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The Revolving Door: Wall Street and the Secretary of the Treasury

by Edward Bonnette, published
Credit: Scott Eells/ Bloomberg News

Wall Street and the Secretary of the Treasury

Tim Geithner is stepping down this year as secretary of the Treasury and President Obama is readying to make his next appointment for the position. It’s not clear at this point whether the president will choose a government insider, someone already serving in Washington, a magnate from the business and finance world, or an “outsider” candidate from another walk of life. However, past precedent indicates that the outsider is the long shot. Tweet

The current front-runner appears to be White House Chief of Staff Jack Lew, according to The Economist. He worked for a short time at Citi Global Wealth Management as their COO, but is largely considered the quintessential government insider.

Prior to his current position, Mr. Lew served as the Director of the Office of Management and Budget (OMB) under Obama and Clinton. Before returning to the OMB position under Obama, Lew was COO and Deputy Secretary of State for the Management and Resources department.

Selecting a government insider is not new -- Tim Geithner was in the public sector prior to appointment -- but it has hardly been the status quo.

Of the past six secretaries of the Treasury, four have been top executives of major companies and two were from the financial and investment giant Goldman Sachs. The trend seems to be that when the economy is thriving, someone close to the private business world is appointed. However, when markets are faltering, like during the 2008 financial crisis, heads of government banking agencies and budget committees are called to ‘save the day.’ Tweet stat: Tweet

The latest Goldman alumni was Mr. Henry (Hank) Paulson, who was chairman and CEO of the company for eight years.

He was appointed by President Bush in 2006 and stepped down in 2009 when President Obama took office and appointed Geithner to the position. While Mr. Paulson can be credited with a number of achievements, including his role in helping establish the G20 Summit, he has also been vilified in the media and popular culture as one of the key players in the financial meltdown of 2008. TIME Magazine even went so far as to name him one of the 25 people to blame for the financial crisis.

Another Goldman alum is Mr. Robert E. Rubin, who was co-chairman of the company and appointed under the Clinton administration, serving from 1995 to 1999. While he is largely credited for being one of the main forces behind turning the national budget from a deficit to a surplus, he also resigned near the beginning of the tech bubble burst.

While no one person can be blamed for any of the recent financial meltdowns of the past few decades, the U.S. Secretary of the Treasury does have considerable influence over the nation’s economy. It begs the question, then, why big business and investment firm insiders have so frequently been given the reigns over regulation of their own industries. Tweet

For instance, Mr. Paulson asked Congress to approve a $700+ billion bailout and helped launch the Federal Tax Rebate Plan, sending out $98 billion in tax rebate checks in Spring 2008. Mr. Rubin pushed for deregulation of the derivatives market and helped cause the repeal of the Glass-Steagall Act. Mr. Geithner helped implement the Dodd-Frank Act, but did little to reign in the systemic problems of the banking industry and the 'too big to fail' ideology.

Any president, whether Republican or Democrat, must engage in a difficult balancing act in appointing a secretary of the Treasury in order to find someone with proper experience in the industries of business and finance, yet who has the independence of mind and fortitude to make difficult regulatory decisions. Tweet

History indicates that past presidents have been happy to limit themselves to a binary search between (a) titan of Wall Street, or (b) government insider. Perhaps with Lew, President Obama is seeking a bit of both. What hasn’t been discussed is the possibility of a true outsider candidate -- someone potentially just from the academic or NGO world, who wouldn’t be beholden to Wall Street or the Beltway. Whether one kind of person is better suited than the others will be up for debate for many decades to come.

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