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Why Republicans Should Reject Jack Lew's Nomination (and Why We Won't)

With all of that said, Jack Lew's role at Citigroup was especially dodgy. Citigroup was not merely a facilitator of bubbly hedge funds through the Alternative Investments division for which Lew was chief operating officer. The COO handles legal, regulatory, and administrative matters, and Lew's bonus of $900,000 for 2008 pegs him as a minor player; a mid-level structured products salesman would have earned more than that. Nonetheless he was there, and signed off on one of the worst scams on Wall Street.

When Lew was a COO at Citigroup, I was strategist for a credit derivatives hedge fund that did a great deal of business with Citigroup. We created collateralized debt obligations out of credit default swaps written on junk-quality debt, and through the magic of structuring, turned the junk debt into AAA-rated bonds. Citigroup not only underwrote these bonds, but bought virtually all of them through its so-called structured investment vehicles (SIV's). These are off-balance-sheet devices sanctioned by the deaf-dumb-and-blind monkeys at the regulatory agencies that allowed banks to lever up AAA-rated paper at a ratio of 70 to 1. That is, Citibank bought $70 of these phony AAAs with $1 of actual shareholders' capital. Of course, the supposedly AAA-rated paper rubber-stamped by Moody's and Standard & Poor's bore no more relation to a true AAA security than a Thai counterfeit Rolex bears to the real thing (in fact, the Thai Rolex holds up better under scrutiny -- at least it will tell time). When the crisis hit, the price of these supposed AAA-rated bonds collapsed, leaving Citi with losses multiplied by the 70:1 leverage factor.

That's why Citigroup went bankrupt (or would have except for repeated federal bailouts). There was a daisy-chain between the hedge fund investment side run in part by Jack Lew, the structuring desk, and the structured investment vehicle. Citigroup took a fee for investing in hedge funds, took a fee for structuring the hedge funds' investments, and also bought a great deal of the dodgiest product. We used to tell our counterparties at Citigroup that they were crazy to buy this garbage (in effect, we were short the phony AAA paper that Citigroup was buying with 70:1 leverage. And I told the whole world this was the case on CNBC.) One of the reasons I knew with certainty that the banking system would blow up in 2008 was that I knew in detail what Citigroup had bought on Jack Lew's watch. (The hedge fund I advised paid out its investors in late 2008 with a profit).

If you start disqualifying people for public office for outrageously bad judgment during the bubble, who knows where it will end? I like Newt Gingrich in a lot of ways, and I agree with a lot of what he has to say, but I will never support another Gingrich bid for high public office.

That's why no-one will look too closely under the rock where Jack Lew spent 2006 through 2008. Bill Kristol is right to raise the issue of Republican policy failure over the 2008 financial crisis, but our professional class is not yet ready to come to grips with the economic reality that burst in upon us in 2008. That is one of the reasons we lost the 2012 presidential election and got steamrolled in the recent fiscal cliff negotiations. And that's why Jack Lew will be the next Treasury secretary, even though his main qualification lies in his proven ability to look the other way and sign off on an outrageous degree of chicanery. In this new era of crony capitalism, Jack Lew is the perfect Treasury secretary for a president like Barack Obama.