The Mechanics of Crony Capitalism

Jack Cranston, writing from Ronda, Spain

Editor’s Note: Many say the Trump administration took crony capitalism to new heights. This post from Jack Cranston’s 2013 archives shows that no matter the presidential administration, crony capitalism is systemic in how Washington and Wall Street do business. He highlights a keen example.

Ever wonder how crony capitalists forge their connections?  A recent Bloomberg News story exposed the machinations and incentives behind a classic crony capitalist job placement.

Jack Lew, Obama’s nominee for the United States Treasury Secretary, worked for Citigroup between stints in government service, and he had an interesting condition included in his employment agreement with Citigroup.  He was incentivized to take a high-level position in the United States government.

Lew served in the Clinton administration as the director of the Office of Management and Budget.  Later, he worked at New York University as a professor and as an executive.  He went on to work for Citigroup in 2006 as the chief operating officer of Citi’s global wealth management division, eventually rising to the position of chief operating officer of Citi’s alternative investments unit in January 2008.

Lew’s employment agreement with Citigroup included standard golden handcuff provisions requiring that he stay with Citi long enough to earn a “guaranteed incentive and retention award,” and for his restricted company stock bonuses to vest. But his agreement also included an unusual clause where he could gain his retention award before the normal qualification period, and his awarded stock would vest if he accepted “a full-time high-level position with the U.S. government or regulatory body.”

Interestingly, other public-service positions wouldn’t qualify, such as positions in local or state government, or working at a high-profile nonprofit organization.  Only the acceptance of a high-level position with the U.S. government would qualify.

These incentives clearly aligned with Citigroup’s interests.  First, if it were to invest in a valuable employee like Lew, Citigroup naturally wanted him to stick around long enough for its investment to pay off.  This is common employment practice.  But it also wanted to incentivize an unusual alternative payoff: getting placed in high level position in the federal government where he could be of benefit to Citigroup.

And, guess what?

Lew was named a deputy secretary of State in 2009, returned to the Office of Management and Budget as director in 2010, and then became Obama’s chief of staff in 2012.

According to a financial disclosure statement filed when he reentered government service in 2009, Lew received $1.1 million of “salary and discretionary cash comp” from Citigroup, along with $250,001 to $500,000 of accelerated restricted Citigroup stock.  His salary in 2008 was $350,000.

Tellingly, this wasn’t a highly principled effort on Citigroup’s part to incentivize an employee who wanted to serve the public.  If so, a myriad of public service positions would have been included to qualify for the incentive package.  No, this was naked self-interest for Citigroup.

If you were Citigroup, wouldn’t you love to have one of your former senior executives appointed as the President’s chief of staff, or, better yet, U.S. Secretary of the Treasury, with his signature on the nation’s currency?

This episode is an insightful glimpse into the machinations of crony capitalism and an example of how Washington and Wall Street work together.  Both of them prioritize their own interests at your expense. 

I encourage you to start living life on your own terms. Your best move is to take control of your life and prioritize your own interests.  The best way to do so is to internationalize your life, putting your business and personal interests and assets out of the reach of crony capitalists. 

Jack Cranston is a partner of Sovereign X and resides in San Miguel de Allende.