Trump’s Treasury Pick Moves in Secretive Hedge Fund Circles

Matthew Goldstein and Alexandra Stevenson
Steven Mnuchin, Treasury secretary nominee for president-elect Donald Trump, stands in the elevator at Trump Tower in New York, U.S., on Wednesday, Dec. 7, 2016.
John Taggart | Bloomberg | Getty Images

As a hedge fund manager, Goldman Sachs trader and bank chief executive, Steven T. Mnuchin has long been a member of the financial elite.

Yet even on Wall Street he was not widely known before Donald J. Trump chose him to be his campaign fund-raiser last spring.

Now, Mr. Mnuchin is on a path to become the first hedge fund manager to head the Treasury. As befitting that closed-door world of finance, Mr. Mnuchin's record shows a willingness to take on risks and a penchant for secrecy that members of both parties expect will be a focus of his Senate confirmation hearing.

A case in point is a Delaware company that he owns, Steven T. Mnuchin Inc., whose existence has not been reported outside of official records.

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Mr. Mnuchin set up the company months before Goldman went public in May 1999. It had a Goldman mailing address and at least one Goldman director. It stayed that way years after he left the Wall Street bank in 2002 to start his hedge fund career.

Its purpose is a mystery. The only clue is in a description on corporate filings in Delaware calling the entity an "investment in partnerships."

Barney Keller, a representative for Mr. Mnuchin, said the company "held small legacy Goldman Sachs investments" and "hasn't made any new investments since 2002."

Over the course of his career, Mr. Mnuchin, 53, has kept a low profile and has rarely granted interviews. His one previous spell in the limelight was when he ran OneWest Bank.

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He and other deep-pocketed investors cobbled together the California bank out of the wreckage of IndyMac, a lender that the federal government seized in 2008 as the financial crisis grabbed hold of the nation. His tenure at OneWest spurred controversy because tens of thousands of borrowers — many of them older people — were foreclosed on.

When a group of protesters gathered outside his Los Angeles house in October 2011 to voice their anger at OneWest's foreclosure practices, police officers were called to disperse the crowd. He responded later by periodically scrubbing the internet of any reference to his home address to protect the privacy of his three young children, according to a filing Mr. Mnuchin made in a 2014 divorce proceeding.

He is more comfortable in his own element — wealthy hedge fund managers like himself.

Days after being tapped by Mr. Trump to be his finance chairman in May, Mr. Mnuchin flew out to a hedge fund conference at the Bellagio hotel in Las Vegas. There, in a swirl of rock concerts, pool parties and casino nights, he schmoozed with billionaires.

Mr. Mnuchin dined with Kenneth C. Griffin, the Chicago hedge fund titan, and government veterans like David H. Petraeus, the former C.I.A. director and retired general, and John A. Boehner, the former House speaker. He shook hands with Leon Cooperman, a 73-year-old pioneer in the industry and another Goldman Sachs alumnus.

The courting paid off: Not long after the hedge fund conference, Mr. Mnuchin helped bring the billionaire investor John A. Paulson on as a donor, as well as Wilbur L. Ross Jr., now Mr. Trump's commerce secretary nominee.

It is these ties, however, that are expected to be fertile ground of investigation for senators who must confirm his selection as Treasury secretary.

"I think he would be controversial — former Treasury secretaries have been top bankers and businessmen or lawyers and they were well-recognized top leaders in their professions," said Prof. Richard Sylla at the Stern School of Business of New York University, whose research focuses on financial history and economics. "But Mnuchin wasn't that famous as a Goldman Sachs guy, and probably not even as a hedge fund guy, so why is he there? Well, he took the job of raising money for Trump."

Mr. Mnuchin shares a network with some of the biggest names in the $3 trillion hedge fund industry, but his work with Mr. Paulson is of particular interest.

An adviser to Mr. Trump, Mr. Paulson, who is best known for making a $15 billion wager that the housing market would collapse, has managed some money for the president-elect.

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The day after Mr. Trump formally selected him, Mr. Mnuchin said that the government should get out of the business of running Fannie Mae and Freddie Mac, the two giant mortgage finance firms that the federal government bailed out in 2008. The shares of the two companies soared in response to his words — some of the sharpest one-day gains for the stocks since the government conservatorship began.

The seemingly off-the-cuff declaration was cheered by hedge fund managers and others who have bet big on the privatization of Fannie and Freddie. One of Mr. Paulson's bigger bets is that the federal government will return Fannie and Freddie to private investors largely unfettered.

