Larry Summers' Citigroup Problem
Could a possible conflict of interest derail the former Treasury secretary's appointment to run the Federal Reserve?
Update 2, Sunday September 15: Larry Summers has withdrawn his name from consideration as chairman of the Fed.
Update 1, Friday September 13: On Friday evening, Bloomberg reported that Larry Summers has severed his ties with Citigroup while the White House considers nominating him as Fed chair.
Former Treasury Secretary Larry Summers' consulting gig with the banking behemoth Citigroup could come back to haunt him if he is nominated to succeed Ben Bernanke as chairman of the Federal Reserve. Bernanke's term expires in January, and Summers and Janet Yellen, the central bank's vice-chair, appear to be front-runners for the post, with media reports suggesting that President Barack Obama is fond of the controversy-prone Summers. But there may be a hitch with a Summers appointment. After Obama took office in 2008, he enacted sweeping ethics rules that say that no presidential appointee can work on matters directly related to a former employer for two years after taking a government job. That means that unless Obama grants Summers an exemption from the rules—a move that could be politically controversial—the former Treasury secretary will have to recuse himself from a slew of Fed decisions involving Citi, which is the third-largest bank in America. Experts say those recusals could hamper Summers' ability to run the Fed effectively.
"Citigroup is a behemoth on Wall Street, and constantly subject to Fed regulatory actions," says Craig Holman, the architect of Obama's 2009 ethics rules and currently a government affairs lobbyist for the consumer watchdog Public Citizen. "I would expect Summers would have to recuse himself quite frequently." He adds, "Recusal can be expected to be so frequent as to hinder Summers' ability to carry out his job as Fed chairman."
The Obama administration has granted dozens of ethics rules waivers since 2009, but they have mostly gone to lower-level appointees with limited conflicts of interest. Were Summers to be granted a waiver, according to Holman, it would be the most significant one yet.
If appointed, Summers might have to remove himself from consultations on penalties levied against Citi for things like sketchy foreclosure practices and inadequate anti-money-laundering protections. Nor would he be able to vote on post-financial crisis rules that Congress ordered the Fed to draft, including restrictions on CEO pay and guidelines for how much emergency capital Citi has to keep on its books. (The Fed board votes on all regulations, mergers, and applications to form new banks; it has voted 20 times so far in 2013. Penalty decisions are often delegated to staff or regional reserve banks, but the board consults on them.)