What Jacob Lew as Treasury Secretary Means to Lenders
White House Chief of Staff Jacob Lew, who is widely expected to be nominated as Treasury secretary this week, is something of an unknown quantity to the financial services industry.
He worked as an executive at Citigroup from 2006 to 2009, but has otherwise spent his time in a variety of government positions, including serving twice as director of the Office of Management and Budget under Presidents Clinton and Obama. Lew was also a top aide to Secretary of State Hillary Clinton and a senior policy advisor for former House Speaker Tip O'Neill.
Obama's decision to nominate Lew, which could be made official as early as Thursday, may signify a shift in priorities away from managing the effects of the financial crisis to preparing for the next crisis emerging over the budget and national debt.
But some argue that Lew's relative lack of experience in the financial industry could prove an obstacle should the economy and the financial system veer off course again.
"Lew is a budget guru, so it's understandable that you'd want somebody like that at the helm of Treasury when fiscal issues are rapidly becoming the top priority," said Jaret Seiberg, a policy analyst at Guggenheim Partners. "That said, I think many investors are going to be disappointed by this selection…We're only a few years removed from what most consider the worst financial mess since the Great Depression—that's what has the market on edge."
Lew's work at Citi, overseeing the bank's hedge fund and private-equity unit formerly called Citi Alternative Investments, has been criticized by some in part because the business invested in a hedge fund that bet on the collapse of the housing market. But industry observers downplayed the experience at Citi as insufficient relative to several of Lew's predecessors, including Hank Paulson and Timothy Geithner.
"That's not the type of hands on experience that is going to reassure the market," said Seiberg. "You look at the two Treasury secretaries who got us out of this crisis—one was from Wall Street and the other was a longtime official at Treasury and the Federal Reserve who dealt every day with the market."
But observers were unanimous in describing Lew's intelligence and strong grasp of budgetary and domestic issues, with some saying that he may prove successful if appointed to the position, despite his lack of direct industry experience.
"If Mr. Lew is nominated and confirmed, he brings a great deal of fiscal and budget experience to the Treasury Secretary's office," said Camden Fine, president and chief executive of the Independent Community Bankers of America. "Having been director of OMB and now chief of staff, he knows both the fiscal and budget side and the political side of issues that are critical to the banking industry. ICBA would look forward to working to him."
Tony Fratto, a partner at Hamilton Place Strategies and former Treasury official, said that while the last two Treasury heads have come from strong financial backgrounds, many over the past two decades have not. For example, John Snow was a railroad executive and Lloyd Bentsen a senator and vice presidential candidate before taking the agency's helm.
"They all bring their own sets of talents, and there's no perfect mold for it," said Fratto, though he cautioned that Lew could still be challenged on his lack of experience, particularly on international economic issues.
Observers also said that industry experience is crucial for relationship building.
"While he can undoubtedly learn the material on the job, we question whether he has sufficient relationships with the banking industry in the U.S. and abroad, which can be critical during a financial crisis," said Brian Gardner, an analyst with Keefe, Bruyette & Woods, in an analyst note. "We think this means that if such a crisis were to erupt during his tenure, he will need to rely, at least initially, on the Fed or another Treasury official who has strong relationships and experience with the financial markets."
Longstanding relationships with central players are also important for helping to gauge the potential industry reaction to various Treasury decisions.
"It is really helpful to have those relationships and to know who you can trust when you are in the trenches. If we do this, what is the impact—good, bad or indifferent?" said Edward Mills, a financial policy analyst at FBR Capital Markets and former Hill aide. "Sometimes when you are in a government position, if you do something people don't like, they'll come in with their hair on fire and tell you why it's terrible. Having those deep relationships can help you to discern what's an annoyance and what's really bad, and help you navigate the waters from there."
For his part, Lew has said little publicly about his views regarding the industry. But he did downplay the role of deregulation in causing the financial crisis at his confirmation hearing to become OMB director in September 2010.
"I don't consider myself an expert in some of these aspects of the financial industry. My experience in the financial industry has been as a manager, not as an investment advisor," Lew said at the hearing. "My sense is, as someone who has generally been familiar with these trends, is that the problems in the financial industry preceded deregulation. There was an increasing emphasis on highly abstract leverage derivative products that got us to the point that, in the period of time leading up to the financial crisis, risks were taken. They weren't fully embraced. They weren't well understood."
Analysts said that Lew would be unlikely to depart too far from the direction of his predecessor, Geithner, on several critical industry issues, including the Financial Stability Oversight Council's work looking at money market fund reforms and designations of systemically important nonbanks. The Treasury secretary plays a vital role on the Financial Stability Oversight Council as council chair and one of the group's 10 voting members.
"We're not expecting any major policy changes on FSOC issues, either with money market funds or with nonbank" systemically important financial institutions, Seiberg said.
Nonetheless, Lew's relative inexperience could slow FSOC's progress as he gets up to speed.