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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Prince does have a point. The problem we see repeatedly in relation to the financial disaster is that even if one believed the bubble would burst, it was very difficult to predict when. Accordingly, the leadership at company like Citi couldn’t unilaterally pull back, because there is a good chance that they would be axed for not being as profitable as their competitors before their bet that the bubble would burst paid off. We saw similiar pressures drive Fannie and Freddie into the subprime business to compete with the private finacial institutions.

It seems like the only solution here is to allow executive compensation to be clawed back in situations like this, so that executives have an incentive to make long term decisions.

Posted by pickandroll | Report as abusive

“Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process,” a former Citigroup executive said of the bank’s big C.D.O. push. “Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more.’ ss/23citi.html?pagewanted=3&_r=1&hp

I always come back to this post and quote because Rubin explicitly understands that CDOs Increase Risk. Once you realize that, you understand that he wasn’t fooled in any way. It’s really a question of how negligent he was.

Posted by DonthelibertDem | Report as abusive

Anyone should have known that Rubin was a crook from his days in the Clinton administration! Now their mea culpas make those of us with a brain sick to our stomachs. These crooks took millions in salaries and not pretend they are innocent. Then give the fricking money back you s.o.b.s!

Posted by intewedm | Report as abusive

What we have learned today
Decision to do CDOs was made by consultants
Prince blames regulators, rating agencies and
used the famous everyone else did it
Rubin says he was not responsible for any
of the decisions

All while both of these people took huge salaries and provided no added value. Disgusting.

Posted by Sechel | Report as abusive

When a man does wrong, he is considered remorseful and respectable if he does what he can to make things right.

If these executives are truly sorry, then let them pay back what they took. If they oversee accounts of families on the brink then they should clear the slate for those families and let them have their homes free and clear as penance for the wrong doings of the company.

Don’t just pay lip service. Do something with substance. But they never will. Because they are not men of substance. They’ll go back to their parties and comfortable lives while the rest of America tightens it’s belt.

To hell with “I’m sorry”. Make it right.

Posted by Benny_Acosta | Report as abusive

I am atleast happy to see that these people are held responsible for mistakes done during their time and answerable if not accountable. Atleast they will feel some shame and existing Leaders will have some self control on what they do. During their time all they have done is number game. Oh .. Competitor grew by 13% let’s grow by 17%. What that growth mean to society. What that growth mean to your own company in future.. no body cares… To me the person who gives loan to someone knowing he is not able to payback, is even bigger criminal as person who is getting is not having maturity in 1st place. …

Posted by Amaresh_Gangal | Report as abusive

pickandroll: Wrong, wrong and wrong. Numerous investment managers and institutions pulled back from the worst of the bubble, survived, and profited. For instance, originating/distributing subprime mortgages was a reasonably safe business if you applied some underwriting standards, knew how to hedge, and didn’t keep originating even when your distribution started to fail and your warehouse/risk limits filled up. It’s true that you lost a big chunk of 2006-07 “profits” but most of those profits were reversed in 2008-09, so as long as you work for people with a three-year+ horizon you should have come through just fine.

If someone sees a bubble, they don’t have to push for the $10m bonus this year or work for the company that has a 3-month horizon. Shareholders, highly paid executives and boards should all monitor short-term risk-taking and look for long-term profits, and there are readily available incentives for all three. The fact that greed, stupidity, complacent regulation and intellectual laziness obstructed the operation of these incentives does not mean that doing the right thing was impossible.

Posted by najdorf | Report as abusive

Prince and Rubin should pay back all the money they earned from 2003-2007

Posted by Storyburn_com | Report as abusive

Interesting that the F word is acceptable to be used in commentary.

Yes, short term incentives have always caused bubbles and consequences. Regulation is needed, but not just for the executives. Short term stockholder requirements drove the bubble. If these guys didn’t deliver, they would be replaced with others who would have done the same.

Congress hasn’t authorized any regulatory agency to come down on anyone making too much money. Big picture, Congress is the problem and they need to fix themselves, but I doubt the voters will let them.

They need to kill the mortgage interest tax deduction. Homeowners think they are getting a break, but if there was no mortgage interest deduction, loan demand would be less and mortgage interest rates would be even lower. The banks and stockholders are the real beneficiaries of the mortgage interest tax deduction.

Posted by jrg | Report as abusive

The Chuck Princes decisions were short term motivated by bonus schemes of Citi. Unfortunately he wasn’t smart enough for taking and executing long term perspective business decisions and withdraws from the bloody business of US mortgages. The main pressure, if I do remember it correctly, of the markets as well as Saudi prince (investor of 4%), was on Chuck to decrease costs /mainly IT/, in 2006-7, which is not easy to manage in such giant as Citi is. Therefore he risks and proffered to gain short term profit instead of long term profitability with lower risk. Citi has global presence and the leverage of risk among Consumer and Corporate part of bank plus US government support in 2008/9 has saved troubled Citi from misery which had roots in US Consumer part of Citibank. The rest of the bank was strong and healthy.
As far as I know the US government support package was paid back by Citi – therefore we could talk about smart investment of US administration.
There are economical cycles with and without influence of banking industry. The banks are just indicators of the health of the whole economy. Is definitely true, that this recession was too deep because of irresponsible business decisions of banking boards and messy financial products covering weak credibility of US mortgages debtors (consumers). But up and downs are present in our lives (private ones) as well as in business.

Posted by Ross71 | Report as abusive

adding to pickandroll’s point: If you’re going to be on top of a massive organization with that kind of responsibility, then you don’t have the luxury of parochially worrying about saving your own job. You are a fiduciary, and if you have to risk getting axed to protect your shareholders, then so be it.

