Senate Republicans pressed President Barack Obama’s choice to head the Treasury Department on Wednesday over an investment in a Cayman Islands fund as well as a bonus deal that came as his then-employer Citigroup was about to need a taxpayer bailout and just before he left the bank to return to the government.
Jacob Lew’s confirmation hearing before the Senate Finance Committee lived up to expectations that the longtime Washington insider would face a frosty reception. During more than three hours of questions, Lew sidestepped some of the pointed questions about his brief tenure at banking giant Citigroup.
The questions weren’t likely to derail his expected Senate confirmation. On another matter, Lew said a large-scale overhaul of the tax code could be achieved without raising taxes.
And he offered an olive branch of sort to Republicans by saying he thinks that a large-scale overhaul of the tax code shouldn’t raise taxes.
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At the hearing’s start, committee Republicans pummeled Lew over his participation in an investment fund offered by Citigroup that was headquartered in the very Cayman Islands building that President Barack Obama lambasted as a tax sham in 2009.
The ranking Republican, Sen. Orrin Hatch of Utah, grilled Lew on his time at Citigroup from 2006 to 2008 as a managing director and chief operating officer of a wealth-management unit and an alternative-investment unit at the heart of the near-meltdown of the U.S. financial system. Hatch asked Lew whether he’d been copied on emails about the imploding complex bonds that led Citi to be given a nearly half-trillion-dollar taxpayer rescue in late 2008.
Hatch also noted that the unit Lew managed later was accused of betting against the very financial product it sold, like other Wall Street banks. He asked Lew whether he’d done anything to address this “or did you not know about the marketing of the sales products in the unit you managed, in which case I wonder what you did do?”
Lew, until recently the White House chief of staff, largely left Hatch’s four-point question unanswered, noting that “It’s quite a number of years. I don’t recall specific conversations.”
“There was a very bad financial situation,” he added. “Yes, I was aware that there were funds that were in trouble. I didn’t have responsibility for the funds themselves, but I was aware that those difficulties were going on.”
On the issue of investment in a Cayman Islands fund, Lew said he’d invested $56,000 in an international fund offered to employees at Citi and lost money on it. He added that he was unaware it was headquartered in the Cayman Islands, an offshore tax haven that attracted attention during the recent presidential campaign because Republican candidate Mitt Romney’s company had established private-equity investment funds there.
Contacted by McClatchy, Citigroup had no comment Wednesday on the Cayman fund.
The hearing grew notably tenser when Sen. Charles Grassley, R-Iowa, asked Lew whether it was morally acceptable for him to have received a nearly $1 million bonus from Citi a day before the bank was forced to take the huge taxpayer bailout. Lew answered that he was “compensated in a manner consistent with other people” in the financial sector.
When Grassley asked whether it was the right decision in retrospect, Lew replied, “I’ll leave it for others to judge.”
Hatch returned to the issue in a second round of questioning, getting Lew to acknowledge that the bonus was on top of a $350,000 base salary at Citi and that it would have been clawed back for most employees who departed the following year. Lew’s contract had a clause that allowed him to still collect the large bonus if he left to take a top-level government job, which he did.
Asked what he did to earn the bonus, Lew said he managed the “business of the business,” selling off problem real estate and cutting costs.
“I think I actually performed quite well,” Lew said.
A budget director in the Clinton and Obama administrations, Lew’s experience dates back to being a top staffer for former House Speaker Thomas “Tip” O’Neill, D-Mass., in the 1980s. Lew reminded the committee that he was at the table for the 1986 revamp of the tax code, the last such tax deal, and oversaw three straight years of budget surpluses in the late 1990s.
On the idea of tax restructuring, Lew offered up what seemed to be several concessions to Republicans. He stated clearly that he doesn’t think a revamp of the corporate tax code should happen without similar changes to the individual tax code.
That’s important to the business community, because owners of smaller companies who declare their business incomes on their personal taxes fear that an overhaul of corporate taxes might leave them disadvantaged
Lew also said the nation didn’t “have the ability to lose revenue as we go through tax reform.” That signaled that he doesn’t favor lowering tax rates without getting rid of a wide number of tax loopholes enjoyed by individual and corporate filers.
Lew also noted that a revamp of the tax code “can be done in a revenue-neutral way.” That means it could be done without raising tax rates.
Sen. Maria Cantwell of Washington state, one of the few Democrats to pose tough questions to Lew, pushed him on whether the Clinton administration’s repeal of the Depression-era Glass-Steagall Act, which erected a wall between commercial and investment banking, was to blame for the U.S. financial crisis and thus should be restored.
The answer is complex, Lew said, adding that resuscitating a 1930s law may not be the best approach.
“I’ll take that as a no,” said Cantwell, cutting him off in midsentence.