My commenters are pretty unanimous that I shouldn’t have published yesterday’s post on Bob Rubin. So I’ll not mention the subject again, and leave that debate to the comments of that post. For there’s more than enough Rubin debate to go around, especially now that Jacob Weisberg, who co-wrote Rubin’s memoir, has published an essay entitled “In Defense of Robert Rubin“.
It’s far from convincing, boiling down as it does to what might be called the Hypocrite’s Defense: “never mind what he did, look at what he said!”
To me, the most wrongheaded of the accusations is that Rubin prevented effective financial regulation when he was in government. I smile when I hear this claim because of the hours I spent listening to him argue the opposite. Rubin’s view has always been that the financial system needs to be protected from the excesses of markets. He was the first person I ever heard talk about the risk of derivatives… After the Asian financial crisis, one of Rubin’s refrains was: I think at some point we could have a derivatives-driven financial crisis.
If this is true — and I have no reason to believe that it isn’t — then that makes Rubin more culpable, not less. For there’s no doubt that over the course of the Clinton administration, financial services industry in general, and trade in derivatives in particular, were deregulated to an unprecedented degree. From a financial and economic point of view, the two darkest spots on Clinton’s record are the Gramm-Leach-Bliley Act and the Commodity Futures Modernization Act. And while Rubin might not have been at Treasury any more when those acts were signed into law, there’s no doubt that he personifies, more than anybody else, the economic and financial policy of the Clinton administration. And there’s no evidence whatsoever that he ever stood up in opposition to either of them.
So what’s Weisberg’s excuse for this disastrous failure?
When he was in the Clinton administration, Rubin thought that absent a crisis, it would be politically impossible to pass new rules because of the intensity of the opposition from his former colleagues on Wall Street. He also faced disagreement from Fed Chairman Alan Greenspan, who believed that markets were essentially self-regulating, and some skepticism from his own deputy at Treasury, Larry Summers. Rubin goes into this at length in his book, noting that Summers later ridiculed the kind of comprehensive margin requirements Rubin favored as “playing tennis with wooden rackets.” The three did agree, however, that a legally ambiguous effort by the Commodity Futures Trading Corp., then led by Brooksley Born, to regulate over-the-counter derivatives could have created dangerous market uncertainty.
Let’s take this one item at a time. First of all, Rubin thought he couldn’t pass new laws because Wall Street wouldn’t like them. This is just another way of saying that Rubin was so completely captured by Wall Street that he considered any legislation which might slow it down to be a political impossibility. He never even tried.
Secondly, Rubin was afraid of opposition from Greenspan — an unelected official at an independent central bank which was at the time proud of the fact that it has no control over legislation. (Today, of course, things are different, to the degree that a leaked Fed memo is playing a huge role on Capitol Hill with respect to the prospects for Blanche Lincoln’s derivatives proposals making it into law.)
Thirdly, Rubin faced “some skepticism” from his deputy, Larry Summers. This one hardly needs comment — but for the fact that Rubin not only was overly solicitous to his deputy on this subject, but was also instrumental in promoting him to Secretary upon his own departure, thereby installing as his successor someone who had no desire to regulate derivatives at all.
Finally, faced with a real-life proposal to regulate derivatives, Rubin opposed it, on the grounds that it “could have created dangerous market uncertainty”. I know what dangerous market uncertainty looks like, Bob: it looks like the TED spread gapping out to more than 450bp, as uncertainty over derivatives-related counterparty risk brings the global financial system to the edge of the precipice. I’d love to know what kind of dangerous market uncertainty Rubin was worried about: maybe the danger that senior Goldman Sachs derivatives traders would no longer be able to afford their fourth house?
Back to Weisberg:
Rubin was not wrong about the risk of unregulated derivatives, nor was he opposed to regulating them. To the contrary, he was prophetic about the risk and correct in his prescription.
Well, Rubin was opposed to regulating derivatives when someone (Born) tried to come along and actually do it. And he never bothered to try to enact his prescient precription. It’s a bit like seeing someone’s house burn down, and then saying “you know it’s OK, he really knew — and even said in public — that he ought to buy fire insurance”. Being prophetic, Jacob, is no defense at all. Quite the opposite.
But Weisberg continues with the same idea when he defends Rubin’s indefensible tenure at Citigroup:
Many a Citi executive sat in his corner office listening to the same apprehensions I heard so often about the mispricing of risk, the excesses in the credit market, and the danger of relying on mathematical models.
Except after delivering his disquisitions on the dangers of derivatives, Rubin would then turn around and tell Chuck Prince to let Tommy Maheras take ever more risk in the Citigroup fixed-income department, relying on exactly the mathematical models which he had just been deprecating. Writes Weisberg:
Even if Rubin had better understood the risks Citi traders were taking and been in a position to do something about it, he almost certainly would not have said, “sell the AAA-rated CDOs.”
Actually, Rubin was in a position to do something about the risks that Citi traders were taking. And what he said was “buy even more AAA-rated CDOs”. Rubin, the golden Goldman Sachs arbitrageur, was so highly respected within Citi that neither the CEO nor the board ever thought about questioning his judgment on the proper risk exposure that the fixed-income department should be allowed to take. And so it ended up growing out of control.
Weisberg ignores most of the many other criticisms which can be made of Rubin. To repeat myself:
- He epitomized the way in which traders ousted investment bankers and turned investment banks into systemically-dangerous institutions by making them much larger than they had ever been in the past.
- For all his vocal bellyaching about tail risk, he ultimately made his money as an arbitrageur, making leveraged bets that something with a 95% chance of happening was, indeed, going to happen. That’s a strategy which works until it doesn’t — but by the time it failed, Rubin had moved on to greater things.
- He was one of those senior men at investment banks who encouraged risk-taking without understanding the risks which were being taken.
- He was perfectly happy to see Larry Summers cheer on the single most disastrous deregulation of derivatives ever, the CFMA.
- He allowed the illegal creation of Citigroup with a nod and a wink, knowing that Gramm-Leach-Bliley was just around the corner and would make Citigroup legal in retrospect.
- He then collected his just rewards in the form of $126 million in pay from Citi, for a job which even Weisberg admits involved no managerial responsibility.
- He turned the job of Treasury secretary into a job where the first priority was to make Wall Street happy, asking for nothing but cheap debt in return.
- He institutionalized and epitomized the revolving door from Wall Street to Washington and back again.
- He set himself up as a wise expert on risk, even as he had no idea what risks his own company was running.
- He took on a job with significant power, but ducked any responsibility which might normally go with such power.
- He specifically refused to take any responsibility for his recommendations to Weill and Prince on the subject of risk-taking.
- He failed to push Prince to put in place any kind of succession plan, thereby creating a horrible vacuum at the top of Citigroup just as strong leadership was desperately needed.
- He’s slippery and unapologetic in hindsight.
So let’s not try to let Rubin off the hook here: he, more than any other individual, deserves an enormous amount of blame for the financial crisis.