A Hedge Fund Manager Should Be Able to Run Treasury

Scott Bessent’s track record shows he’s well-placed to succeed as Trump’s man in finance.

Bloomberg

Published25 Nov 2024, 10:46 AM IST

A Hedge Fund Manager Should Be Able to Run Treasury

(Bloomberg Opinion) -- A big theme in finance over the past two decades has been a shift in power away from investment banks that traditionally dominated the industry to the asset management firms that orbit it. Now, that’s reflected in the seat of government, too. By picking Scott Bessent as Treasury secretary, Donald Trump has chosen a Wall Street type who hasn’t held a senior position at a Wall Street firm.

Bessent isn’t the first hedge fund manager to take on the role of Treasury secretary; that honor went to Steven Mnuchin in 2017. But while Mnuchin spent 17 years at Goldman Sachs Group Inc. before setting up a fund – which he ran only briefly – Bessent has been an investment manager his entire career. Eschewing traditional Wall Street firms, he joined Brown Brothers Harriman after Yale University – one of only a few in the early 1980s to hire graduates straight into investment management – and has remained in the industry since.

Some may wonder what skills a hedge fund manager brings to the role considered akin to chief financial officer of the US, whose responsibilities include shaping policy, managing federal finances and ensuring regulatory compliance within the financial sector. Unlike predecessors, Bessent has little experience managing large institutions. Henry Paulson (2006-2009) ran the Treasury Gepartment fresh out of Goldman Sachs; Robert Rubin (1995-1999) and Nicholas Brady (1988-1993) similarly rose to the top of their firms, and Jack Lew (2013-2017) was senior in another. The first in the job, Alexander Hamilton (1789-1795), even founded a bank before taking office.

In contrast, Bessent is used to working in small, tight-knit teams. Overseeing a department of 125,000 Treasury officials presents a different challenge (albeit one Elon Musk at the Department of Government Efficiency may help to make more manageable).

But he does know how to manage money and has been an invested observer in policy over many economic cycles. After joining Soros Fund Management in 1991, he was dispatched to London where his analysis of the local mortgage market contributed to the firm putting on its famous trade against the British pound. Bessent recognized that homeowners wouldn’t be able to withstand the high rates the Bank of England would need to impose to defend the currency. Although now known as more of a macro manager, his bottom-up research into housing proved vital to the firm’s billion-dollar score. “The micro drives the macro,” he says. As Treasury secretary, this understanding of how economies fit together stands him in good stead.

Other qualities he can draw upon are a drive to turn quick decision-making into an asset and an aptitude to imagine multiple outcomes in an uncertain world. Like many fund managers, Bessent is also ruthlessly pragmatic. Two words to avoid in the investment business, he says, are “never” and “always.” A former colleague notes his uncanny ability to read newspapers six months ahead of time.

These features, combined with learned market awareness, explain how Bessent got himself in a position to be selected in the first place. According to the Wall Street Journal, he decided to back Trump when he saw that legal cases were helping rather than hurting approval ratings, telling people it reminded him of a stock that rises despite bad news – often a bullish signal.

Hedge fund managers have made their mark in senior positions in other countries. They’ve run national banks in Switzerland and Brazil – Arminio Fraga, a former president of the Central Bank of Brazil, worked alongside Bessent at Soros Fund Management. In the UK, a hedge fund manager, Rishi Sunak, even made it all the way to prime minister, via a stint as chancellor of the exchequer. But few have amassed as much experience navigating through global economic cycles as Bessent.

Trump’s choice has already laid out his thinking on the economy, so his policies shouldn’t come as a surprise. One of his most successful trades was in Japan in 2013 when he anticipated the impact then-Prime Minister Shinzo Abe’s “three-arrow program” would have on the country’s finances. Possibly influenced by it, he has a three-arrow proposal of his own: Cut the budget deficit to 3% of gross domestic product by 2028, spur growth of 3% through deregulation and produce an additional 3 million barrels of oil or its equivalent a day. Markets will be encouraged by the lesson he learned from his Japan experience: “Capital flows to where it is treated well.”

As an experienced global strategist with a deep understanding of financial systems, and a track record of backing views with real money, Scott Bessent is positioned to succeed. He also knows the cost of failure. “Bad policy creates good investment opportunities,” he says. He won’t want to give his competitors a chance to make money at his expense.