Has Obama been skewered by those who called it wrong?

5th December 2008

Have fretted for weeks about the heroic  Obama’s economic appointments.  Refuse to go along with the knee-jerk ‘sell-out’ accusations. Was really pleased about Tim Geithner – whom I  met when he backed not just Jubilee 2000, but also a battle I fought at the IMF (with Prof. Kunibert Raffer) to draft an international insolvency framework for insolvent countries.  Geithner did call it right in a roundabout way in  speeches made at the Fed before ‘debtonation day’ (9 Aug 07). But worry about the influence of Robert Rubin (who did not call the crisis at all) and Larry Summers, who as the Herald Tribune noted ‘helped tear down the regulatory walls between banks, brokerages and insurance companies and freed them to trade in unregulated and little-understood derivatives worth trillions of dollars”.  And then John Gapper wrote this brilliant piece about Rubin in the Financial Times yesterday: ‘Time to give something back, Bob. Quotes from the piece follow.

“in Robert Rubin’s autobiography, he recounts, as Treasury secretary in 1995, trying to persuade President Bill Clinton to back a bail-out of Mexico that might cost $25bn. You mean $25m? someone asked. “No,” said Larry Summers, then an undersecretary, “billion with a B”.

Rescuing an entire country for $25bn seems like a bargain these days, when Citigroup, Mr Rubin’s current employer, has just been bailed out to the tune of $45bn (€36bn, £30bn) by Hank Paulson, the current Treasury secretary.

Citigroup’s rescue was not only more costly than Mexico’s but has tarnished Mr Rubin’s reputation, which was so high when he left the Treasury in 1999 that he could virtually name his price.

Name it he did: an initial three-year contract with Citi that guaranteed him at least $15m a year, barring “extraordinary circumstances drastically negatively affecting Citigroup operating results”.

Funny, that rainy day is here.

The mess in which Citi finds itself raises awkward questions for Mr Rubin, whose job has always been hard to define precisely, but who has taken home $115m for performing it during the past nine years.

Recently, Mr Rubin has been trying to explain why he is not to blame. His defence of himself, while ingenious, has holes in it. Last year, he chose not to take an annual bonus and I expect that he will repeat the gesture this year. But, in these extraordinary times, he could do more to atone.

The case against him is simple: he was a highly paid member of the Citi inner sanctum – a director and an adviser to successive chief executives – in a period when Citi went astray. His defence is multi-layered.

The first pillar is that he was only an adviser to senior executives and not an executive himself, so he was not responsible for its losses in mortgage-backed securities and other things. He told The Wall Street Journal last week that his role was “an experienced senior person who has no axe to grind”.

He is rewriting history a bit since he records in his autobiography In an Uncertain World (co-written with Jacob Weisberg) that he did not want just to be a glad-hander for a bank but sought “a real role in management”. That is why he joined Sandy Weill and John Reed at Citi.

It is fair to say that Mr Rubin never had direct oversight of others, barring a brief period as chairman when Chuck Prince resigned from the post last year. But he clearly had, in the broad sense, authority.

Take the meetings in which Mr Rubin participated in 2004 and early 2005 at which Mr Prince and other executives – helped by outside consultants – talked over the level of trading risk Citi was taking compared with other banks.

Mr Rubin was present in his consigliere role and endorsed the idea that Citi should take more risk, a move that ultimately led to it having a vulnerable balance sheet when trouble struck in 2007. He insists that he hedged it with qualifications such as the need for risk controls, which does, to be fair, sound like him.

Does the fact that he was only offering advice and had no knowledge of how Citi’s fixed income traders would execute the strategy get him off the hook? Plainly not.

Mr Rubin was not just some bloke with grey hair offering his two pennies’ worth. Not only was he a board director, but he was a former chairman of Goldman Sachs and before that an arbitrage trader and co-head of fixed income.

What he said carried all the more weight because Mr Prince was a lawyer without the same financial background and expertise as Mr Rubin. In taking that stance, Mr Rubin was placing his trust in Tommy Maheras, Citi’s fixed income head, who resigned in 2007.

The second pillar is that he could not have foreseen what has just occurred in financial markets because nobody, or extremely few people, did. He might have predicted a reversal similar to the 1994 bond downturn, or the 1998 collapse of Long-Term Capital Management, but not this.

That is sort of true, although a man whose core conviction is “that nothing can be proven for certain” should have left open the possibility of a financial disaster, but it is, in an important sense, irrelevant.

The fact is that Citi charged into opaque forms of risk-taking at what turned out to be the top of the market and several of the senior executives in that room at the time have lost their jobs. Perhaps Mr Rubin was less culpable than others, but he bears some responsibility.

The third pillar is perhaps the most tenuous of all. Most people would say that Mr Rubin was paid so much money at Citi – more than several senior executives – that he was obviously a powerful figure. His reply is that, no, he could have earned as much elsewhere for doing a less expansive job than at Citi.

This might also be true, given the inflated pay market at the time for former statespeople who could hobnob with prime ministers and chief executives to gain business. But that was a bubble phenomenon and he was paid for the job he did.

Given all of this, Mr Rubin needs to find a way to make up for his part in Citi’s downfall. My suggestion is that, in addition to giving up his bonus for this year and last, he returns, or gives to a good cause, the bonuses he got in 2005 and 2006, the years when Citi’s risk-taking ratcheted up.

Doing so would provide a salutary example to Citi and other banks as they try to work out how, in future, to claw back annual bonuses from trading that subsequently goes wrong. It would cost him $30m, which is quite a lot of money, but a reputation, as Mr Rubin knows better than anyone, is a precious thing.


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