Blaming Prince and Rubin

By Felix Salmon
April 8, 2010
more responsibility for the crisis than Prince does -- still refused to say that he was sorry, let alone accept any responsibility for anything, except in a vague "it was everybody's fault" kind of way.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

This morning saw Chuck Prince and Bob Rubin hauled up in front of the Financial Crisis Inquiry Commission, and they didn’t do themselves any favors at all. Even in the wake of Citigroup’s systemically-devastating collapse, they insisted that Citigroup’s risk management systems were “robust and proactive”, to use Rubin’s words. And while Prince apologized for his actions, Rubin — who bears more responsibility for the crisis than Prince does — still refused to say that he was sorry, let alone accept any responsibility for anything, except in a vague “it was everybody’s fault” kind of way.

The commissioners, especially Angelides, Holtz-Eakin, and Georgiou, asked some very good and pointed questions, most of which were ducked by the former Citi executives. At one point, despite the fact that Brooksley Born was one of the commissioners, Rubin even declared that he wasn’t in favor of derivatives deregulation while he was at Treasury. (In fact, he clashed so strongly with Born on the issue at the time that he effectively pushed her out of her position as chair of the CFTC.) Rubin’s position on derivatives regulation is a bit like Hank Paulson’s position on bailing out Lehman Brothers: “I’d love to have done it, but it was impossible legally.” And it’s even less credible.

The fact is, as Rubin is clearly aware, that the risk management function at Citi failed spectacularly, not least in the way that senior executives weren’t even told about Citi’s monstrous subprime exposures until the end of 2007. When pushed on this, Rubin repeated many times what he said in his testimony:

I first recall learning of these super senior positions in the Fall of 2007… I learned that Citi’s exposure included $43 billion of super senior CDO tranches. The business and risk management personnel advised that these CDO tranches were rated AAA or above and had de minimis risk.

My view, which I expressed, was that… these CDO transactions were not completed until the distribution was fully executed.

That said, it is important to remember that the view that the securities could be retained was developed at a time when AAA securities had always been considered money good. Moreover, these losses occurred in the context of a massive decline in the home real estate market that almost no financial models contemplated, including the ratings agencies’ or Citi’s.

This is all very slippery indeed. For one thing, Rubin well knows that you can’t be rated “above” AAA, although the people structuring synthetic CDOs certainly tried to imply that was possible. For another thing, as Georgiou pointed out, a lot of this exposure came in the form of “liquidity puts”, which required Citi to put up no capital. In fact, however, the liquidity puts were essentially the same thing as a multi-billion-dollar contingent credit line from Citi to its off-balance-sheet vehicles, which would have required lots of capital. And yet both Prince and Rubin told the commission with a straight face that Citi wasn’t in the business of regulatory or capital arbitrage.

As for those models of Citi’s, which failed spectacularly, both Prince and Rubin said that they trusted them at the time, and neither of them expressed any regrets about doing so: indeed, both had nothing but praise for the risk managers who put the models together.

The fact is, as Sean Park points out, that Citi got in over its head in the CDO business precisely because it loved being able to add tens of billions of dollars to its balance sheet without anybody (Prince and Rubin emphatically included) noticing or caring. Citi executives revelled in the bank’s enormous size, and considered it one of Citi’s strongest competitive advantages. But they never bothered to spend much time asking just where the growth in the balance sheet was coming from, or what the attendant risks were. It was a monstrous dereliction of their fiduciary duties, and I still hold out some hope that they will be held accountable somehow.

More From Felix Salmon
Post Felix
The Piketty pessimist
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
Comments
10 comments so far

AS A FORMER CITIGROUP EMPLOYEE AND PROFESSIONAL BOND TRADER WITH 39 YEARS EXPERIENCE, I CAN TELL YOU TWO THINGS: CHUCK PRINCE WAS A LAWYER WHO UNDERSTOOD NOTHING ABOUT INVESTMENT BANKING OR RISK. EVEN IF HE HAD BEEN PRESENTED WITH A CAREFUL RISK ANALYSIS OF THE BANKS’ POSITIONS, HE NEITHER WOULD HAVE UNDERSTOOD NOR BEEN ABLE TO EVALUATE THE CREDIBILTY OF WHAT HE WAS SEEING. FORTUNATELY, HAVING HEARD HIM SPEAK HE MOTIVATED ME TO LIQUIDATE MY ENTIRE CITIGROUP POSITION IN MY 401K BETWEEN 48-56. AS FOR RUBIN HE WAS A 15 MILLION A YEAR FIGUREHEAD WHO NEVER PARTICIPATED IN OPERATING MANAGEMENT. THE CDO’S THAT CITIGROUP OWNED WERE OFTEN MARKETED TO CLIENTS IN THE FORM OF HEDGE FUNDS. THE RISKS INHERENT IN THESE PRODUCTS AS WELL AS THEIR LEVERAGE AND COMPLEXITY WERE OBVIOUS TO AN EXPERIENCED TRADER. I AVOIDED THEM FOR THAT REASON SO THE PREMISE OF FALLING BACK ON THE RATING AGENCIES AS A COPOUT IS ABSURD.

