Former US Treasury Secretary Steven Mnuchin thinks the correction in stock markets has turned positive, especially for technology companies that had “gone crazy” and now have good opportunities. But one overvalued tech bet he never liked was bankrupt crypto trading company FTX, which spectacularly collapsed from a $32 billion valuation to bankruptcy filing and criminal investigation amid allegations of misuse of client assets.
“We looked at investments twice and succeeded both times,” Mnuchin said Tuesday at the CNBC Technology Executive Council Summit in New York.
Mnuchin, who has managed private equity investments since he left the Trump administration, stressed that his decision had nothing to do with current allegations that FTX misused client money, which he described as “worrying” but said he is concerned. first heard about it in the press. “There’s a lot that needs to be understood and I’m just looking out now. I didn’t expect it to go away so quickly, and if customer money is indeed being misused, those are very serious issues,” he said.
Mnuchin declined to go into details regarding his decision-making on FTX in an interview at the TEC summit with CNBC’s Melissa Lee, but did say the second time he made an investment, the crypto trading company was “five times the valuation” it been before.
“We were a little surprised by the overall valuation level,” Mnuchin said.
Last week, venture capital firm Sequoia downgraded its investment to zero in FTX, one of the major institutional investors caught up in the collapse. Mnuchin said top investors getting caught up in the fear of missing out on the hype cycle is nothing new. “We’ve seen in a lot of tech companies where we had very smart investors investing at ridiculous valuations,” he said.
In the recent bull market, that FOMO spread well beyond crypto. “People were making an investment in technology every day,” Mnuchin said at the CNBC event. “I just don’t see how you can make 300 investments a year and think you can do due diligence on it and pick winners from losers,” he said. “Appreciations reflected that everything is perfect in the world.”
But now, he added, “it’s a much better environment to invest in.”
The former Treasury Secretary believes that we have seen the spike in inflation and that the cycle of Fed rate hikes could end slightly lower, at 4.5%, than the market’s worst-case scenario. Those rate hikes will take some time to work their way through the economy and contribute to some more potential market downturns, but the correction in stocks and technology stocks was a healthy thing, said Mnuchin, whose private equity firm Liberty Strategic Capital has a focus on technology investments.
Mnuchin, who once held a top tech position at Goldman Sachs, remains a believer and investor in the underlying blockchain technology, which he believes has interesting applications.
“We are more focused on the infrastructure side of crypto than the asset and trading side of the business,” he said.
He also thinks there is a regulatory middle ground that needs to be struck in the wake of the FTX implosion.
“The problem is that there needs to be more regulatory clarity,” he said, pointing to a current US approach that delegates regulatory authority to entities like the FTC, SEC and Treasury – where he focused on crypto market transparency and money laundering.
He also pointed to the offshore entities involved in the FTX situation, saying that while it had a US company, crypto remains an industry where “people are moving from jurisdiction to jurisdiction” in a game of “regulatory arbitrage”.
The main result, Mnuchin said, is that the US does not go from one extreme to the other, from under-regulation to over-regulation. “There are very important innovations in this industry,” he said. Although he added that the allegations of misuse of client funds in the FTX case point to a fundamental principle in financial regulation. “We have to separate clients’ funds. It’s one of the fundamental principles we rely on,” Mnuchin said.