Going to the Lew

Sounds Like Your Money Is Safe

Treasury Gets a Citibanker

From Wall Street Failure to the pinnacle of finance in four short years.

WSJ Editorial, January 27, 1013

There was a time when you had to be successful on Wall Street to become secretary of the Treasury. Now along comes presidential nominee Jack Lew, whose only business credential is a stint at the most troubled too-big-to-fail bank.

During the darkest days of the financial crisis Mr. Lew served as the chief operating officer of Citigroup's C -1.03%Alternative Investments unit (CAI). When Mr. Lew took this job in January 2008, the unit was already infamous for overseeing "structured investment vehicles" that hid mortgage risks outside Citi's balance sheet. It also housed internal hedge funds that were in the process of imploding.

CAI no longer exists. At the end of Mr. Lew's first quarter on the job, the unit reported a $358 million loss. Things got much worse after that but Citi stopped breaking out CAI results in its earnings releases. The unit was eventually shuttered and many of its assets were sold.

There probably weren't many laughs at Citi during the market panic in 2008. But if someone had said that a CAI executive would be the secretary of the Treasury within five years, the line would have brought the house down. That year the house almost really did come down, thanks to horrendous mortgage bets at CAI and other parts of Citigroup. The bank survived only with a series of taxpayer bailouts that provided $45 billion in cash, taxpayer guarantees on more than $300 billion of risky assets, tens of billions more in federal guarantees on Citi debt, plus cheap loans from the Federal Reserve.

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Defenders of Mr. Lew say that by the time he showed up at CAI most of the bad decisions had already been made. But even if Mr. Lew didn't create the mess, the taxpayers who ended up underwriting his seven-figure compensation might want to know what exactly he was doing to clean it up. All we can find is a list of things that Mr. Lew and his allies claim he was not responsible for.

It might also be instructive to learn what Mr. Lew was thinking as he took the Citi job. Did he understand that he was sailing into an iceberg, or did he believe that the unit was putting its problems of 2007 behind it? This is important because, thanks to the 2010 Dodd-Frank law, it is now the job of the Treasury secretary to spot financial icebergs.

If confirmed, Mr. Lew will chair the Financial Stability Oversight Council, responsible for identifying and addressing "systemic risks" to the financial system. It's hard to believe he can competently perform this task if his only experience in a similar situation ended in failure.

There are other questions. In 2004 the student newspaper at New York University, where Mr. Lew was working at the time, reported on a discussion he held with students. According to NYU's Washington Square News, Mr. Lew said he had turned down "attractive" banking jobs because he wanted to "do something bigger." NYU "mattered a lot more to me than whether or not consumer loans are up or down," he added.

Citi obviously made an offer attractive enough for Mr. Lew to get over the fact that he didn't care about consumer credit markets. But a Treasury secretary should care.

Speaking of consumers, the toughest questions for Mr. Lew may relate to his previous gig at Citi. Before he took the top operating job at the CAI division, he held the same job at Citi's Global Wealth Management division, beginning in July 2006. This means he likely oversaw, among other functions, the division's legal affairs. And during that time his division was creating one very big legal headache for Citigroup, one that continues to this day.

You see, while Mr. Lew's future colleagues at the CAI division were cooking up toxic investments, some of his Global Wealth Management colleagues were feeding them to investors. A lot of those investors later felt they'd been misled about the risks in Citi hedge funds and some Citi employees agreed, sparking an internal debate at Citi, according to reporting in this newspaper.

The funds invested in mortgage-backed securities and other instruments and in some cases borrowed more than $8 for every dollar invested, a risky way to seek high returns. In 2008 the bank decided to spend $250 million to compensate investors, but that didn't begin to cover the losses.

According to a 2012 USA Today report, the bank has paid out at least $85 million in settlements and arbitration awards, not including dozens of confidential agreements. We're told that the settlement dollars will keep flowing this year as more cases are resolved. Citigroup has maintained that its disclosures were adequate. What was Mr. Lew's opinion in these internal debates?

A former colleague of Mr. Lew's argues that since he had no role in sales, marketing or managing investments, this one isn't his fault either. But that raises the question of whether Mr. Lew was merely holding down a non-job reserved for those with political juice. He was brought into Citi by his patron and Clinton Administration colleague, Robert Rubin.

When it comes to pay for non-performance and monetizing Beltway status, Mr. Rubin set Wall Street's unofficial world records. Over roughly a decade Citigroup shareholders paid the former Treasury secretary more than $115 million, though Citi said he had "no line responsibilities." Unaccountable for any business results, Mr. Rubin nevertheless advised those who were accountable to take on more risk. Citi managers tragically followed his advice.

Without a famous name, Jack Lew couldn't make Rubin money. But after a career as a government official and then a university administrator, he probably enjoyed making more than $1 million a year. Not bad considering the bank was collapsing.

The fact that almost no one seems to know what exactly he did for that paycheck underlines the fact that Mr. Lew comes to this job not as an expert or practitioner in financial markets, but as a political actor. Like the current Treasury secretary and fellow Rubin protégé Timothy Geithner, Mr. Lew knows bureaucratic power.

Mr. Geithner succeeded in bailing out Citigroup and prevailed over Federal Deposit Insurance Corporation Chairman Sheila Bair. Like these columns, Ms. Bair wanted to clean out Citi's management and asked her fellow regulators to consider putting it into receivership. In her recent memoir, Ms. Bair writes that when she suggested in early 2009 that Citi's private investors should take losses before the company received additional government assistance, "that was a nonstarter for Tim."

Now an alum from this most political of banks will chair the financial risk council and decide how failing firms are resolved. The next time Citi gets in trouble, who wants to bet against help from Washington?

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The greatest irony is that given Mr. Lew's crisis-era resumé, he bears a remarkable resemblance to the bankers who President Obama says created the financial crisis and deserve federal investigation. But apparently there's an exception as long as your liberal intentions are noble and you're a loyal Democrat. Then you can get rich at one of Wall Street's biggest failures and end up running the entire financial system.