Where Rubin went wrong

By Felix Salmon
August 21, 2009
Charlie Gasparino is right:


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Charlie Gasparino is right:

If there’s one certainty of the past decade of Wall Street greed and government mismanagement of the economy, it’s that Citigroup was a grossly mismanaged institution. Eventually, the federal government was forced to prevent what would have been the largest bank failure in U.S. history by pumping some $50 billion in capital into the bank, and guaranteeing hundreds of millions in toxic assets.

The U.S. government is now Citigroup’s largest single shareholder. The firm is currently on its third CEO (and some regulators are pressing for yet another change at the top); it has gone through almost a half dozen CFOs, numerous management changes during its sordid history, and endless regulatory turmoil.

Throughout the good times and bad, there’s been one constant—Bob Rubin. And consider the following: Citigroup was technically illegal when it was founded by Sandy Weill and John Reed back in 1998 because it combined both commercial and investment banking, but with the help of Rubin as Treasury secretary, the law that would have prevented the supermarket model from working—The Glass-Steagall Act— was dismantled. Citigroup survived, and Rubin was rewarded with his dream job: Lots of money and little if any management responsibility.

Now you know why Bob Rubin’s reputation won’t be repaired anytime soon.

There’s a typo: the government guarantees are for hundreds of billions in toxic assets, not hundreds of millions.

What interests me is that although Gasparino concedes that Rubin’s actions as Treasury secretary were instrumental in creating the monster that was Citigroup, he still says that Rubin “served this country well while in government”.

My view of Rubin is harsher: that from the very beginning of his career he amassed vast stores of both fiscal and reputational capital by making huge bets that things would go right. And so long as things went right, Rubin became ever richer and more powerful. When things went wrong, however, he was blindsided with enormous force. Rubin was so used to things going his way that he lost sight of the possibility that there was any other potential outcome:

[Rubin] has been speaking to former government officials, regulators and friends on Wall Street to determine if they saw the financial crisis coming because he sure didn’t until it was too late. Most admit they didn’t either, and that makes Rubin feel better.

Of course as any former Goldman employee should know, this isn’t a simple binary question — did you see the crisis coming or didn’t you. It’s a question of risk management: did you see the possibility that the crisis might come, and did you protect your balance sheet against that possibility. In Rubin’s case, clearly, the answer is no. While many senior officials were very worried about the possibility that the Great Moderation was really just an old-fashioned credit bubble, Rubin wasn’t. As a result, Chuck Prince kept dancing, fatally, until the music stopped.

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