This ought to be a celebratory event, the scrutiny of a powerful player in the financial system who heretofore seemed immune to criticism. And what is interesting about the spotlight on Citigroup consigliere and board member Robert Rubin is that, unlike Greenspan, the reassessment is starting while he would still appear to have his hands on the reins of power. After all, he is still on Citi’s board; his protege Timothy Geithner is slotted to become Treasury Secretary, his buddy Larry Summer is head-of-the-National-Economic-Council-in-waiting.
Yet if the reaction in New York is any indication, the outrage about the speed and size of the second Citigroup rescue is considerable, and a recent Wall Street Journal piece fingered Rubin as a moving force behind Citi’s disastrous strategy to take on more risk in debt markets in pursuit of profit and better competitive rankings. And the only consequences to Rubin will be (hopefully) lasting damage to his reputation. But he gets to keep his cash and prizes.
Rubin refuses to take an iota of responsibility for the bank’s tsuris (and that also comes from the Goldman playbook. The firm always circles the wagons and admits nothing). Get a load of this:
Robert Rubin said its problems were due to the buckling financial system, not its own mistakes, and that his role was peripheral to the bank’s main operations even though he was one of its highest-paid officials.
“Nobody was prepared for this,” Mr. Rubin said in an interview. He cited former Federal Reserve Chairman Alan Greenspan as another example of someone whose reputation has been unfairly damaged by the crisis.
Yves here. Unfairly damaged? Is this what leadership amount to in America? You have the power, you get the perks, but you only take credit for the good stuff?
A very simple psychological construct places people on a spectrum of internalizing versus externalizing (boldface ours):
When something goes wrong, we look for answers as to why-what caused this? How we deal with setbacks has enormous implications for how we feel about ourselves during these difficult times. Some people take the responsibility onto themselves-“it must have been because of something I did or didn’t do.” We can call these people internalizers because they internalize the responsibility. This can lead to feelings of depression if one’s self-esteem takes too much of a beating. However, sometimes there is also the promise of a brighter future-“maybe I can do this differently next time so it turns out better.” Other people are more likely to place the controlling factor outside of themselves-“it must have been someone else.” We can call these people externalizers. In some cases, they will act out in anger over a bad situation. Externalizing frees them of any feelings of self-criticism or guilt, but it also leaves them powerless over the situation unless circumstances change. So, the price they pay is that they don’t learn anything new.
Salesmen are typically externalizers.
Note the uncanny parallel in word choice with Rubin in this tidbit:
The self-talk of the Externalizer is all about the defectiveness of others and the “unfairness of it all.”
Back to the Journal:
Its [Citi’s] troubles have put the former Treasury secretary in the awkward position of having to justify $115 million in pay since 1999…
Yves again. Please, his pay should have been questioned long before now. He did not have his name on any deals, and he claims not to have gotten his hands dirty. Indeed, he contends the problem was not the strategy, but the execution, and by implication he had nothing to do with that.
Are we expected to buy that? Did any firm that went out on the risk curve do well? The only reason Goldman was less damaged for a while was that two traders told the management committee that they thought subprime was way overvalued and the firm put on shorts that exceeded its long position. That was serendipity (combined with some intellectual flexibility in the top ranks).
Back to the Journal:
Mr. Rubin said his pay was justified and that there were higher-paying opportunities available to him. “I bet there’s not a single year where I couldn’t have gone somewhere else and made more,” he said…..
Yves again. Yes, and I could make a lot more money dealing drugs, or better yet, providing financing to terrorists (one of my buddies says they make an absolute fortune). The issue is did you deliver value to Citi that bore any relationship to what you were paid? What you could have made elsewhere doing something different is a distraction from the question at hand.
To Rubin again:
Mr. Rubin said it is a company’s risk-management executives who are responsible for avoiding problems like the ones Citigroup faces. “The board can’t run the risk book of a company,” he said. “The board as a whole is not going to have a granular knowledge” of operations…..
They do at Sandater, in fact, they consider that to be the board’s most important responsibility. They meet twice weekly. Investment banks, when they were private, had management committees that similarly watched risks like a hawk. So “can’t” is counterfactual. “Generally don’t” is more accurate. The wipeout in the banking industry strongly suggests that this deliberate inattention to one of the most important determinants of profits and long-term survival was a fatally flawed policy.
Back to the Journal:
The decision has been blamed in part for Citigroup’s problems, including the growth of its CDO holdings amid signs the mortgage market was unraveling. Mr. Rubin doubts that’s true. “It was not an inflection point,” he said, but “I just don’t know what would have happened” if the decision had been different.
At the time, Mr. Rubin was saying in speeches that most assets were overvalued. He would quote a noted investor he knew as saying that “the only undervalued asset class in the world is risk.”
Yves again. So he denies that the CDOs or the assumption of more risk had anything to do with Citi’s near death experience, despite the evidence in the form of huge writewdown on recent positions. And at the same time he was supporting Citi’s bigger bets, he was saying externally, in public, that assets were overpriced and investors were not getting paid enough for risk assumption? It will never happen, but I would love to see a great litigator like David Boies have a go at Rubin under oath.