And Mr. Mnuchin's remark may have benefited someone else: Mr. Trump has invested $3 million to $15 million with Mr. Paulson's hedge fund, according to the financial disclosure statement filed during his run for president.

To date, the Trump transition team has not commented on whether Mr. Trump continues to own stakes in Mr. Paulson's firm and other hedge funds listed on the disclosure statement. "We're not sharing any additional information at this time," said Jason Miller, a Trump representative.

The president-elect has said that he will announce a plan for separating himself from his many business interests before his inauguration on Jan. 20. Similarly, Mr. Mnuchin will have to file financial disclosures with the Senate Finance Committee before his confirmation hearing. On Monday, he began the process by filing three years of tax returns.

Mr. Mnuchin's time at his hedge fund, Dune Capital Management, which he formed with two former Goldman colleagues in 2004, is one area that the Senate Finance Committee is expected to examine more closely.

At its peak, the firm had roughly $2 billion and was backed by the billionaire investor George Soros. It had a taste for real estate, movie financing deals and exotic investments including life insurance policies, which Dune bought through a third party at discounted prices from cash-poor older Americans.

Dune had plans to package the insurance policies — called life settlements — into bonds that could be sold to investors. Life settlements represent one of the most macabre actuarial bets that Wall Street has dreamed up. It's a wager that the elderly person selling the policy will die sooner rather than later, meaning the hedge fund does not have to make many premium payments to keep the insurance policy in force and collect the payout upon that person's death.

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But the market for life settlements largely collapsed during the financial crisis.

Eventually, Dune, like many hedge funds during the worst of the crisis, faced investor withdrawals. Mr. Mnuchin and one of his co-founding partners, Chip Seelig, decided to wind down the operation. The real estate arm of Dune was spun off into a firm led by Dune's third co-founder, Daniel M. Neidich.

After the split, Mr. Mnuchin and Mr. Seelig set up shop in Southern California. Both became big players in movie financing, lending money to hits like "Avatar" and "Gravity" along with flops like "In the Heart of the Sea."

But it was the deal for a failed California bank, IndyMac, that contributed mightily to Mr. Mnuchin's personal fortune and the one deal that has created the most political heat. On Friday, Senate Democrats, in a sign that they intend to go hard after Mr. Mnuchin, set up a website that calls him the "foreclosure king," and asked customers of OneWest to submit complaints in advance of the confirmation hearing.

In late 2008, Mr. Mnuchin joined with Mr. Paulson to put together the OneWest deal. They were part of the initial round of bidding for the assets of IndyMac, which the Federal Deposit Insurance Corporation had seized that summer. The group, which also included Mr. Soros and other investors, won the deal with a $1.55 billion bid.

One of the competing bids was put together by J. Tomilson Hill, head of the Blackstone Group's hedge fund and asset management group, and Goldman.

"As a deal person, I had nothing but admiration for how entrepreneurial he was and how quickly he adapted to the circumstances," Mr. Hill said in a recent interview. He was one of the first to call Mr. Mnuchin to congratulate him on his new job as campaign finance chairman.

The remnants of IndyMac reopened under the name OneWest with Mr. Mnuchin as chairman and chief executive. But controversy followed, including complaints over foreclosures on soured mortgages that IndyMac had written before the crisis. In particular, it drew scrutiny for its business in reverse mortgages — products pitched to older people who had paid off their initial mortgages but needed cash.

The Department of Housing and Urban Development is investigating complaints about the foreclosure practices of OneWest's reverse mortgage business, which resulted in 16,000 foreclosures alone.

CIT Group, which merged with OneWest last year in a $3.4 billion deal that provided a hefty payout for Mr. Mnuchin and his co-investors, has said it is trying to resolve the HUD inquiry. It is also dealing with a $230 million charge the company said in July it had to take in connection with accounting issues from the reverse mortgage business.

An analysis in 2015 presented by the California Reinvestment Coalition, which lobbied against the merger, found that 68 percent of the 36,000 foreclosures in California by OneWest, including those on reverse mortgages, occurred in communities that were primarily nonwhite. A government filing shows OneWest offered to modify about 101,000 mortgages for its customers.

Mr. Mnuchin stepped down from the helm of OneWest in March, not long before he became among the first in finance to come out for Mr. Trump and against Hillary Clinton. Mr. Keller said Mr. Mnuchin was "proud of his record at OneWest."

Still, the worlds of finance and politics can be small ones, and Mr. Mnuchin even has a connection to Mrs. Clinton. The in-house accountant at Goldman who prepared a tax filing for Steven T. Mnuchin Inc. many years ago has among her clients, at her current accounting firm, the former Democratic presidential candidate.