President Obama is facing criticism for nominating another former Wall Street executive to become treasury secretary. On Thursday, Obama tapped his own chief of staff, Jack Lew, to replace Timothy Geithner. Lew was an executive at Citigroup from 2006 to 2008 at the time of the financial crisis. He served as chief operating officer of Citigroups Alternative Investments unit, a group that bet on the housing market to collapse.
Lew has also long pushed for the deregulation of Wall Street. From 1998 to January 2001, he headed the Office of Management and Budget under President Clinton. During that time, Clinton signed into law two key laws to deregulate Wall Street: the Financial Services Modernization Act of 1999 and the Commodity Futures Modernization Act of 2000.
Independent Senator Bernie Sanders of Vermont criticized Lews nomination, saying, “We dont need a treasury secretary who thinks that Wall Street deregulation was not responsible for the financial crisis.”
William Black talking:
on financial matters, Jack Lew has been a failure of pretty epic proportions, and he gets promoted precisely because he is willing to be a failure and is so useful to Wall Street interests. So, youve mentioned two of the things in terms of the most important and most destructive deregulation under President Clinton by statute. But he was also there for much of the deregulation by rule, and a strong proponent of it, and he was there for much of the cutting of staff. For example, the FDIC, the Federal Deposit Insurance Corporation, lost three-quarters of its staff, and that huge loss began under Clinton. And the whole reinventing government, Lew was a strong supporter of that. And, for example, we were taughtinstructed by Washington that we were to refer to banks as our “clients” in our role as regulators and to think of them as clients.
He goes from there to Wall Street, where he was a complete failure. You noted that part of what Citicorp did was bet that housing would fall. That was actually one of their winning bets. But they actually made a bunch of losing bets, as well. And the unit that he was heading would have not been permissible but for the deregulation of getting rid of Glass-Steagall under President Clinton. And you saw, as an example of Citicorp, why we shouldnt be doing this. Why would we create a federal subsidy where all of us, through the U.S. government, are on the hook for Citicorps gambling on financial derivatives for its own account, running a casino operation? That makes absolutely no public policy sense.
Then he comes into the Obama administration, and he was disastrously wrong. He tried very hard to impose austerity on the United States back in 2011, which he wanted, the European strategy, which has pushed the eurozone back into recession, and Spain, Greece and Italy into Great Depression levels of unemployment.
And this is the guy, after all of these failures, who also is intellectually dishonest. He will not own up to his role and deregulations role and de-supervisions role in producing this crisisand not just this crisis, but the Enron-era crisis and the savings-and-loan debacle.
Matt Taibbi talking:
I think itsthe symbolism of this choice is, I think, very important for people, just the mere fact of picking somebody from Citigroup and from that same Bob Rubin nexus that Timothy Geithner came from. And, you know, you heard Barack Obama, as hes introducing Jack Lew, praising Tim Geithner as somebody whos going to go down in history as one of the great treasury secretaries of all time. I think what this tells everybody is that Jack Lew is going to represent absolute continuity with the previous treasury secretary, who had a very specific agenda when it came to Wall Street. And I think were just going to expect more of the same, more of the same really being overt and covert support of these too-big-to-fail institutions that Lew worked for, Citigroup being the worst and most disastrous example of that kind of company. So I think itsthe choice of somebody from that particular firm is fraught with pretty upsetting symbolism for the country, I think.
William Black talking:
we can agree that he lacks expertise in the area, but he was supposed to have expertise. This was supposed to be his area of expertise, both in his role as OMB head under Clinton, and then, of course, as being in the industry and actually implementing the fruits of this deregulation.
Soand he has the history, in one sense, correct. He says the problem arose before deregulation. Thats true that derivatives were already a problem before deregulation. And so, Brooksley Born proposes to deal with the problem by having a regulation to deal with credit default swaps. And then the Clinton administration, in league with Greenspan, in league with Phil Gramm, and with one of the important architects of all of this being Jack Lew, squashes Brooksley Born to destroy the proposed regulation and to pass something, the Commodity Futures Modernization Acttalk about a dishonest phrasethat not only said, “You, Brooksley Born, cannot go forward with this particular regulation,” the statute actually said, “We hereby withdraw all regulatory powers to protect the nation, period. From the federal government, from the state and local governments, we exempt you from the gambling laws. We exempt you from the boiler room laws to prevent fraudulent operations.” Its one of the most extraordinary abusive things in the world, heavily involved with AIGs ability to produce not just the disaster at AIG, but the disaster of creditof the CDOs that blew up a larger portion of the world. And those CDOs would not have been possible without these credit default swaps.
