The tragedy of Prince and Rubin

By Felix Salmon
April 8, 2010
Cyrus Sanati for getting a bit of snark into Dealbook:

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Well done to Cyrus Sanati for getting a bit of snark into Dealbook:

Byron Georgiou asked [Chuck Prince] about the ballooning of Citi’s leveraged loan exposure to $100 billion from $35 billion within a short period of time.

“If you were at all concerned about this business how come you allowed the limits to be tripled during that period?” he asked.

“My belief then and my belief now is that one firm in this business cannot unilaterally withdraw from the business and maintain its ability to conduct business in the future,” Mr. Prince said…

“If you are not engaged in business, people leave the institution, so it is impossible to say in my view to your bankers we are just not going to participate in the business in the next year or so until things become a little more rational,” he said. “You can’t do that and expect to have any people left to conduct business in the future.”

Just months after Mr. Prince’s dancing comment, Citi took a $1.5 billion write down tied to its leverage loan portfolio. Most of the bankers that did those deals are no longer employed at the firm.

Of course this is a prime example of Prince not answering the question. Georgiou didn’t ask Prince why Citi hadn’t quit the leveraged loan business entirely: he asked why Citi had trebled the size of its leveraged loan business during a time when Prince claimed to be concerned about the risks involved and indeed, by his own account, specifically asked regulators to step in and impose limitations.

It really ought to go without saying that the CEO of a company as big as Citigroup, especially when he’s being paid a hefty ten-figure salary, should be able to control his own businesses without crawling to regulators with a plea of “stop me before I issue another cov-lite bond, I can’t help myself”. If Prince would have been happy to see regulators crack down on his leveraged-loan operations, he should by rights have been even more happy to do so himself. After all, if regulators did it, there wouldn’t be any competitive advantage to the move, whereas if he did it and his competitors kept on making bad loans, then Citi would end up beating its competition.

But that’s not the way that bank incentives work: no one ever gets rewarded for not doing a bad deal. In fact, you’re much more likely to get rewarded for doing a bad deal: the investment-banking world rewards dealmaking much more than it rewards successful dealmaking.

The tragedy of Chuck Prince is that he was smart enough to understand how screwed up his incentives were, while at the same time being so weak that he felt powerless to do anything about it, beyond bleating pathetically to his regulators. The tragedy of Bob Rubin is that he stood loyally by Prince’s side the entire time, supporting him wholeheartedly in his milquetoast pusillanimity. And indeed remained loyal to Prince even through the FCIC hearings this morning.

And the tragedy for the rest of us is that we picked up the tab for the errors of Prince and Rubin to the tune of hundreds of billions of dollars, while letting them both retire with dynastic wealth. Tim Geithner, remember, bears almost as much responsibility for Citigroup’s implosion as Prince and Rubin do: after all, their job was to take risks in the service of shareholder returns. Geithner, as their regulator, had the job of protecting the downside.

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