On a muggy morning in July 2008, hundreds of customers stood
outside IndyMac Bank branches in Southern California, trying to
pull their savings from the lender, which was doomed by losses on
risky mortgages.
Steven Mnuchin didn't know much about IndyMac as he watched the
scenes on CNBC from his Midtown Manhattan office. But he
immediately saw an opportunity and began figuring out how to buy
the bank.
Regulators seized IndyMac, foreshadowing a vicious banking
crisis. Six months later, Mr. Mnuchin and his investment partners
acquired IndyMac with a helping hand from the U.S. government. The
deal eventually earned him hundreds of millions of dollars in
personal profits.
The former Goldman Sachs Group Inc. partner, Hollywood financier
and hedge-fund manager now is President-elect Donald Trump's choice
for Treasury secretary. Like other Trump cabinet picks, Mr. Mnuchin
has a ré sumé that is at odds with much of the president-elect's
populist rhetoric on the campaign trail.
Mr. Trump is building a cabinet that combines traditional
Republican Party leanings with unconventional elements, including
people who made their fortunes by taking big investment risks.
IndyMac was the defining deal of Mr. Mnuchin's career. He knew that
the government needed to sell the failed bank—and he played
hardball.
In an interview Tuesday before word leaked he was Mr. Trump's
choice, Mr. Mnuchin said he is proud of the transformation at
IndyMac, based in Pasadena, Calif. "We turned around a huge
economic disaster," he said.
Mr. Mnuchin, 53 years old, has no experience in government or
running a large organization, though he was a campaign loyalist and
fundraiser for Mr. Trump. Mr. Mnuchin's political views are a
secret even to some of his associates. If confirmed by the Senate,
the defining traits he will bring as the 77th Treasury secretary
include a Wall Street pedigree, long relationship with Mr. Trump,
and a history of moving fast to seize opportunities that might
terrify others.
In the interview, Mr. Mnuchin said the new administration's goal
would be to achieve annual economic growth of 3% to 4%. He said his
top policy priorities would be to overhaul the federal tax code,
roll back certain financial regulations, review trade agreements
and invest in infrastructure.
Mr. Mnuchin is regarded within the Trump transition team's inner
circle as a skilled team player. Mr. Trump's advisers say Mr.
Mnuchin will fuse traditional Republican Party support for lower
taxes and less regulation with the president-elect's populist
stances on trade and infrastructure.
"Trump, like Ronald Reagan, would go outside of the box," Mr.
Mnuchin said in the interview Tuesday. He said Mr. Trump won't
hesitate to call up corporate chiefs to lean on them about jobs,
factory closures and other matters.
The IndyMac deal will likely be a feature of Mr. Mnuchin's
confirmation process. Sen. Ron Wyden, the top Democrat on the
Senate committee that will hold hearings on the proposed
appointment, said Tuesday that Mr. Mnuchin has a "history of
profiting off the victims of predatory lending."
Foreclosures on the homes of delinquent IndyMac borrowers
sparked protests outside Mr. Mnuchin's mansion in the Bel Air
neighborhood of Los Angeles. The bank, which was renamed OneWest
Bank and is now part of CIT Group Inc., is under civil
investigation by the Department of Housing and Urban Development
for loan-servicing practices.
CIT said it is "committed to fair-lending and works hard to meet
the credit needs of all communities and neighborhoods we
serve."
Mr. Mnuchin, whose father spent his entire career at Goldman,
came of age on Wall Street in the 1980s as the business of slicing
loans into securities was booming. As a mortgage banker at Goldman,
he saw the savings-and-loan crisis and efforts by the government to
wind down hundreds of insolvent financial institutions.
Colleagues recall Mr. Mnuchin's ability to quickly weigh the
risks involved in particular trades. He made partner in 1994 and
oversaw Goldman's mortgage-trading desk before becoming chief
information officer.
Dinner parties
Like other partners, he earned tens of millions of dollars when
Goldman became a publicly traded company in 1999. He bought a
6,500-square-foot apartment in a famous Park Avenue building.
Messrs. Mnuchin and Trump were soon in the same philanthropic and
social circles, attending dinner parties at each other's Manhattan
homes and mingling at the U.S. Open tennis tournament and the
Metropolitan Museum of Art Gala.
The reserved Mr. Mnuchin never struck colleagues as a political
animal but contributed regularly to political campaigns, records
show.
In the interview, he said he has been a registered Republican
for "as long as I can remember," yet he also gave a total of $7,400
since 2000 to Democrat Hillary Clinton's campaigns.
Mr. Mnuchin donated to the campaigns of Democrats Barack Obama,
John Edwards, John Kerry and Al Gore. The only Republican
presidential candidate Mr. Mnuchin gave money to was Mitt Romney in
2012.
In 2002, Mr. Mnuchin left Goldman and wound up running an
investment fund set up by billionaire investor George Soros. Mr.
Soros was a big contributor to the super PAC backing Mrs. Clinton
in her unsuccessful presidential campaign this year and has donated
to other groups supporting Democrats.
Mr. Mnuchin and two former Goldman colleagues struck out on
their own in 2004 with a new hedge fund, Dune Capital Management
LP, which received financial backing from Mr. Soros. Mr. Mnuchin
soon steered Dune into the business of financing Hollywood films,
which began to elevate his public profile. He also was part of a
group that lent money to Mr. Trump for a Chicago condominium
project.
When IndyMac unraveled in 2008, the images of customers lined up
around corners and across parking lots became an enduring symbol of
the financial crisis. Federal Deposit Insurance Corp. officials
descended on IndyMac's headquarters on July 11 and shut down the
bank.
It was the second-largest bank failure of the crisis, surpassed
only by Washington Mutual Inc. in September 2008.