So, this is a guy who designed the disaster, participated in the disaster on Wall Street, was made rich by it. We havent talked about the fact that he got a huge bonus for destroyinghelping to destroy the world at Citicorp. And he got it through the bailout of Citicorp by the U.S. government. So he produces disaster, profits from the disaster, we pay him bonuses for causing the disaster, and then we have the absurdity of the president of the United States saying that this is a man with a track record of unmitigated success. It is exactly the opposite, in terms of finance. He is a worthy successor to Tim Geithner, in that he has screwed up everything substantively he has ever touched.
under Lew, in his new incarnation a while back as OMB head offor Obama, I have a piece that talks about how OMB under Obama sounds almost exactly like the tea party. So, it adopts all of their rubric about, you know, these terrible social programs, this terrible safety net and how its going to imperil our nation, and what we need to do is be balancing the budgetin other words, austerity.
Now, had Obama succeeded in following Lews recommendation in July 2011, when they were trying to negotiate the so-called “grand bargain,” which is really the grand betrayal of the safety netunemployment in July 2011 was 9.1 percent. Austerity in the United States would have done just what it did in Europe. Unemployment would have surged. So, all through 2012, the election year, unemployment would have been going up well above 10 percent, quite possibly into the 11 and 12 percent range, which is where it is in Europe. Obama would have been toast; would have been no chance. He would have been crushed in the election. The Democrats would have lost control of the Senate, and such. And these folks, even today, are claiming that the failure to achieve the grand betrayal and to cut the safety net is their great disappointment. So, they not only tried to destroy themselves and the country, they are continuing to do that, and indeed, but for Harry Reid literally throwing the Obama administrations suggestion that they do cuts to the safety net in the fireplace and burning it up, they would have gotten it as part of this interim austerity deal that was just done about eight days ago.
Matt Taibbi talking:
it speaks to the failure of the government to address the foreclosure problem still, four and five years after the financial crisis. And one of the points I make in the piece I just wrote, “Secrets and Lies of the Bailout,” is that foreclosure relief was originally written into the statute, the TARP statute, as a primary function of the original bailouts. Its right there in black and white, section 109, that TARP was supposed to provide alla massive program of foreclosure relief, and they never got around to it. And the only bailout program that ever provided any foreclosure relief was HAMP, and that onlyto date, theyve only ended up spending about $3 billion or $4 billion out of all the bailout on that program. They have nowthrough litigation, there are these settlements that are starting to trickle in, but its just too little, too late. And you contrast that with what happened at the beginning of the bailout, where the banks and the financial companies were instantly handed hundreds of billions, trillions of dollars of relief, and I think that that dichotomy is important for people to recognize, that the relief for ordinary people is still coming slowly and insufficiently years later, whereas relief for Wall Street came instantaneously and was excessive.
This is a longstanding dispute between the former CEO of AIG, Hank Greenberg, and the government. And its funny. If you actually read Greenbergs suit, there are some points in it that have a little bit of validity. I mean, its still preposterous that Greenberg, who was, in a way, kind of like the Patient Zero of the financial crisis, because the scandal that he started at AIG back in the 2000in the early 2000s. It was a reinsurance scandal where he was artificially inflating the balance sheet of AIG, that led to a downgrade of AIG, which led to the catastrophe of 2008, when the company went intoimploded. And that subsequently caused the entire financial crisis. You can really point to Hank Greenberg as maybe the guy who caused the financial crisis, and here he is suing the American government over the bailout.
But one of the things he says in thishis lawsuit is that the bailout of AIG was not really a bailout of AIG, it was a bailout of the companies that were owed money by AIG, because they gave 100 cents on the dollar to all the companiesthe counterparties of AIG, like Goldman Sachs and Deutsche Bank and Barclays, and that if he were in that position, he would have negotiated a much tougher deal. Thats probably true. I mean, theres actually some validity to that point, that theres no way, under any rational circumstances, that those companies should have gotten 100 cents on the dollar for the money they were owed by AIG.
mortgage settlement. It is really, to me, amazingly scandalous that, years later, justice has not been forthcoming for all of these homeowners who lost their homes. I think the settlement calls for about $3.5 billion in cash to some three million homeowners; that works out to maybe about $1,000 a homeowner. And here we had instances of banks, with the massive robo-signings, evicting people from homes that they didnt even legally own at the time. And the thing became such a mess that the government review ended up wasting about a billion dollars just on the consultants hired to review all the bank foreclosures.
