WHEN: Today, Tuesday, May 7, 2024
WHERE: CNBC’s “Squawk on the Street”
Following is the unofficial transcript of a CNBC interview with Liberty Strategic Capital Founder & Managing Partner and Former United States Treasury Secretary Steven Mnuchin on CNBC’s “Squawk on the Street” (M-F, 9AM-11AM ET) today, Tuesday, May 7 from the 2024 Milken Institute Global Conference. Following is a link to video on CNBC.com:
All references must be sourced to CNBC.
DAVID FABER: Joining me now is Steven Mnuchin. He’s the former Treasury Secretary of the United States. Nice to see you.
STEVEN MNUCHIN: Nice to see you as well. Good to be here.
FABER: We’ve been talking a bit lately and we’re happy to be able to do that with you. NYCB, not that long ago, and then followed up by an interview you did when you said, somewhat unexpectedly, you were at least looking for an investor group or put together a group to buy TikTok. I wanted to start there if we could, given it is now on pace to be banned. The legislation has been signed. Where are you in your efforts to potentially be there should there be an opportunity to buy the assets outside of China?
MNUCHIN: Well, we’re still very interested in buying it. We’re investing in it because it may not be a purchase. It could be a spinoff and investing in it, which would keep the existing investors, but dilute down the Chinese ownership. We’ve spent a lot of time with technology companies. We think, given the year, it can be rebuilt. So it can be separated for ByteDance’s technology. And if the company wants to pursue, we’re very interested. But the problem is, if they’re going to pursue litigation and that takes six months, it will inevitably end up with too short of a period of time to rebuild the technology.
FABER: Well, why? I want to understand the timeline there, because it has a year. Could you not potentially agree to some sort of a deal during the course of that where you would have an opportunity to rebuild the algorithm, the source code, so to speak? I don’t understand why the litigation would interfere.
MNUCHIN: Well, the best outcome would be if they’d agreed to do a deal now.
FABER: Right.
MNUCHIN: And you’d have a year to rebuild the technology, which I think would be a major effort, but could be done. But my concern is if they spend six months litigating and then they decide to do a deal, and there’s almost — there’s only six months left, it’s just impossible to build the technology in that time.
FABER: I see. I’m sorry. I understand now. Well, they do seem — I mean, let’s go to the Chinese here. It’s always difficult to know, and you would certainly be in a better position, given you have a lot more history in terms of understanding the communications from that country – but it doesn’t appear they’re particularly interested in allowing ByteDance to sell or spin off the asset. Is that your understanding?
MNUCHIN: Well, they’re clearly not interested in giving an export license on the critical technology, which is the algorithm. And that’s why our premise has been we’d have to disconnect it and we’d have to rebuild it ahead of time. So from a technology standpoint, I think we could do it without the license. From a political standpoint, it’s obviously a more difficult political situation now that the law has been passed.
FABER: You also mentioned something, though, about a potential spin where then you would dilute the existing owners of ByteDance, I guess, who would be part owners of the spin but come in as additional capital. Is that something you’ve discussed as a possibility?
MNUCHIN: It is something I’ve discussed. I think it’s actually the best way to do it because there is 60% foreign ownership now. And I think many of those investors would like to stay in. So it doesn’t have to be a complete sale. It just has to be disconnected from ByteDance. And it needs to get the Chinese ownership below 20% to comply with the law.
FABER: Is there interest in buying it without the source code? In other words, just for the user base with the idea that, I don’t know, somehow it could be powered in some way and then over time you can rebuild it, as you say?
MNUCHIN: Well, I think if it goes dark, it won’t have a lot of value. So I think as it relates to the source code, there’s got to be some mechanism that you can run it and then effectively flip the switch and run it with U.S. technology. And as I said, with a year under the law, so the good news is the original proposal was six months. It changed to 12 months. But it’s a big effort and one would have to start right away to do this.
FABER: Has it started right away? It doesn’t appear that you’re saying it has.
MNUCHIN: Well, it hasn’t because they’re not yet ready to negotiate.
FABER: You think they will be?
MNUCHIN: We’ll see. I’m not going to speculate on that.
FABER: But you think you would have the capital there to potentially participate, should there be an opportunity?
MNUCHIN: Yeah, there’s a lot of interest. We’ve had a lot of interest from investors. I think, as I’ve said before, no investor would have more than 10%. It wouldn’t be foreign-controlled. It would be all U.S.-controlled. So I think there’s a lot of interest. Look, it’s a great business, and I think if it were separated from ByteDance, it would have access to U.S. technology, U.S. AI, U.S. chips, and U.S. data centers.
