With President-elect Donald Trump promising to spend as much as half a trillion dollars on infrastructure and slash taxes - initiatives that could add dramatically to the U.S. debt and balloon the budget deficit - Wall Street is far more focused on who will next head the U.S. Treasury than it was in the previous selection process under President Barack Obama.
Unlike current Secretary Jacob Lew, who assumed the role in early 2013 with little fanfare and has operated largely in the background, the next Treasury chief is expected to be a featured player in articulating and executing the Trump administration's economic policies and initiatives.
"You need somebody who has the experience and the knowledge and understands the gravity of the position," said Richard Bernstein, chief executive of Richard Bernstein Advisors LLC, an asset management firm. "It's a huge position. It has implications not only for the U.S. economy but also the global economy."
Among a handful of possible contenders, former Goldman Sachs banker and Hollywood movie financier Steven Mnuchin, who served as Trump's campaign finance chairman, is seen as front runner.
"He knows financial markets very well," said Joachim Fels, a managing director and global economic advisor at Pimco. "I think it's interesting that he also has experience outside of financial institutions, the movie industry."
Others in the mix, according to published reports, include JP Morgan Chase & Co. Chief Executive Jamie Dimon and U.S. Rep. Jeb Hensarling of Texas.
Both Mnuchin and, in particular, Dimon, who heads the largest U.S. bank and the biggest bond dealer, are seen well equipped to manage the relationship between Washington and the banks that facilitate the trillions of dollars of borrowing required of the next administration.
Under Obama, the U.S. debt has nearly doubled to $19.6 trillion from about $10.7 trillion. Under Trump's stimulus proposals, that could grow quickly, as would the federal budget deficit, which has actually shrunk by about two thirds during Obama's tenure.
"It's very likely that we get rising fiscal deficits, at least initially," Pimco's Fels said. "I think this administration, like all administrations, will need the bond community."
Hensarling, who was just elected to an eighth term in his district east of Dallas, would not have such deep Wall Street ties. A noted deficit hawk and a critic of the wave of financial regulation enacted after the 2008 financial crisis, his private-sector experience has not been in finance. In fact, most of his interaction with Wall Street has come through his role as chairman of the House Financial Services Committee.
CLEAR ON POLICY
The last Wall Street insider to serve in the post was Henry Paulson, a former head of Goldman Sachs who was appointed by George W. Bush in 2006 and whose term was dominated by navigating through the financial crisis. He was succeeded in 2009 by Timothy Geithner, who moved into the post from running the Federal Reserve Bank of New York and worked extensively with Paulson during the crisis.
Wall Street is keen to avoid an appointment that resembles either of Paulson's two immediate predecessors, John Snow and Paul O'Neill.
The two Bush appointees ran large industrial corporations before taking over Treasury and lacked deep experience in financial markets. Snow was CEO of railroad CSX Inc. and O'Neill ran aluminum producer Alcoa Inc..
Both are viewed to have struggled to enunciate the Bush administration's policy preferences on issues key to investors, such as the strength of the dollar, the world's main reserve currency.
"You go back to Bush with his Treasury secretaries," said Gregory Peters, senior investment officer at Prudential Fixed Income, said Tuesday at the Reuters Global Investment Outlook Summit in New York. "The markets hated them."
"O'Neill every other week had a different dollar policy," Peters recalled.
One relationship important to Wall Street is how the Treasury secretary interacts with and accepts advice from the Treasury Borrowing Advisory Committee, or TBAC. The panel of executives from Wall Street's biggest bond dealers and fixed-income investment managers meets with Treasury four times a year to advise on the scope and make up of the hundreds of billions of dollars in Treasury bonds, notes and bills issued by the U.S. government each year.
It was on TBAC's recommendation, for instance, that the Treasury opted to issue more long-term debt in recent years and to introduce new securities, such as floating rate notes, to diversify the pool of potential Treasury buyers.
"Although these may sound like mundane, technical policy considerations, the U.S. Treasury market is the most important market in the world," former TBAC chairman Matthew Zames wrote to Lew in his departure letter earlier this year.
"Its orderly operation is critical for financial markets to operate and investors rely on U.S. government securities as a safe haven in during uncertain times," wrote Zames, who is chief operating officer at JP Morgan. "Even small changes in rates can result in significant direct costs or savings to taxpayers, and changes in Treasury yields can also influence rates on other financial instruments, impacting investors and consumers around the world."
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