Jack Lew, the nominee for U.S. Treasury secretary, said he wasn’t aware that a personal investment involved a fund in the Cayman Islands and he lost money when he sold the holding.
Lew, selected by President Barack Obama last month to succeed Timothy F. Geithner, responded to senators’ questions about the investment and his work at Citigroup Inc. as he testified at his confirmation hearing before the Senate Finance Committee in Washington today. Lew also said he sees opportunities to broaden the tax base and lower corporate and perhaps individual tax rates.
Committee Chairman Max Baucus, a Montana Democrat, said a vote on Lew’s nomination would likely occur after the Senate returns from next week’s scheduled recess. It would then go to the full Senate, and Baucus said he expected Lew to be confirmed.
So far, no Republicans on the panel have said how they will vote on Lew’s nomination. Senator Charles Grassley, an Iowa Republican, said in a statement after the hearing he was surprised that Lew professed to be unfamiliar with a Cayman Islands address associated by critics with tax avoidance.
Lew’s testimony was “jaw-dropping,” especially given that Obama and Democratic senators have repeatedly mentioned the office building where the Citigroup fund was located, Grassley said.
“I have serious doubts about whether the president made the right choice,” he said.
Lew invested $56,000 in the Citigroup fund in the Caymans and sold it for $54,418, according to Sean Neary, a spokesman for the committee. Responding to questions from Baucus, Lew said he divested the fund after he took a government position in 2009 and paid any taxes owed.
“My benefit was really very small in the sense that I took a loss when I sold the investment,” Lew said.
Grassley noted that Obama has criticized Cayman investments.
“You invested more money there than the average American makes in a year,” Grassley said. “There’s a certain hypocrisy in what the president says about other taxpayers and your appointment.”
Hedge funds often establish investments in the Cayman Islands to limit potential taxes for nonprofit and foreign investors.
Grassley also questioned a $940,000 bonus that Lew received in January 2009 as Citigroup was receiving federal bailout funds.
Lew said he was paid in the same manner as other private-sector employees in similar jobs.
“I think I actually performed quite well in managing the business operations,” he said, citing real estate sales and other moves to make the company more efficient.
Lew, 57, is Obama’s former chief of staff and was director of the Office of Management and Budget under both Obama and President Bill Clinton. He said the country needs “balanced” deficit reduction that includes more revenue and changes to entitlement programs.
Republicans reject that combination of taxes and spending, a divide that will make it difficult for Congress and the administration to agree on rewriting the tax code.
“The best thing would be for us to do both individual and business tax reform,” Lew said. “The challenges are many, but I think once we’re doing tax reform, we should do it right.”
Republicans say any revenue gained from broadening the tax base should be used to lower tax rates, not reduce the deficit or pay for spending. Lew said he supported a lower corporate tax rate and that he hoped individual rates could be reduced too.
“The goal in all this should be getting the rates down and promoting economic growth,” said Senator John Thune, a South Dakota Republican.
Treasuries extended losses, pushing 10-year yields higher for a third day, as the U.S. sold $24 billion of the securities after a report showed retail sales rose for a third straight month.
The yield on the current 10-year note rose five basis points, or 0.05 percentage point, to 2.03 percent at 4:55 p.m. in New York, according to Bloomberg Bond Trader prices. The yield touched 2.058 percent on Feb. 4, the highest level since April 12.
On international taxes, Lew said there is “room to work together” to make changes that could lead to lighter burdens on some foreign income of U.S. companies.
His comments referred to the international tax system as a “dial,” not a binary choice between a territorial system that exempts foreign income of U.S. companies or a worldwide system that taxes it at the U.S. rate. He said that the current system, often labeled worldwide, is already a hybrid.
He emphasized that the administration supports a global minimum tax. Still, his comments suggested that the administration could support a system that is nominally “territorial” like Republicans want and include limits on companies’ ability to locate income in low-tax or no-tax countries.
Senator Orrin Hatch of Utah, the top Republican on the Finance Committee, focused on Lew’s time working at Citigroup Inc. and questioned whether Lew could work as the chairman of the Financial Stability Oversight Council as it oversees the so-called Volcker Rule designed to separate proprietary trading from traditional banking.
“If you were to be confirmed, it could lead to an awkward situation in which, in your role as chair of the FSOC, you would effectively be saying to financial firms: ‘Do as I say, not as I did,’ ” Hatch said, adding that Lew was “well-compensated” at Citigroup. “These are not trivial matters. Indeed, they bear directly on your qualifications.”
Lew worked as a Citigroup executive from 2006 before joining the Obama administration at the State Department in 2009. His tenure at New York-based Citigroup overlapped with the U.S. government’s $45 billion bailout during the 2008 global crisis. Citigroup later repaid the government funds.
Lew served as managing director and chief operating officer of Citi Global Wealth Management. In 2008 he moved to Citi Alternative Investments, which managed billions of dollars in private-equity and hedge-fund investments, some of which were under pressure as the financial crisis neared. A group of the unit’s municipal bond funds lost most of their value that year, placing the bank at the center of a regulatory probe and a wave of litigation from investors.
Lew said he wasn’t responsible for Citigroup’s investment decisions.
After the hearing, Hatch declined to say whether he’ll support Lew’s nomination.
In response to questions from Democratic senators Sherrod Brown of Ohio and Bob Casey of Pennsylvania, Lew said the Chinese yuan is still undervalued.
“We pushed back on our perception that the currency is undervalued,” Lew said. “We made progress. It is still undervalued and more progress” needs to be made.
He also reiterated the U.S. government’s “strong dollar” policy.
Lew responded to criticism from Republicans that he came up with the idea for sequestration, the across-the-board cuts, half in defense, that are scheduled to start March 1. The cuts result from a budget agreement reached in August 2011.
The reality, he said, was “more complicated” than that because he was trying to broker a deal that would include an increase in the federal debt ceiling.
“I look back at a time when a lot of people thought we were going to default,” Lew said. “That was not an acceptable option.”
Lew was introduced and endorsed by Senator Charles Schumer, a New York Democrat and Pete Domenici, a former Republican senator from New Mexico.