FABER: Yeah, and it’s an amazing company. That said, it’s funny, Steven, the U.S. business has not really been generating much in terms of EBITDA or free cash flow, at least at this point, because they’ve been investing so much. Do you have a sense as to how you would go about determining what actually is a fair value for the asset?
MNUCHIN: You know, I’ve had preliminary thoughts. We’d obviously have to look at that more carefully. But I do think it’s a business that can generate a lot of cash. It has continued growth. I think there’s opportunities in e-commerce and payments that can be expanded. So there’s a lot of opportunities around the business.
FABER: Four-plus years ago when it was being discussed, the groups that were conceivably trying to buy it then, they were talking about not just the U.S. business but outside of China. Is that also the case for you?
MNUCHIN: That is.
FABER: OK.
MNUCHIN: That is. I mean, the U.S. business alone is – would have substantially less value. You want to be able to access the major markets outside of China.
FABER: I see. I don’t know. You want to put a percentage guess on what your chances are?
MNUCHIN: I think I’ll hold off on speculating.
FABER: Alright. Let’s move on to your other big investment, which was also news-making, of course, some time ago. NYCB, a struggling regional bank. You came in with significant capital with an investor group. They reported earnings recently. Were you encouraged by what you saw?
MNUCHIN: I was encouraged. First of all, not only would bring capital, but we brought a whole new management team. So Joseph Otting, who had worked with me at OneWest and was the controller of the currency as CEO, and he’s just been a magnet for talent. So he’s brought in a new chief credit officer. He’s brought in a new general counsel, a new CFO, new head of real estate. So we’ve really rebuilt the management team. And there’s some great people from New York Community Bank who are staying and part of the management team. And Joseph laid out a three-year plan that it will take to get the bank to normal profitability, which is basically 11% to 12% ROE, 11% to 12% CET1 by the end of 2026.
FABER: But your expectation is you’re not going to require or it will not require any additional capital at this point.
MNUCHIN: No, we think it has more than sufficient capital, and it’s trading at a significant discount to tangible book value. So there’s a lot of opportunity if the management team executes.
FABER: And then broadly speaking, just curious to get your take. Sara and I were talking earlier. She’s obviously been speaking to a lot of the participants here about what is — you know, what seems to be a fairly robust economy, somewhat less than positive feel. I don’t know. Do you — do you share that?
MNUCHIN: I think we’re going to see a slowdown in the U.S. economy. You know, as you look at the risks around the world, obviously we’re very concerned with what’s going on in the Mideast and Israel, the situation in Ukraine. And I think we’re going to have higher interest rates for a while in the U.S. And even if the Fed ultimately lowers Fed funds to 3.5%, which will take a considerable period of time, I still think you could have 4.5% 10-year Treasuries and a reasonable yield curve. So I think we’re going to have interest rates at these levels for some period of time.
FABER: But you — but at the same time, you do think we’re slowing down, which would auger for potential for rate cuts, wouldn’t it?
MNUCHIN: I think there will be rate cuts. I think it’s not a question of when. It’s a question of where we get. And I think, as I said, I think we’ll get back to 3.5% Fed funds rates. Down from 5.25% is a big move, but that’ll take a while. And I think the Fed is in no great rush to do that, given the recent inflation numbers.
FABER: Right. Although 3.5 — I mean, it’s — you know, we got so accustomed to zero — to zero, basically. I mean, we were all doing perfectly well, and the economy was in a 3.5% rate environment, weren’t we?
MNUCHIN: It is. It just takes a lot of people got hooked on zero interest rates, and we have to get adjusted back to what’s the new normal.
FABER: Do you share the overall concern that I’ve heard a number of participants here have in terms of the national debt, which obviously went up under President Trump, continued to go up significantly under President Biden as well, that interest costs alone may approximate as much as a trillion dollars? How much should we be concerned about that?
MNUCHIN: I think we should be very concerned. I mean, if you look at what we did in the beginning of the administration, and I still think had it not been for COVID, the Trump tax cuts would have paid for themselves. We were on that trajectory on that basis. Obviously, we got to COVID. The first $2 trillion we absolutely needed to spend, or I think we would have had a worldwide depression, not recession. I think, in hindsight, we shouldn’t have spent the second $2 trillion. And then the Biden administration having ongoing spending after that, and normalizing trillion-dollar spending. It’s a big concern and something that I think both parties are going to have to address.
FABER: Steven, we could go on for quite some time, particularly on that, but we’re out of time here. I certainly appreciate you taking the time with us. Thank you.
MNUCHIN: Thanks for being here.
FABER: Thank you for being here. Steven Mnuchin, former Treasury Secretary.
