July 14, 2010
President Barack Obama’s choice to lead the White House budget office oversaw a Citigroup unit that profited off the housing collapse and financial crisis by investing in a hedge fund king who correctly predicted the eventual subprime meltdown and now finds himself involved in the center of the U.S. government’s fraud case against Goldman Sachs.
Jacob Lew, named Tuesday as Obama’s nominee to lead the Office of Management and Budget to replace departing OMB chief Peter Orszag, served as chief operating officer of Citigroup Alternative Investments in 2008. He has served as a top aide to Secretary of State Hillary Clinton since the administration came into office.
Though Lew is a longtime public servant who’s spent nearly 30 years in various positions throughout government, it is his few years at Citi — in particular the one year he spent at its then-$54 billion proprietary trading, hedge fund and private equity unit — that’s likely to raise the most eyebrows in the coming weeks as Lew faces a Senate confirmation hearing.
Especially his unit’s investments in a hedge fund that bet on the housing market to collapse — a reality suffered by millions of American homeowners.
At the time, Citi’s Alternative Investments unit was a $54.3 billion behemoth that participated in the kinds of activities that would be largely limited under the coming financial reform bill. The bill, which is expected to pass the Senate as soon as this week, contains the “Volcker Rules,” named after their champion, former Federal Reserve Chairman Paul Volcker, which limits the amount of money banks can invest in hedge funds, private equity funds, and use to either invest or speculate in the financial markets. About 20 percent of the unit’s available funds, or $11 billion, came from Citi itself (rather than clients), according to the bank’s April 18, 2008, presentation to investors.
One part of the entity invested in hedge funds. Multi-Adviser Hedge Fund Portfolios LLC was a unit of Alternative Investments’ Hedge Fund Management Group, the 36th-largest such “fund of hedge funds” in the world when Lew came aboard, according to a ranking by Alpha magazine, a publication that covers the hedge fund industry.
That Multi-Adviser fund in particular had $407 million by the end of 2007, a week before Lew was named as Alternative Investments’ chief operating officer, according to SEC filings. At that time, it had $18 million invested in Paulson Advantage Plus LP, worth $26.4 million, comprising about 6.5 percent of the Multi-Adviser fund’s total capital.
The Paulson fund was run by hedge fund king John Paulson, the man who made billions off the deterioration of the housing industry by making bearish bets on securities tied to home mortgages — particularly subprime home mortgages.
One of those bets involved Goldman Sachs, Wall Street’s most profitable firm and the target of multiple investigations and lawsuits stemming from its bets on the housing market and actions during the height of the financial crisis.
On April 16, the SEC charged Goldman and one of its employees for defrauding investors by creating and selling exotic securities tied to subprime home mortgages in 2007 without disclosing that they were handpicked by a hedge fund that was betting on them to fail.
That hedge fund was run by John Paulson. He has not been charged with any wrongdoing, nor is he likely to be.
During Lew’s tenure atop Citi’s Alternative Investments group, the Multi-Adviser fund significantly increased its investment in Paulson’s fund, more than doubling Citi’s investment to $41.5 million by March 2008. On paper the firm’s investment was worth $55.2 million, accounting for 9.7 percent of the fund’s total assets to rank as its second-biggest investment, SEC filings show.
The next quarter, the value of the investment jumped to $60.3 million, making it the biggest part of the Multi-Adviser fund.
By the end of September, the Citi fund, realizing some of its profits, took money out of Paulson’s hedge fund. It’s investment was down to $31.5 million, a $10 million decrease from June, but it was still worth $57.3 million, a mere $3 million less than June’s appraisal, according to filings with the SEC.
By December 31, the value of Citi’s investment jumped to $57.3 million, reflecting the declining fortunes of homeowners and other investors, and the economy at large. It now comprised 10 percent of the Multi-Adviser fund, making it the fund’s biggest holding.
The Citi fund redeemed $13 million of its stake in Paulson’s hedge fund by March 2009, bringing its investment down to $18.5 million — roughly the same amount it was before Lew became Alternative Investments’ COO. But that stake — worth $26 million at the end of 2007 — was now worth more than $50 million, SEC filings show.
Paulson’s fund, Advantage Plus LP, went up 37.8 percent in 2008, according to Paulson’s year-end letter to shareholders.
The Advantage Plus fund made its money thanks to bearish bets on financial institutions.
“[E]ight out of the top 10 banks on our list either failed, were recapitalized by the government, or were sold off to other banks as part of government-backed transactions,” the hedge fund wrote to investors in its year-end letter.
Lew held other jobs under Clinton; he was a member of the National Security Council and was a special assistant to the president from 1993 to 1994, when he helped design AmeriCorps, the national youth service program.
Is it Coincidence that Jack Lew is inadvertently connected to Soros (through Paul Soros and David de Ferranti?
As they say: If you want to uncover connections……..Follow the money.
Why is it America that anything connected to Obama IS CONNECTED (directly or indirectly) to George Soros?
Do you……America…..BELIEVE that Jack Lew can be the Head of the Treasury Department in a non-partisan fashion?
If you do….I have a bridge to sell you.
America: “Had Enough” of the lies and stealth nationalization of America’s financial sector?
JUST NO LONGER SILENT.