For the past four years, the presence of Timothy Geithner as Secretary of the Treasury has been a blight on the Obama Administration.
In keeping with his weak performance as president of the Federal Reserve Bank of New York, Geithner has allowed Wall Street culprits to enjoy lavish assistance from taxpayers as they avoid any serious consequences for having brought on the financial crisis from which the country is still trying to recover.
Now that Geithner is departing, Obama had a chance to take Treasury in a new direction. His choice of White House chief of staff Jack Lew for the post is not a good sign. As a deficit hawk, Lew will reinforce the president’s regrettable inclination to take seriously the wrong-headed notion that the country has a spending problem.
Yet perhaps even more troubling is Lew’s background, particularly the fact that he is a veteran of one of the leading financial-sector miscreants: Citigroup. Unfortunately, it is not unusual for presidents to turn to Wall Street for their Treasury secretaries. Ronald Reagan brought in Don Regan from Merrill Lynch; Bill Clinton got Robert Rubin from Goldman Sachs; and George W. Bush turned to Goldman again when he chose Hank Paulson to be his third Treasury head. The difference is that Lew is the first Wall Street veteran to be chosen for Treasury since the financial meltdown of 2008 exposed the pernicious behavior of the giant banks.
While Lew is not a Wall Street lifer and is not coming straight from the private sector, his time at the bank (2006-2009) was not long ago. Moreover, he was personally involved in some of Citi’s dubious practices. In 2010 the Huffington Post reported that when Lew served as chief financial officer of Citi’s Alternative Investments operation his portfolio included investments put together by hedge fund manager John Paulson that made a killing by correctly betting that the housing market would tank. This was the same Paulson who helped Goldman Sachs put together a similar notorious deal that led to SEC charges and a $550 million settlement.
Actually, Lew’s dealings with Paulson are just the beginning of why it wrong for Obama to be selecting a veteran of Citigroup to such an important position in his administration. It is well known that Citi was bailed out by the federal government to the tune of $45 billion while also getting loss protection for some $300 billion in toxic assets. What some may have forgotten is the absolutely abysmal track record of Citi before and after the bailout, including the following:
It was the merger of Citibank and Travelers Group—technically illegal when it was announced in 1998—that played a key role in bringing about the disastrous policy of financial deregulation.
Citi gave a boost to predatory lending and subprime mortgages when it purchased Associates First Capital. In 2001 Citi had to pay $215 million to settle charges brought by the Federal Trade Commission in connection with Associates’ abusive practices.
In the wake of revelations that it helped Enron conceal its massive accounting fraud, Citi had to pay $2 billion to settle lawsuits brought by Enron investors. It later paid another $2.65 billion to settle lawsuits brought by investors in WorldCom, another perpetrator of accounting fraud, alleging that Citi failed to perform due diligence when underwriting the company’s bonds.
In 2010 the SEC announced that Citi would pay a $75 million penalty to settle allegations that it misled investors about its exposure to subprime mortgage-related assets. The following year, Citi paid $285 million to the SEC to settle charges that it defrauded investors in a $1 billion collateralized debt obligation tied to the U.S. housing market.
The settlement amount in the latter SEC case, which was far below the $700 million in losses suffered by the defrauded investors, was roundly criticized by the federal judge, Jed Rakoff, who was overseeing the case. Judge Rakoff also challenged the SEC’s willingness to let Citi get off without admitting guilt in the matter, calling the deal “neither reasonable, nor fair, nor adequate, nor in the public interest.” He rejected the settlement, but the SEC filed an appeal, which is not yet fully resolved.
Citi was one of five large mortgage servicers that in February 2012 consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. That same month, U.S. attorney’s office in Manhattan announced that Citi would pay $158 million to settle charges that its mortgage unit fraudulently misled the federal government into insuring thousands of risky home loans. In August 2012 Citi agreed to pay $590 million to settle lawsuits charging that it deceived investors by concealing the extent of its exposure to toxic subprime debt. And just this month, Citi was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve claims of foreclosure abuses.
Lew, of course, was not personally responsible for all these offenses, but his association with this rogue bank is strong enough to disqualify him from a top economic policy position.
Note: This history draws from my new Corporate Rap Sheet on Citigroup, which was just posted here.