William K. Black
The New York Times has just run two articles confirming that President Obama intends to appoint Jacob Lew as Treasury Secretary Geithner’s replacement. Most people assume that Geithner is a creature of Wall Street through direct employment, but Geithner never drew a paycheck directly from Wall Street. Geithner worked for a wholly-controlled subsidiary of Wall Street – the Federal Reserve Bank of New York. Lew is the real deal, another brick in Obama’s creation of Wall Street on the Potomac. While the first NYT article ignored Lew’s work on Wall Street, the second article simply tries to minimize it.
“Mr. Lew had a brief turn in the financial industry before joining the Obama administration four years ago, working at the financial giant Citicorp, first as managing director of Citi Global Wealth Management and then as chief operating officer of Citigroup Alternative Investments.”
“Global Wealth Management” refers to banking services for the wealthiest people in the world, a club in which mere millionaires are barely worth having as a client. “Alternative investments” refers to financial derivatives traded for the bank’s own account. Lew’s training was as a lawyer.
“Obama is clearly comfortable bringing another ex-Wall Streeter into an administration that, beyond a recent ratcheting up of populist rhetoric, has done relatively little to rein in the financial industry.
That, in turn, reflects the ease with which Washington hands like Lew shuttle between the Street and the Hill. Case in point: Lew's predecessor as budget chief, Peter Orszag, left the agency and joined Citi as vice chairman of global banking. A job in politics is no longer a back-door to a lucrative job in banking -- it's a red carpet. The revolving door keeps spinning.
The Citi [alternative investments] division ultimately lost billions. As for Lew, he naturally made big bucks during his three-year stint at Citi, including a roughly $950,000 bonus in 2009 -- after the company's federal bailout.”
Lew helped establish finance policy under President Clinton.
“Lew served as OMB chief from May 1998 to January 2001 during the Clinton administration, when Clinton signed into law the Financial Services Modernization Act of 1999 and the Commodity Futures Modernization Act of 2000 -- two pieces of legislation at the heart of the deregulation of Wall Street. The first repealed the law that had long kept commercial banks from offering products or engaging in services more common with investment banks; the second "eliminated virtually all regulation" over the kind of derivatives that trade outside regulators' view….”
Lew’s predecessor as chief of staff was William Daley. Daley is a lawyer. Daley was on the executive board of J.P. Morgan-Chase during the crisis and before that he was on Fannie Mae’s board of directors. Daley is a member of “Third Way’s” controlling board. Third Way is a Pete Peterson ally that lobbies in favor of austerity and cuts to the safety net. It pushes Wall Street’s, and Pete Peterson’s, greatest dream – privatizing Social Security. Privatization would allow Wall Street to increase its profits by hundreds of billions of dollars in fees for managing our retirement savings.
Daley’s predecessor as Obama’s chief of staff was Rahm Emanuel. Emanuel’s degrees are in the liberal arts and communications. Clinton appointed him to Freddie Mac’s board of directors during the period when the board was heavily criticized for its failure to prevent massive accounting abuses at Freddie Mac. Emanuel worked for Wasserstein Perella, the prominent investment banking firm.
The obvious aspects of this pattern include: (1) Obama prefers to have Wall Street guys run finance (despite coming to power because Wall Street blew up the world), (2) the revolving door under Obama that connects Wall Street and the White House has been super-charged, and (3) even very short stints in Wall Street have made Obama’s finance advisers wealthy. The obvious is vitally important, and it is largely ignored by the most prominent media. The obvious aspects help explain why Obama’s economic policies have been incoherent, ineptly explained, inequitable, and often slavishly pro-Wall Street at the expense of our integrity and citizens.
The unobvious aspects of the pattern compound these problems. First, Obama likes to surround himself with failures. Geithner set the pattern. He was supposed to the principal regulator of most of the largest U.S. bank holding companies. He was an abject failure. His speeches and his statements at the Federal Reserve System’s FOMC meetings during the crisis demonstrate that he remained clueless to the end. For reasons of brevity, I discuss only three of his failures as Treasury Secretary below.
Lew has gone from failure to failure. He was one of the architects of both of the Clinton administration’s disastrous statutory deregulatory actions that helped produce the epidemic of accounting control fraud that drove the Great Recession.
Emanuel and Daley were failures as directors of Fannie and Freddie. Lew was a failure at Citicorp’s proprietary derivatives trading arm. That failure is particularly dangerous because the purpose of the Volcker rule was to ensure that federally insured banks did not take proprietary positions in derivatives. Obama has put failed anti-regulators in positions where they can best undermine the reregulatory effort that is essential to reduce the risk and harm of future crises.
Obama’s senior financial advisors have also failed ethically. Lew’s great moral challenge was whether he would be honest about his errors. Honesty is essential to preventing future harm. Lew failed this second, less obvious, test as well. The CBS special notes:
“During a 2010 Senate hearing to confirm him as White House budget chief, Lew seemed to soft-pedal the role of financial deregulation in the housing crash, saying, “‘[I don't] personally know the extent to which deregulation drove it, but I don't believe that deregulation was the proximate cause.’"
The Financial Crisis Inquiry Commission (FCIC) found that deregulation played a decisive role in producing the crisis. My research confirms their finding.