There is much more in this article, but it illustrates a pathology operative in our society. Why have we gravitated to leaders and advisors who built Potemkin villages and tell us that is progress, and then deny that they have any responsibility? This pattern has become widespread in Teflon CEOs and public officials. And the converse delivers better results. Jim Collins, in his book Good to Great, found that the CEOs of the very best performing companies were modest, shared credit for what went right and took blame for failures, the opposite of the Rubin/prevailing US pattern. And they also paid themselves modestly by modern standards.
Read the entire article, if you have the stomach for it.
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Being a fairly partisan Democrat, Rubin had me snowed right up to the triggering events of August 2007. It’s really quite remarkable how quickly the veils have fallen. I now think of him as one of the very best proof points for Christopher Hitchens’ long ago remark (before he lost his mind) that the biggest myth of American politics is that there are two parties.
Rubin’s denial here highlights the fact that Obama has a coterie of laissez-faire free market types running his economic team. The question is: what takeaways will these advisors make given the present crisis?
The analogue to Rubin’s comments would be to assume that the execution of laissez-faire, free market economics was poor rather than looking “internally” for factors that are endogenous to a deregulated, market-driven approach.
The anti-regulation model is flawed in that it assumes one can set the strategic course and let the market proceed without significant oversight. This is market fundamentalism and it is a strategic flaw both at Citigroup and sytem-wide.
He’s another one of the jerks who blames everything on the number crunchers on low salary in the Risk Management department. It would be good to see some risk land right on him.
This country is really screwed up. We should wipe out the financial system, filled as it is with leeches like Rubin, and start over. Zero out the value of their holdings, then invite them to Congressional hearings and consider criminal prosecutions.
We need to see some punishment, heavy hurtful punishment that these guys cannot escape despite all their maneuvers. We need to take it out of their hides. Otherwise the little people in this country will see no justice at all.
The little people?
Yves,
It is so bad at Citi that the Audit Committee (made up of board members and a few lack luster “auditors”) lack any background in either risk or financial services. It is chaired by the former head of the NSA. Now he knows a lot about puzzles and things blowing up – but CDO’s? Additionally the Citi Auditors are so completely focused on auditing to process and guidelines that they never took into account real risk the firm was exposed to.
When your “last line of defense” (aka Audit) is totally clueless then you have massive problems. The whole board should be sacked and the members of the Audit Committee should be charged with criminal negligence. What a disgusting joke the whole thing is.
WE WANT BLOOD! Offering up Rubin will not be enough. Let’s frog walk the yes men through the whole organization and send a message to these corporate vampires that their days are numbered.
They are going to try to follow the same policies that worked well in the 1990’s after the savings and loan debacle, that resulted in massive growth and eventually a budget surplus. Their will be a decidedly different result this time around…
Hell, if we’re willing to resort to quaint questions, you might ask why we’re accepting taxation without representation. In fact, no representation has been a pretty common stipulation of all these bailouts, as we’re terrified of owning these monstrosities.
Thanks for the inside glimpses, anonymii.
“Rubin’s denial here highlights the fact that Obama has a coterie of laissez-faire free market types running his economic team.”
Uh, you’ve got that 180 degrees out of phase! These guys are anything but free market types. Granted, they’re not calling for the worker’s of the world to unite, control the means of production, etc., but they are tinkerers of the first order.
Mercantilists, like Hamilton, not capitalists like Jefferson. Favoring one sector or another, one business or another, manipulating the money supply, etc., with the imprimatur of government; that’s not capitalism, that’s mercantilism – a bridge to eurosocialism.
Rubin and guys like him masquerade under labels such as free trade and open markets.
They are your typical variety crook. It just so happens that all these crooks run many of our major corporations and own all of the political elite as well as the DC conventional wisdom.
I have known Rubin for over a year now. You can never get a straight answer out of him. I think the best descriptions of read of him are “forked-tongue”, reptilian. The guy does not have an honest bone in his freakin’ body.
OK, why can’t I get the movie “Weekend at Burnie’s” out of my head?
Skippy
Dear God,
Please make sure Volker and Obama read Nakedcalitalism twice a day, including all the comments, and thus please allow them to not be hoodwinked by a bunch of political banker assholes that will go on destroying America. While your at it, can you make sure that people like Rubin are exposed on a regular basis for the scumbags they are and then help shame them to a point, where they beg for mercy!
i agree that the top guys should be hurt, really hurt. busted up and left to bleed on wall street if not have their heads placed on pikes.
and the underlings should be in stocks up and down the street to also show what happens if you pull this shit again. then returned to prison at night, for a number of years, perhaps ten to fifteen.
the money is good, but don’t mess up.
When Citi was (very hastily) bailed out, Treasury and the Fed basically said: “No change in management, it could be too disruptive.”
Wonder how much say Rubin had in this incredibly stupid and arrogant decision.
“He cited former Federal Reserve Chairman Alan Greenspan as another example of someone whose reputation has been unfairly damaged by the crisis.”
