(Bloomberg) -- Treasury Secretary Steven Mnuchin will spare the department's markets room from an internal push to shutter or outsource an operation that was the agency's nerve center as it tried to contain the 2008 financial crisis.
The unit, staffed by about 10 career Treasury officials, came into the crosshairs of some of Mnuchin's senior advisers as the Trump administration tries to trim overall government spending, according to three people familiar with the matter.
But Mnuchin says he has no intention of closing down an office that gained stature a decade ago under Treasury Secretary Hank Paulson -- his former boss at Goldman Sachs Group Inc. The recent rout in share prices as bond yields became unhinged provides Mnuchin the perfect reason to keep the markets unit open.
“The markets desk is important to have,” Mnuchin said last week in an interview with Bloomberg News. “It allows us, in times of uncertainty, to monitor lots of things.”
Its value to the department was highlighted earlier this month when the S&P 500 plunged more than 6 percent in three days and a key volatility gauge surged to its highest reading in more than two years amid concerns that rising interest rates would drag on the economy. The markets room provided real-time debt pricing and looked for emerging trends -- such as a break higher in long-term Treasury yields, which can drive down risky assets.
Small Operation
The operation, with its roughly 10 Bloomberg and Reuters terminals, prepares daily briefings for Mnuchin and President Donald Trump on financial markets, can dive deep into particular regions or asset classes to help policy making, and is available around the clock.
The markets desk is small enough that it doesn't appear as a separate line item in the Treasury's budget. The costs are shared by the department's domestic finance and international affairs offices.
A proposal to outsource the operation also surfaced during the Obama administration but Treasury Secretary Jacob Lew, Mnuchin's predecessor, showed no interest in the idea.
The markets room was started in the 1990s, though its importance ebbed until Paulson revived it during the global financial crisis. Paulson wanted the ability to gather in-depth data on specific asset classes or regions, such as esoteric products like derivatives linked to mortgage-backed securities -- whose spiral in value helped triggered the near-global credit freeze.
Nerve Center for Crises
It was considered the nerve center of the department during the chaotic days of 2008 as officials tried to keep a lid on the unfolding mess in global financial markets. The team worked seven days a week, studying the capital structures of floundering banks and searching the debt and equities markets to see how investors were responding to the U.S.'s crisis.
Financial market veterans say the loss of the market's room would create risks for Treasury.
Treasury needs “access to people that have hands-on and good contacts across market sectors in the industry to keep them abreast of what's going on,” said Marty Mitchell, an independent strategist who has been working in the financial markets since the late 1980s and most recently as former head government bond trader at Stifel Nicolaus & Co. “But back when we were in the financial crisis that information was extremely valuable so they know how dire the situation is and how quickly they need to respond.”
Staff of 10
The markets room is now unlikely to be dismantled or outsourced to a private firm on Mnuchin's watch. Hiring a consultant to do the job could pose security risks, providing contractors with details of which asset classes and regions Treasury officials are focused on at a particular time.
Mnuchin has found other ways to cut costs. He has left open the department's No. 2 post, deputy secretary, and reduced staffing levels. He announced plans to cut the Office of Financial Research, a byproduct of the Dodd-Frank law, by a third.
Having about 10 people inside Treasury dedicated to the job in the markets room among 70,000 employees at Treasury is “a good investment,” he said.
During the recent market frenzy, Mnuchin said he spoke with executives at three of the larger banks, along with officials from the New York Federal Reserve, the Securities and Exchange Commission and Commodities and Futures Trading Commission. He checked his iPhone every few minutes for updates, even during his appearance at a congressional hearing on Feb. 6.
Mnuchin has called the volatility a correction, brushing aside investor concerns about rising prices. Markets have since calmed.
“People should actually take a lot of confidence in the fact that we could have this big of a correction and the system worked fine,” Mnuchin said.
To contact the reporters on this story: Saleha Mohsin in Washington at smohsin2@bloomberg.net, Liz Capo McCormick in New York at emccormick7@bloomberg.net.
To contact the editors responsible for this story: Alex Wayne at awayne3@bloomberg.net, Saleha Mohsin
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