This pattern repeats the savings and loan debacle. The National Commission on Financial Institution Reform, Recovery and Enforcement (NCFIRRE) found that deregulation contributed to that debacle. My book explains in detail how it did so. George Akerlof and Paul Romer’s 1993 article (“Looting: the Economic Underworld of Bankruptcy for Profit”) emphasized this point in its last paragraph.
“Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself” (George Akerlof & Paul Romer.1993: 60).
Lew, President Clinton, Bob Rubin, Larry Summers, and Alan Greenspan pushed the key statutory acts of deregulation that helped create the crimionogenic environment that drove the crisis. But they also drove the destruction of regulation and supervision at the banking regulatory agencies. A senior official who lacks the integrity to admit his errors and learn from them is unqualified to serve in any capacity.
Geithner failed the same moral test. He also refused to pay his taxes that he knew he owed because he believed he could get away with it. The irony is that the Internal Revenue Service (IRS) reports to Geithner.
The third, less obvious problem is that the Treasury Department and its bureaus (which include bank regulators) is responsible for adopting an enormous number of critical regulations intended to reduce the risk of future crises. Appointing a failed anti-regulator to head a department that is supposed to adopt hundreds of regulations is a prescription for repeated failure.
The fourth non-obvious problem is that Obama chooses as his principal financial advisors people who have not been trained to have financial expertise. Geithner studied international politics. Emmanuel studied speech. Lew, Obama, and Daley studied law. Lew, Daley, Emanuel, and Geithner all worked in finance, but they did so because of politics and who they knew rather than what they knew. Competence was never the key. Their substantive failures in those finance positions did not matter. As a reward for their failures they were given bonuses that made them wealthy for failing. That is the norm for senior finance officers in the modern world. Lew became far wealthier because Citicorp was bailed out by the U.S. government.
The fifth less obvious problem is that each of these key advisors is so slavish in his dedication to our systemically dangerous institutions (SDIs) (the so-called “too big to fail” banks) that they have embraced crony capitalism and the ability of the SDIs’ CEOs to lead “control frauds” with impunity from the criminal laws. I have explained in prior articles how this has crippled our Nation’s economy, democracy, and integrity and will cause recurrent, intensifying global financial crises.
Geithner has disgraced the Nation and the Department of the Treasury by pushing to prevent criminal cases against the SDIs and their senior officers. There is nothing in Lew’s record that suggests he will restore the Nation’s honor. He was picked to continue to serve the SDIs’ interests. Lew will act to ensure that the revolving door remains a direct portal to immense Wall Street wealth for the administration’s senior officials.
The final unobvious problem I describe is that all of these advisors are in thrall to the neo-liberal dogma of austerity that has devastated the Eurozone. I have explained this point in several prior articles. What needs to be emphasized is that Obama chose Geithner, Lew, and Daley as his principal advisors on his effort to commit the “Grand Betrayal” in July 2011. Geithner is a Republican who changed his affiliation to “independent” as a fig leaf, so his embrace of austerity is understandable. Daley is a senior Pete Peterson ally. Peterson is a Republican billionaire Wall Street leader who is leading the effort to unravel the safety net. Daley’s efforts
Lew’s embrace of long-falsified austerity dogmas is intense.
Austerity is a lose-lose-lose-lose proposition most analogous to bleeding a patient. Austerity reduces growth so severely that it throws a Nation back into recession, increases unemployment, increases misery by cutting social programs when they are most needed, and can often increase the deficit. Obama bears the responsibility for all of these financial officials and policies.
We (and Obama) have been saved three times from the Grand Betrayal. He called his plan “the Grand Bargain.” In July 2011, Obama and Speaker Boehner nearly finalized agreement on a $4 trillion austerity package consisting of over $2 trillion in cuts in social programs, nearly $1 trillion in cuts to the safety net, and a series of often fictional revenue enhancements – all over the course of a decade.
Had Obama been able to finalize the deal its draconian austerity would have thrown the Nation and many other countries back into recession. U.S. unemployment was 9.1% in July 2011. Austerity would have led within months to a second recession. During 2012, an election year, unemployment would have risen every month to a level well in excess of 10%. Obama would have been crushed in the election and the Republicans would have retaken control of the Senate.
Obama and Boehner’s July 2011 deal was blocked by the Tea Party and progressives in the Senate. Instead, they reached a budget deal in August 2011 that created a “super committee” that was supposed to reach an agreement on at least a $1.2 trillion austerity program by November 2011 and created what came to be known as the “fiscal cliff” (which automatically inflicted austerity absent a new deal by January 2013). The November 2011 deal was killed by the opposition of the same “odd couple” – the Tea Party and progressive Democrats. In late December 2012, Obama urged Senate Majority Leader Reid to adopt a list of concessions that included substantial cuts to the safety net. Reid threw the proposed instrument of surrender and betrayal into his office fireplace. The Tea Party revolted in the House and killed Boehner’s alternate austerity plan. The January 2013 deal delayed inflicting the automatic austerity provisions for two months.
Progressives need to understand that the Grand Betrayal is not inevitable. What the administration and Boehner are attempting to inflict on the Nation is indefensibly self-destructive. Medicine realized over a century ago that bleeding patients constituted medical malpractice. We have known for at least 75 years that austerity in response to a recession or the Great Depression constitutes economic malpractice. The ironic aspect of the Wall Street wing of the Democratic Party is that they are terrible at finance. Wall Street on the Potomac combines the worst aspects of finance and politics. It is crony capitalism – anti-American style.