William Black talking:
the first thing is, this is more of what Matt and people like me have been writing about for years: the complete immunity of the elite Wall Street folks who caused this crisis through fraud, who became wealthy because of those frauds, and were then bailed out as a result of their frauds. None of them are being prosecuted. So we have admissionsand, by the way, this would have continued but for the discovery of this fraud. In other words, the banks werent stopping it on their own.
The robo-signing, that means what they were doing was lying systematically to the tune, typically, of the large places, of 10,000 times a month, so over 100,000 times a year, committing felonies that would lead to people being made homeless in America, in many cases. Its just an astonishing aspect that nobody has gone to prison for all of this and that they gave them one of the largest grants of immunity youll ever see.
Second thing, the money in the press reports is grossly inflated. Theres only about $3 billion in cash. Youre quite correct, that works out to less than $1,000 per victim. So it is exactly what Barofsky quotes Geithner as saying, that these housing programs were not designed for the victims; they were designed to,”foam the runways” for the banks to reduce their loss exposure. So the rest of the supposed $5 billion in settlement is really just what in the commercial world we call “troubled debt restructurings,” which are the things you would do anyway if the government didnt exist, because in most cases its better for the bank not to have the default, to instead reduce the principal slightly. So, none of that is actually a bailout. None of it is actually a settlement. Its just the banks doing that which will profit maximize for the banks anyway.
Matt Taibbi talking:
right after TARP was passed, where the government elected to call companies that were unhealthy and insolvent “healthy” and “solvent.” When they scrapped the plan to buy up troubled assetsremember, TARP was the Troubled Asset Relief Programwell, they scrapped that idea a few days after the bill was passed and decided to just dump a whole bunch of money onto the balance sheets of these banks. This was called the Capital Purchase Program. They spent $125 billion right off the bat. It was spent on nine companies. And one of the things they said was, all of these companies are healthy and viable. And it turned out later, according to numerous sources, including all the SIGTARP reports, includingaccording to Barofsky and other sources, that they didnt even check to see if these companies were solvent at the time. They had no interest in discovering that, one way or the other. And, in fact, many of these companies were on the brink of failure at the time. Barofsky was told specifically that Morgan Stanley and Goldman Sachs were both on the brink of disaster when they were given this money.
Its interesting that Jamie Dimon talks about how his company didnt need that Fed money. You know, it came out in thein Bloombergs Freedom of Information request, when they got all the data from the audit of the Federal Reserve, it came out that his company, at that time, in late 2008, had a $50 [billion] or $60 billion line of credit with the Fed on top of all the money they were getting through the TARP bailout, through the bailout of Bear Stearns and other facilities. So, apparently, they didnt need all that money, you know, that $100 billion or whatever it was they got from the federal government; it was just they were taking it because they were being polite, they were beingand they were asked to by the federal government. And this fiction, that they didnt need the money, that they were healthy all the time, the governmentwe not only gave them money, but we vouched for them, and now were stuck vouching for them basically forever. And thats the ongoing bailout that has become the real problem.
William Black talking:
They also changed the accounting rules, so the banks didnt have to recognize their losses, so that they could hide them and pretend to be healthy. So thats a huge part of that story.
As to taxes, you know, this was, again, a classic example of the Obama administration snatching defeat from the jaws of victory, where it had all the leverage and negotiated against itself once again. And so, yes, the wealthiest folksand this is the irony, of course, is were talking about the Mitt Romneys of the world are the principal beneficiary through thesomething that is completely unsupportable, on any policy ground, which is this carried interest, which simply treats income as if it werent income anymore for the wealthiest Americans who receive their money from running hedge funds. And thats continued.
Geithner is a principled person who caused the crisis. He was supposed to be the top regulator preventing it in New York and did nothing. Second, he has created crony capitalism, American style. Third, those regulations in fact will not prevent future crises and were designed to make sure they were not. And I agree strongly with Matt that the choice of Jack Lew is to not only produce continuity with Geithners disastrous failed policies, but to signal the administrations desire to continue the bailout of Wall Street.
Matt Taibbi talking:
legacy of Tim Geithner is simple. Hes the architect of “too big to fail.” And thats going to be, historically, his legacy. When this all blows upand its going to blow up, for sure, because it cantthings cant continue the way they are right nowpeople are going to look back in history, and theyre going to say, “Who was to blame for this?” And Timothy Geithner is going to be the guy who designed this entire system.
and he will always be remembered as the first treasury secretary who neglected to pay his own taxes.
– source democracynow.org, democracynow.org