Likewise, Ken Lewis’ worst sin of all was allowing the threat of losing his job to influence his decision on the ML acquisition. I don’t think Jamie Dimon is a diety, but I could imagine him calling Hank and Ben on their bluff. I think Dimon would have quit before caving.

Sadly, this all comes back to the agency problem and the fact that boards and corporate governance are a shadow of what they should be. Would Chuck or Bob have levered up their own personal balance sheets anywhere near that much? What if their own economic interests were truly, and more deeply, bound up in the equity of Citi? Please.

Posted by fixedincome | Report as abusive

f bomb in reuterland???

Posted by scampr | Report as abusive

I remember the joy and delight that the white female HR officer took in rejecting black applicants to positions in Citi. I remember the arrogance of the corporate executives at Citi. It still shows in the executive answers to the committee, but who really cares? After all big monies power and prestige went along with these jobs and it was not open to the ordinary african american. Its a shame that the same rejected African Americans unemployed and homeless must make blood out of stone and turn around and provide tax relief and support to an organization that instead of encouraging and growing the African American customer base must now support the New Indian Organization. The Indians, the Muslims, the Arabs don’t consider themselves black and I think it very offensive to ask black African Americans to take their hard earn taxes and save a white racist corporate organization. In this case racism, dishonesty, lies, the rich elite and corporate america have sold their solds to Wall street, made lots of money of the blacks customers, enjoyed the high life and now leave the eggs for the poor black americans to save. Good luck and please more lies, arrogance and falsehoods its corporate americas customary way of life.

Posted by mwilson30058 | Report as abusive

PickandRoll…you are blinded by the profits. Prince was CEO of the company and he did not invest in a RATIONAL manner, and he ignored risk management principals, something he learned in his business classes. CITI bought up all these worthless securities, then continued to buy more after the danger signals were in place. An assest is only worth as much as the risk attached to it, this is a very basic investment rule. The CITI board of directors removed Prince a year BEFORE this thing blew up, knowing well he had over-leaveraged the company.

Posted by GrissfortheMill | Report as abusive

Birds of Prey

Their shadow dims the sunshine of our day,
As they go lumbering across the sky,
Squawking in joy of feeling safe on high,
Beating their heavy wings of owlish gray.
They scare the singing birds of earth away
As, greed-impelled, they circle threateningly,
Watching the toilers with malignant eye,
From their exclusive haven–birds of prey.
They swoop down for the spoil in certain might,
And fasten in our bleeding flesh their claws.
They beat us to surrender weak with fright,
And tugging and tearing without let or pause,
They flap their hideous wings in grim delight,
And stuff our gory hearts into their maws.
–Claude McKay

Posted by Pfunk | Report as abusive

@mwilson30058…”black African Americans”? Isn’t that redundant?

Posted by iflydaplanes | Report as abusive

Somebody needed to look at Prince and Rubin in that hearing, after they said they had no idea these CDO’s were that risky, and ask this simple question “Are you two incompetent, liars, or both?”

Wall Street keeps saying they need these big paychecks to keep talented people. If Rubin and Prince could not figure out that taking Bbb mortgage backed bonds and repackaging them in a way that made a high percentage of them get a AAA rating required some sort of fraud, then they do not deserve minimum wage. They did not perform due diligence.

I think they are liars, I think they gave themselves “plausible deniability” and I know there were a lot of people in the Nixon White House who used that excuse, and still served time in prison.

They need to spend the rest of their lives in court, defending themselves against lawsuits and fraud charges. These guys make the clowns at Enron look good by comparison.

Posted by randymiller | Report as abusive

And, it is time for Geithner to resign to go teach high school economics on a teacher’s salary. Maybe Gym class, because he might teach kids the wrong lessons in economics.

When he was being confirmed I think we had to sleep with the devil to keep the whole thing from coming down, but now that people like Michael Lewis have given us a clearer picture, it is time for Obama to retool his economic team. Summers stuck his head in the sand when he fought to eliminate Glass Steagall and fought regulation of CDS on the lame excuse that regulating CDS at that time would disrupt the existing CDS market.

There are a lot of people out there with a lot more sense than those two, so Obama needs to get better advisors. If Summers and Geithner are still working for Obama in 2012, I will not vote for him.

Posted by randymiller | Report as abusive

Prior to the establishment of the FDIC as the protector of depositors’ assets the banking law was one of “double liability” for the banks’ shareholders.

The shareholders will be jointly and severally responsible to pony up the shortfall between the banks’ assets and liabilities from their personal wealth, upto the par value of the stock.

This will certainly force the banks’ stockholders (and its managers) to avoid leveraging the bank’s deposits and creditors’ money flippantly.

Why not abolish the FDIC and bring back the notion of double liability of shareholders?

A good law review article can be found here: Miller_and_Macey_2.pdf

Posted by DoubleLiability | Report as abusive

Clearly, the author is mistaken. Bankers, wasn’t Chuck Prince the banker of bankers at Citi? are immensely overpaid for making bad deals.

If the author is even nearly correct aboutr Prince’s decision making while at Citi, he’s either a crook & a liar or was inept & out of his deepth & shouldn’t have been in the position in the first place. Or conceivably he was just a victim of bad luck. There appears to be no fourth choice. IMO it boils down to choices one, he’s a crook, or two, he was unqualified for the position. Between the latter two choices, I lean toward the first, he’s a crook.

Posted by LoachDriver | Report as abusive