Treasury secretary’s effort to calm the markets risks making a bad situation worse

Treasury Secretary Steven Mnuchin answered a question no one was asking.
(Mandel Ngan / AFP/Getty Images)

Treasury Secretary Steven Mnuchin looked to quash big-bank worries over plunging stock markets and reports that President Trump might try to oust his Federal Reserve chief by assuring the financial community Sunday that market liquidity was in good shape.

Some market participants wondered why Mnuchin answered a question no one was asking. Even after recent market losses, a liquidity squeeze or fresh financial crisis hadn’t been on the market’s mind. Mnuchin’s assertion of ample liquidity raised doubts.

And on Monday, Mnuchin is convening a call with the President’s Working Group on financial markets, a panel created in the aftermath of the 1987 crash.

“Nothing says ‘don’t panic’ like saying, ‘I’m calling the plunge protection team tomorrow,’ ” said Michael O’Rourke, JonesTrading’s chief market strategist. “That’s the type of event that’s going to startle markets and create more panic and fear when it’s meant to create confidence.”


Even with U.S. stock markets on the skids for weeks and the federal government in a partial shutdown since Saturday, many market watchers wondered whether there’s something more systemic going on.

Bigger issue?

“My initial instinct is this isn’t necessarily a positive thing, because it portrays that there’s worries that there is a bigger, broader issue than what I think is just typical repositioning toward the end of the year,” said Nathan Thooft, Manulife Asset Management’s head of global asset allocation.

“When you see it and investors look at it,” he said, “I don’t think they’re going to view it as, ‘Oh, this is the saving grace of what’s going to cause the catalyst to turn markets around.’ ”

Mnuchin’s phone calls — and announcement of a Monday meeting — capped a chaotic three days that started with another 2% lopped off the Standard & Poor’s 500 index and got a jolt from a Bloomberg News report that Trump was discussing firing Federal Reserve Chairman Jerome Powell.


Stocks slid again Monday. Shortly after 8 a.m. Pacific Time, the S&P 500 was down 1.3% and the Dow Jones industrial average had lost 1.4%. The tech-heavy Nasdaq composite fared a bit better, posting a loss of 0.5%.

The Treasury secretary moved to tamp down concerns that Trump would oust Powell. But it’s also clear that Trump is still concerned about the Fed chair.

Trump is trying to arrange for at least one intermediary to meet with Powell amid his anger over the central bank’s interest-rate increases, said a person familiar with the matter.

And on Monday morning, the president continued his campaign of blaming the nation’s central bank. “The only problem our economy has is the Fed,” he said on Twitter. “They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch — he can’t putt!”

‘Mnuchin isn’t helping’

Mnuchin issued a statement on Twitter on Saturday evening quoting the president as saying he wouldn’t fire Powell and disavowing authority to do so, which in itself raised eyebrows. Why, people wondered, did Mnuchin and not Trump — never shy with a tweet — make the statement?

“Mnuchin isn’t helping,” said Mayra Rodriguez Valladares, a former foreign-exchange analyst for the Federal Reserve Bank of New York. “For him to come out and explain what Trump is expressing is bizarre. It adds to the nervousness.”

Rodriguez Valladares, who also conducts training for bankers and regulators through her consulting firm MRV Associates Inc., said the suggestion of Trump firing Powell is unprecedented. “This is really making us look like a very underdeveloped market where the president is telling the central bank what to do,” she said.

Mnuchin’s move looks like a public relations stunt that may backfire, said Michael Antonelli, equity sales trader at Robert W. Baird.


“We saw a lot of selloffs in 2011, 2015-2016, and I don’t remember the presidents trying to convene the bank heads,” Antonelli said. “I’m worried the White House is going to make a mistake by exacerbating the market concern. Trump needs a political win, a PR that looks like he’s on top of the situation, and that’s what the weekend strikes me as.”

Echoes of financial crisis

A Treasury spokesman said Mnuchin initiated Sunday’s calls with the bankers because he felt that having conversations with major market participants, as well as holding the Working Group call, was prudent given considerable market volatility.

The group, which includes officials from the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission, was created after the 1987 U.S. stock market crash by an executive order signed by then-President Reagan.

The group worked overtime during the global financial crisis of 2008 — in October of that year, it issued a statement saying it was taking multiple actions to stabilize the financial system.

Some saw the Treasury’s response as adding to a sense of crisis.

“The secretary of Treasury calling the nation’s top bankers on a Sunday to confirm they have cash to lend. Not exactly confidence-inspiring,” said Ian Bremmer, president of the Eurasia Group.

“Personally, I take it as a huge negative,” said Scot Lance, managing director at California-based Titus Wealth Management. “He’s calling bank CEOs asking about their liquidity. That doesn’t make me feel all warm and fuzzy. The bottom line is, there’s a crisis going on right now and it was born I believe as a political crisis exclusively last February in a trade war. That’s turned into an economic crisis.”

Not everyone saw Mnuchin’s efforts as counterproductive.


“To me as a trader, that’s ruled out some tail risk,” said Ilya Feygin, senior strategist at WallachBeth Capital. “That’s better than nothing. They’re not going to say that banks are fine this week and announce that the banks are bust next week. Whether he’ll be able to appease the markets, we don’t know, but it’s very likely that the banks will rally. ... What else can you do in a situation like this? What he did was creative and clever.”

The banks

According to the Treasury Department, the CEOs Mnuchin spoke with on Sunday were: Brian Moynihan of Bank of America; Michael Corbat of Citigroup; David Solomon of Goldman Sachs; Jamie Dimon of JPMorgan Chase; James Gorman of Morgan Stanley; and Tim Sloan of Wells Fargo.

A spokesman for Goldman Sachs confirmed that Solomon spoke to Mnuchin but declined to provide further detail. Representatives of Citigroup, Morgan Stanley and Wells Fargo declined to comment.

A spokesman for JPMorgan Chase & Co., the nation’s biggest bank, who was contacted before Mnuchin’s tweet, also declined to comment. A representative from Bank of America didn’t immediately return a request for comment.