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Takeaway: Lew is most likely to replace Geithner at Treasury, which is an improvement, but will likely lead to a continuation of weak dollar policy.

President Obama kicked off negotiations on the fiscal cliff last week before heading to Asia for his first international trip since his re-election.  Interestingly, Obama indirectly made Tim Geithner, outgoing Secretary of the Treasury, as the administration’s lead negotiator.  This is somewhat surprising as it appears to displace Jack Lew, White House Chief of Staff, in his role from the prior negotiations.

There are likely a couple of reasons for Geither to take more of a lead role.  Firstly, Geithner has close ties to Wall Street given his time as the President of the Federal Reserve Bank of New York, so may help settle the markets (or so the argument goes).  Secondly, according to various accounts, including from Bob Woodward’s “The Price of Politics”, Lew developed an adversarial relationship with Republicans in the first round of negotiations.  Finally, and perhaps most importantly, this may well be a signal that Lew is focused on preparing for his next role as Secretary of Treasury.

The role of Secretary of the Treasury is defined on the Treasury department website as follows:

“The Secretary of the Treasury is the principal economic advisor to the President and plays a critical role in policy-making by bringing an economic and government financial policy perspective to issues facing the government. The Secretary is responsible for formulating and recommending domestic and international financial, economic, and tax policy, participating in the formulation of broad fiscal policies that have general significance for the economy, and managing the public debt.”

In effect, the Secretary of the Treasury manages the finances of the United States.  More importantly, as Chairman Bernanke has recently noted, the Treasury Secretary is the key spokesman on the U.S. dollar.  So assuming the rumor mill is on the correct track, and anecdotal evidence suggests it is, who is Jack Lew?

On an education level, Jack Lew bears a pretty similar resemblance to his predecessors at Treasury with an undergraduate degree from Harvard and law degree from Georgetown.   Conversely, unlike recent Secretaries, Geithner, Paulson, Snow and O’Neill as examples, Jack Lew is not a former prominent CEO and does not have, at least currently, the same kind of star power.  In fact, Lew has spent most of career as a numbers and operations guy within the beltway.  As Lew’s former roommate Ari Weiss noted in a National Journal article when describing one of Lew’s first jobs working as an Aid to former Speaker of the House Tip O’Neill:

“Budgets are places with details. Inescapably, you can’t put a budget together on slogans. It appealed to Jack and his nature and his talents because it is something that is essential.”

Thus, very quickly Lew’s government career became focused on the budget and he would go on to have two tours of duty as the Director of the Office of Management and Budget. The first was as President Clinton’s last OMB Director from May 1998 to January 2001.  He then succeeded former Hedgeye guest speaker Peter Orzag as President Obama’s Director of the OMB from November 2010 to January 2012.  In between these roles, Lew was the Executive Vice President of Operations at New York University and also took a spin on Wall Street as the Chief Operating Officer at Citigroup’s now defunct Alternative Investments unit.   

As it relates to his candidacy for Treasury Secretary, there are a few things we like about Lew:

  1. Budget knowledge – There is no question that Lew understands the federal budget and its levers better than almost anyone in Washington, if not the nation.  He has led the OMB twice and before that was a key staffer at OMB.  He understands the long term deficit issues facing the U.S., which will be critical for any incoming Treasury Secretary.
  2. Clinton era tenure – The last time the U.S. federal budget was balanced was under President Clinton, with the Balanced Budget Act of 1997 being a catalyst.  Prior to leaving for his first tour at OMB, Lew coordinated the Clinton administration’s budget and appropriations strategies.  He was also a member of the negotiating team that put together the aforementioned Balanced Budget Act by working across party lines.  In the chart below, we highlight the budget surpluses while Lew was in his role as Director of OMB.                                                               Who is Lew? - 1
  3. Not an attention seeker – Almost to a fault, Lew is known as someone who attempts to stay out of the lime light.  By most accounts, his life is balanced by work, family and faith (he is an Orthodox Jew).  He is certainly lower profile versus many of his predecessors and has a history of largely not commenting in, or on, articles that are written about him or related government negotiations.

By and large the attributes outlined about bode well in describing a potential Treasury Secretary that will be focused on the correct issues relating to reducing the deficit, and in turn advocating for a strong dollar. Unfortunately, there are a number of countervailing pots to consider as well, specifically:

  1. Long time Washington insider – Lew is what he is - a long term Washington insider. On our recent call with Neil Barofksy, a gentleman who was brought in from the outside to run TARP, he made his thoughts pretty clear on the idea that it would be difficult to change the Treasury from the inside and Lew is certainly an insider choice.
  2.  Policy continuity seems likely – On many levels, Lew is a choice that best conveys continuation of prior policy.  He’s been a mainstay in the Obama administration and is certainly not representative of a new voice, or new set of ideas.  On one hand, this will create stability, which is important for the financial markets.  On the other hand, it will also signal to the markets a continuation of a Treasury Department that is not going to adequately defend the U.S. dollar.
  3. Naïve related to markets – In his confirmation hearing to be President Obama’s Director of OMB, Lew was asked by Senator Sanders as to whether he thought de-regulation played a critical role in the to the collapse on Wall Street.  His response was as follows:

“Senator, 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 adviser. My sense, as someone who has generally been familiar with these trends, is that the problems in the financial industry preceded deregulation.”


The primary concern with the statement above, and admittedly it is a cherry picked statement, is that it implies a somewhat superfluous understanding of Wall Street and the banking industry. 

We think that Lew has an experiential history that suggests that he may be a more effective Treasury Secretary than Tim Geithner.  That reality is, though, Washington, DC is rarely changed from the inside. 

Daryl G. Jones

Director of Research