Federal officials expected to suffer as much as $8 billion in
losses from IndyMac. That left regulators looking for someone to
take over the bank and mitigate the damage. Speed was essential,
since the FDIC was bracing for a wave of additional bank
failures.
Mr. Mnuchin assembled an all-star cast drawn from his years on
Wall Street, including Mr. Soros, hedge-fund manager John Paulson,
billionaire Michael Dell's investment firm and several former
Goldman executives, including J. Christopher Flowers. They signed
up on the basis that Mr. Mnuchin would personally run the bank,
according to people familiar with the matter.
By now, he knew that few bidders would be willing to buy all the
failed bank's assets. And he knew he was taking a giant risk.
At the end of 2008, Mr. Mnuchin persuaded the FDIC to sell
IndyMac for about $1.5 billion. The deal included IndyMac branches,
deposits and assets. The FDIC also agreed to protect the buyers
from the most severe losses for years. That loss-sharing
arrangement turned out to be a master stroke.
Mr. Mnuchin threw himself into managing IndyMac, where he became
chairman and chief executive of the parent company. He moved from
New York to California. To accomplish his goal of a quick
turnaround, Mr. Mnuchin needed to deal with IndyMac's bad mortgages
and other assets, a job made easier by the FDIC's agreement.
Mr. Mnuchin set out to refashion OneWest as a plain-vanilla
lender that eschewed the unconventional mortgages that got IndyMac
in trouble. It was a major provider of Alt-A loans, a category
between prime and subprime that often involved borrowers who didn't
fully document their income or assets.
He began scouting opportunities for OneWest to buy other small
lenders. Before long, OneWest had doubled the number of branches
that IndyMac had when it failed. OneWest often paid more than other
banks for deposits, helping it attract new customers while interest
rates were unusually low.
Sharing the losses
Banks often go out of their way to avoid losses, even when
borrowers are in violation of loan terms. The loss-sharing
agreement took away some of the disincentives, since future losses
would be borne partly by the government.
In October 2011, dozens of activists gathered outside his
mansion to protest OneWest's evictions, waving signs and shouting
angry slogans. Mr. Mnuchin has said he was rattled, and OneWest
agreed to pay for security services at his home.
Mr. Mnuchin said Tuesday it was "unfortunate that anyone was
foreclosed, [but] all these loans were originated under previous
management."
In 2013, OneWest had more than $300 million in profits, nearly
equal to what IndyMac earned in 2006. It had a loss of $767 million
in the first half of 2008.
Mr. Mnuchin's next step was to sell. He toyed with the idea of
taking OneWest public. Then a better option came along. Another
Goldman veteran, former Merrill Lynch & Co. Chief Executive
John Thain, had taken over commercial lender CIT Group Inc. and was
trying to fortify its finances. OneWest was a source of stable
deposits.
In July 2014, CIT agreed to buy OneWest for $3.4 billion, a
bounty of more than $3 billion, including dividends. Mr. Mnuchin's
take was several hundred million dollars, according to a person
familiar with the matter. He stayed on at CIT.
After the sale, newly discovered accounting problems forced CIT
to take a $230 million charge.
It inherited another problem from nearly $40 million of loans
OneWest made in 2014 to struggling film studio Relativity Media
LLC, in which Mr. Mnuchin was a big investor through his Dune
Capital hedge fund.
Relativity filed for bankruptcy less than a year later, and CIT
struggled to get the loans repaid. A film-financing company that
also was owed money by Relativity accused OneWest of getting
favorable repayments because of Mr. Mnuchin's dual roles at the
bank and the studio. He declined to comment.
Mr. Mnuchin left CIT amid a management shake-up announced last
year, receiving a $10.9 million severance payment. His exit came
just as Mr. Trump's bid for the Republican nomination was gaining
momentum. "The timing worked out well," Mr. Mnuchin told The Wall
Street Journal earlier this year.
Before formally launching his presidential bid, Mr. Trump turned
to Mr. Mnuchin for advice over dinner. Mr. Mnuchin helped write a
tax-cutting plan and tried to rein in some of Mr. Trump's populist
rhetoric, including his vow to not "let Wall street get away with
murder," people familiar with the matter said.
"I don't think he has negative views on Wall Street," Mr.
Mnuchin said of Mr. Trump in the earlier interview.
When Mr. Trump delivered his victory speech after the New York
primary in April, Mr. Mnuchin stood behind him and took photos of
the crowd with his cellphone. The next morning, Mr. Trump asked if
he would consider taking the role of national finance chairman, an
operation that had previously relied largely on Mr. Trump's own
bank account. Mr. Mnuchin agreed.
Mr. Mnuchin had no previous experience in political fundraising
and the finance operation endured early setbacks. It eventually got
on track.
Mr. Mnuchin, who divorced his second wife in 2014, brought his
fiancé e, Scottish actress Louise Linton, on the Trump campaign
plane, where she got to see a draft of one of his foreign-policy
speeches, she wrote in an Instagram post.
Since Election Night, Mr. Mnuchin has been commuting from Los
Angeles to New York and has been a regular presence inside Trump
Tower as the president-elect works on the transition team.
Mr. Trump's financial agenda, which Mr. Mnuchin would lead as
Treasury secretary, has ignited a broad stock-market rally. CIT
shares are up about 13%, increasing the value of Mr. Mnuchin's
stake by about $11 million. It is now worth more than $100
million.
Nick Timiraos and Damian Paletta contributed to this
article.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com,
Anupreeta Das at anupreeta.das@wsj.com and Rebecca Ballhaus at
Rebecca.Ballhaus@wsj.com
(END) Dow Jones Newswires
December 01, 2016 08:05 ET (13:05 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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