Posted by DavidKPerdue | Report as abusive

Rubin is a lying sack of excrement and always has been. There will be no accountability, because he is a Washington insider, and Citi could burn down around him and he would come out smelling like a Rose.

The only accountability for Robert Rubin will be when he burns in hell.

Posted by slatesplace | Report as abusive

I remember reading the following back in 9/08 and thinking no one knows, no one has a clue as to the depth, risks and interconectivity of the mostly dark OTC derivatives market.

Chairperson Born’s prescient remarks in the 11/13/98 “Regulatory Responses to Risk in the OTC Derivatives Market”

http://www.cftc.gov/opa/speeches/opaborn -40.htm

Posted by david3 | Report as abusive

Rubin’s notion of “above AAA” (and obviously, he has one) is getting royally rewarded by taxpayers no matter how far he and his pals screw things up.

Underlying truth: Citi derivatives are the square root of all evil.

Posted by HBC | Report as abusive

I am dismayed but no surprise that Rubin can act with such impunity. It’s incredible that a guy like him can get away with what he did. He’s the de facto, untouchable Chairman of the Board of the country as it seems.

Posted by AlanFurth | Report as abusive

Rubin is a card carrying memeber of the big bank boy club.

He is as crooked as they come.

Just like Paulson, Geithner, Bernanke, and Greenspan ain’t nothing going to happen to him.

The big bank boy club owns the media, government, and law enforcement.

They would think nothing of destroying anyone they consider a threat.

Posted by bigkirb1 | Report as abusive

If you Wiki the gaussian copula and attempt to apply it to derivatives, you will notice you need a math/computer background first, then economics, statistics, insurance, probability, law, etc. The product might fly, might fly far, we’ll have to see.

Posted by ken419 | Report as abusive

Thanks to David K Perdue for your insight on this matter. However, I do find it disheartening.

If they are as incompetent as you point out, then the matter of whether or not they were overpaid and/or entitled to their ridiculous bonuses is something the entire board of directors should be jailed and fined for.

Posted by breezinthru | Report as abusive

Prince and Rubin (as well as all other Bank Senior management) cant have not known about these positions for two reasons :

1. their Bank was financed by these positions via the Repo market.

In Bios, the Bank was (is still) financing itself via the Repo market by exchanging these agaisnt cash to fund these positions.

2. They were paid out these instruments in ways that are extraordinary.

When the word “PV” (Present Value) is going to hit the tape next, then people are going to understand and see the link between Enron and these banks.

Posted by Spread | Report as abusive

Prince and Rubin (as well as all other Bank Senior management) cant have not known about these positions for two reasons :

1. their Bank was financed by these positions via the Repo market (the Shadow Banking System).

In Bios, the Bank was (is still) financing itself via the Repo market by exchanging these against cash to fund these positions.

So how cant you know how your Bank is getting financing ? impossible.

2. They were paid out these instruments in ways that are extraordinary i.e. that require special authorization and there again they couldnt have know.

When the word “PV” (Present Value) is going to hit the tape next, then people are going to understand and see the link between Enron and these banks.

Without getting into too much detail, these securities were used internally for their status of quasi “risk free” instruments to use very aggressive accounting methods of Profit recognition : in summary the Bank recognized ON AN UPFRONT BASIS, profits (very large !!) in advance based on the fact that these securities were supposed to never be impaired.

So first your Bank finances itself using these securities and second the Bank made Bios of bonuses (including them of course) out of these using Enron-style methods but of course you didnt know about it ..

Everybody knows they knew but no harm done because lobbies run the show, not politicians.

And the Financial lobby extracts so much ON AN UP FRONT BASIS out of their respective businesses in CASH that the remaining ownership they have in stock doesnt really count .. this is just to pretend they are committed or get to a Political job to help their ex-colleagues repeat the cycle ..

But is ok because we finance them .. until when ?

Posted by Spread | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/