Lew’s time at the wealth-management division was relatively placid. Revenue grew steadily.
Meanwhile, big changes were afoot at Citigroup.
A year after Lew joined the bank, Citigroup paid $800 million for a hedge fund called Old Lane. The bank had its eye not only on the fund and its clients, but on the man running the operation, Vikram Pandit. Once the acquisition was completed, Old Lane became the bank’s primary hedge fund, housed in its alternative investments unit, CAI.
At the same time, a downturn in the housing market was becoming a full-blown crisis for Wall Street, courtesy of the complex financial instruments invented by the industry. By the fall, losses tied to subprime mortgages began wiping out profits at banks everywhere — but especially at Citigroup.
In November 2007, chief executive Chuck Prince stepped down. Pandit, who only months earlier was running Old Lane, was named the bank’s new leader, leaving holes at the top of CAI.
Ned Kelly, an executive with experience handling investments, became head of the group. But CAI also needed someone with hefty management experience.
The bank turned to Lew, according to Michael Schlein, a former president at Citigroup who has known Lew for years.
“They complemented one another well,” said Schlein, now president and chief executive of Accion, a nonprofit financial-services company. “At that time, the division needed good, solid management.”
A news release announcing Lew’s new job said he would “oversee coordination between the operations, technology, human resources, legal, financial and regional departments.” It added that Lew would be a member of Citigroup’s management committee, a group of senior executives who met regularly to discuss the bank’s business.
The division under Lew’s watch was a sprawling group.
A document from May 2007, which may have been prepared for potential clients, lists 14 investment areas, including private equity, real estate, venture capital and infrastructure.
The document said 20 percent of CAI’s capital was Citigroup’s own, totaling $10.8 billion. This meant that CAI was a center for the bank’s proprietary trading, a practice that is, in theory, now banned by the new Volcker rule in the Dodd-Frank bill.
By the time Lew joined in 2008, the hedge funds in the unit were in freefall. The bank began pumping hundreds of millions of dollars into the funds in an effort to keep them afloat.
As investors saw their investments getting wiped out, some began suing the bank, saying they were misled about the level of risk in the investments they bought.
During this time, government agencies also began asking for materials related to the marketing of the investments, according to a Citigroup financial filing for the quarter ending in June 2008.
Lew was “in the loop” on the bank’s damage-control efforts as it tried to contain investors’ concerns over the imploding hedge funds, according to a person familiar with evidence from one of the investor lawsuits against the bank that year. The person spoke on the condition of anonymity because many documents related to the cases are not public.
Separately, the bank’s structured investment vehicles, or SIVs, were generating massive losses for the bank. These pools of investments, which included exotic and risky bets, had been held off the bank’s books and out of the view of regulators.
It is not clear how much oversight Lew exerted over the SIVs.
According to an annual financial filing for 2007, the SIVs were a part of CAI:
“Alternative Investments, through its Global Credit Structures investment center, is the investment manager for seven Structured Investment Vehicles (SIVs),” the filing says.
“To be in the SIVs world at that point in time, that would’ve been in the middle of a financial tornado,” said Williams, the former Fed bank examiner. “I can imagine [Lew] got some gray hair very quickly.”
Yet a critical decision was made before Lew became chief operating officer of CAI: The bank decided to bring the funds onto its balance sheet.
This was a perilous move for the bank. Moving the SIVs onto Citigroup’s balance sheet meant that, just as the bank was hemorraghing money from the mortgage-related losses in its other divisions, it would have to account for massive losses from the SIVs. That would drain still more money from the increasingly vulnerable firm.
Citigroup’s finances continued to nosedive until that fall, when the bank landed in the federal government’s arms. Citigroup received the most assistance of all the banks, between the Treasury’s Troubled Assets Relief Program, the Federal Reserve and the Federal Deposit Insurance Corp.