February 10, 2025 | As the first month of the Trump Administration ends, the deconstruction of the administrative state is accelerating. First rule: Personnel is policy. President Biden converted many of this political appointees to career positions, but the Trump Administration is moving to remove these employees.
Last summer before the November election, we described how a key weapon President Trump and other conservatives are using is Schedule F, a new federal job category established in October 2020 by Executive Order 13957. It allows federal agencies to convert certain civil service positions to Schedule F. This makes them at-will appointments and removes rights to appeal in the event of termination.
President Trump initiated Schedule F in 2020. The executive order was rescinded by President Joe Biden in 2021, but Trump immediately reinstated the EO after the election. Since then, Trump has idled or dismissed thousands of government workers. Thousands more have been given offers for early retirement. But suffice to say that the spoils system has returned to Washington and with it a certain level of operational chaos in the early days.
As with Trump I, the encore features a laser focus on loyalty by all Trump appointees and an unconstrained vision, to recall author Tom Sowell, when it comes to possible government action. Unlike Trump I, the new regime is prepared to take action in many more areas than court appointments with the support and blessing of the conservative establishment. And notice in particular how quiet and deliberate are the public workings of Trump II as it executes a classic conservative agenda and more.
Remember when Cantor Fitzgerald CEO Howard Lutnick told the New York Post that all those who worked on the Heritage Foundation Project 2025 would be "toxic" under Trump II? Not. By no coincidence, Luknick found himself marginalized and even subject to opportunistic attack by Washington conservatives for shocking lapses like conflicts of interest. Now Lutnick may look forward to a rewarding tenure heading the Commerce Department.
Treasury Secretary Scott Bessent has emerged as the adult in the room in Trump II, a steady and reasonable counterweight to the swirl of ideas and political rhetoric erupting from the White House. Bessent has rightly said that short-term interest rates are the Fed’s problem, but LT interest rates are the Treasury’s problem. Show progress on the fiscal side in terms of reducing the deficit and LT interest rates will fall, but so far long rates have risen. Growing political noise is continuing to push reserve asset managers increasingly into gold, says Katie Martin at the FT.
Despite the burgeoning fiscal deficit, global demand for short-duration risk free assets remains brisk and will reward any real progress made by the DOGE team under Elon Musk (h/t Eko). There is huge potential upside for the Trump Administration in any reductions in scheduled Treasury debt issuance in terms of falling LT interest rates. Given the tightness in corporate debt and other markets, Secretary Bessent may be able to deliver some early wins for the Trump White House as federal cash outlays fall as a result of DOGE excavation inside the federal government. And falling LT rates directly impact political priorities such as home affordability.
Upon Bessent’s confirmation by the Treasury, President Trump made him acting head of the Consumer Financial Protection Bureau and promptly ordered the entire agency to stand down. Whereas the CFPB tormented lenders with unnecessary fines and sanctions at the behest of Senator Elizabeth Warren (D-MA), today the agency is essentially shut down. Look for legislation to change the CFPB into a traditional Washington agency or eliminate the CFPB entirely. Note: Hundreds of corporate lawyers face unemployment as a result.
The policy agenda in Trump II is clearly informed by the conservative community in Washington, but the unconstrained view allows for literally any possible outcome. President Trump picked Jason De Sena Trennert, a respected Wall Street investment advisor, for a senior Treasury Department role overseeing financial market policy. Trennert is another adult in the room who will ultimately need to defend his agency, but meanwhile politics is the order of the day.
“President Donald Trump has renewed calls to end a popular Wall Street tax break,” reports Kate Dorr at CNBC. “The ‘carried interest loophole’ refers to favorable tax treatment for certain compensation received by private equity, venture capital and hedge-fund managers.”
Getting rid of the hideous carried interest tax exemption is good politics and Trump knows it. By pushing for an end to lower taxes for deserving private equity executives, Trump outflanks the Democrats politically and gains a big stick to use with Wall Street in other discussions. Do the big PE firms and Buy Side funds want to fight the White House on carried interest? Maybe. Do the Big Banks care? Not really. They have more important things to consider.
As Trump and his DOGE team struggle to cut federal spending by subjecting discretionary programs to a zero budget test much beloved by Elon Musk, folks in the financial sector are beginning to wonder if certain parts of the government apparatus will continue to function. Droves of government employees are leaving Ginnie Mae, for example, making some wonder if new issuance of mortgage backed securities will continue. HUD legal has told Ginnie Mae issuers, of note, not to present any new agreements for legal review.
As with Trump I, the world of banking and housing finance are not particular priorities for the White House, but that does not mean there is inaction. While Bill Ackman and other investors are still hoping to see the GSEs released from captivity, in fact the larger mortgage issuers are arguing privately to the White House that we should eliminate Fannie Mae and Freddie Mac entirely and move the guarantee function for all residential mortgages to Ginnie Mae.
The Trump Administration knows that releasing the GSEs from conservatorship is bound to be a political fight. Handing the entire residential mortgage industry to the banks and large nonbank issuers may be an easier lift, especially when done in the name of reducing risk to the taxpayer. In the grand scheme, the banks and independent mortgage banks (IMBs) that dominate housing finance have a lot more to gain by doing away with the GSEs.
Of course, a deal with the banks and IMBs to kill the GSEs would include a way for agency MBS to remain risk free assets by paying an annual fee to Treasury. But as we’ve noted previously, when we unbundle the MBS insurance function from the two GSEs, the remaining business is limited and frankly not particularly attractive as an investment. From a conservative political perspective, eliminating the GSEs and putting all subsidized housing activity into the Federal Housing Administration makes a lot of sense.
In the free-for-all of Washington today, we do not exclude any possibility that delivers fiscal savings and also brings positive political attention to President Trump and his administration. As readers of The Institutional Risk Analyst ponder events in coming days and weeks, remember not to confuse political bluster with calculated change.
The President needs explosive headlines, like Trump's idea to build resorts in Gaza, to maintain the roar of disapproval that is his political capital. He needs to fight. Fighting with countries is more fun that baiting pathetic Democrats. But President Trump does want to destroy much of the progressive political apparatus in Washington dating back to the New Deal.
President Trump's actions are very considered and informed by the community of conservatives in Washington who have waited decades for this opportunity. If anything, the business community still does not appreciate the breadth and scope of the changes underway and in prospect in government under Trump II. We'll be describing the brave new world of Donald Trump in coming months.
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