agenda

Mnuchin’s prepared testimony reiterates Trump’s economic agenda of overhauling the tax code, slashing government regulations and emphasizing to other countries that trade deals must be fair to American workers, according to a copy obtained by Bloomberg News.
He said about 100 people at the Treasury are working on tax policy with the goal of coming up with a plan that brings relief to the middle class and makes U.S. companies “competitive again.”

On financial rules, Mnuchin said the Treasury is preparing an initial report that will focus providing relief for community banks, while laying out recommendations for making making regulations “more efficient, effective and appropriately tailored.” The study was triggered by an executive order Trump signed in February that ordered a review of Obama-era rules, kicking off what’s expected to be a broad rewrite of regulations enacted under the 2010 Dodd-Frank law.

Volcker Rule

As head of the Financial Stability Oversight Council, Mnuchin has already directed key agencies to re-examine what’s permitted under the Volcker Rule, according to people familiar with the matter. The provision, widely despised on Wall Street, bars banks from wagering on markets with their own capital. Mnuchin didn’t mention the rule in his prepared testimony.

Mnuchin plans to tell lawmakers that it’s a priority to figure out what to do with Fannie Mae and Freddie Mac, the mortgage-finance giants that have been under government control since the 2008 financial crisis.

“This has been an unresolved issue for far too long and one we are committed to fixing,” he said in his prepared remarks. “We will ensure that there is both ample credit for housing and that we do not put taxpayers at risk.”

Accomplishing any of Trump’s economic goals will require political capital that’s rapidly being spent on managing tumult at the White House.

“The longer the political turmoil lasts, the more risk it will present to banks and housing,” said Jaret Seiberg, an analyst for Cowen Group Inc.

The U.S. stock market, which had rallied to record highs since Trump was elected in November, suffered a steep drop on Wednesday as doubts grew about the administration’s ability to achieve its legislative goals. The Dow Jones Industrial Average fell 1.8 percent, while the dollar dropped for a sixth straight day and Treasury 10-year yields tumbled.