Well…Rubin was right this time. It was very unfair to the truth to have Greenspan’s reputation take a hit so light that it amount to a slap on the wrist.
The guy should’ve been declared fuckhead of the century.
Right now I think most of here assume that nothing with happen to these monkeys, other than a little negative publicity in the press. But what if the crisis deepens, and the economy collapses in a significant way? The masses could get quite angry.
It’s too bad people like Rubin aren’t Japanese and honorable. I’d personally buy him a knife.
Yves,
The answer to your question “The issue is did you deliver value to Citi that bore any relationship to what you were paid?” is simply yes, he did.
Rubin was Citigroup’s biggest supporter in the Clinton administration, was heavily involved in lobbying for passage of the Gramm-Leach-Bliley Act that made permanent the Citi/Travelers merger, and resigned as Treasury Secretary to join (only a few weeks later) Citigroup’s board.
Considering the money Citigroup has earned over that time span, I think Rubin earned his pay and then some.
Woah, so is Rubin saying that citigroup paid him to do nothing? If he wasn’t involved in any of the risktaking projects that initially produced profits, then he did “bothing”? And he was paid over 100 million for doing nothing?
which is worse; taking responsibility for the failure of judgement or admitting you were the financial institutions’ ken doll?
It was pretty clear to me that Rubin took the job at Citigroup with the idea of not having any responsibility except providing connections with the powers-that-be. He’d get a big office and a big desk and a big nameplate and a big check, but only have to make a few telephone calls every once in a while. And sure, any number of institutions who have paid more to have the same connections.
Rubin probably felt justified in accepting the huge money because he had been in government for eight years, being reasonably selfless, while his brethen were pulling in the big bucks (and the bucks kept getting bigger) out in the private sector. So it was his due – his payback.
So sure Rubin is a jerk – I personally deplore the most his role in fostering the stock and Nasdaq bubble, but I think there is strong competition with his role in the Asian crisis. His idea that one cannot have too much confidence in the future is the classic spiel of the snakeoil salesman; in fact, too much confidence is just as much a problem for an economy as too little.
But Rubin’s not the only one. The larger problem is American culture – which since Reagan has been driven mad.
Rubin is just the first name on a long list of Dem operatives like their Repub counterparts that seamlessly move from politics to business and back again each time making millions more.
Look at Rahm Emanuel, leaves DC becomes a investment banker and 2 1/2 years later pockets 16 million. Retires! Even had time to sit on the Fannie board leaving as the scandal started to run for Congress in 2001.
Jamie Gorelick with no finance background becomes Vice Chairman of Fannie Mae, makes her millions and leaves after a scandal. And who can forget Terry McAuliffe who makes a $100,000 investment in an unknown company in 1997 after working for the Clinton/Gore 1996 campaign and two years later sells it for 20 million. The company, the infamous Global Crossing.
What do they all have in common? They use the same excuses as Rubin and furthermore they get away with it. The Enron people went to jail for cooking the books. The Fannie Mae folks cooked the books contributing ten’s of millions of dollars to their bank accounts while walking free leaving us with the trillion dollar bill. For entertainment some of them now advise Obama.
I could waste all day on the list.
Rubin needs to be tarred and feathered but the list is long and he is only one of many. All the laws ut in place during the 30’s to make sure it never happened again were slowly thrown overboard and here we are again.
it’s a classical case of lack of accountability which will call into question the kind of envisaged change. At least Greenspan said “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.” Does Mr. Rubin know how many layoffs there are now at Citi and how many hare being caused by his/its model of banking?
Summary of unconvenient truths of this crisis
Despite Rubin’s championing of Graham Leach Bliley, that legislation was good and reflected reality that was continually being litigated. De-regulation is not the culprit, in fact, B of A couldn’t have done the deal with Merrill (assuming it goes through) Morgan Stanley and Goldman couldn’t have changed their charters to bank holding companies in order to attract new capital under the byzantine provisions of Glass Steagall.
Where Rubin failed Citi was relying on the okey doke of the “moral obligation,” pressured investment grade rating, credit default swap labyrinth. He knew better or should have. Because he failed Citi, of course, he put us all on the hook.
The bloom should come off the rose of his and any Clinton administration official’s stewardship of the economy and how effective they were. It is as persistent as that of FDR’s acumen in guiding America through the GD. Rubin’s failure is Summer’s and since Geithner has been his understudy…
That’s a great setup Rubin had at Citigroup.
Earn all of the money, have no “knowledge of operations”, and none of the responsibility. Must be a great job to have.
He is at the very heart of the corruption which drove Wall Street to destroy our financial system and our economy.
And yet he is the same person that Obama is using as his closest advisor to select his top finance people in the next Presidency. Rubin tells Obama to pick his closest cronies (Geithner and Summers) to be his top financial guys. This same Obama which was supposed to be all about “CHANGE”.
Since Obama has been elected as President, he has proven himself to be a total out-and-out fraud. He has appointed a whole coterie of well connected Washington insiders to staff his Administration. This “CHANGE” was a real bill of goods that he sold the American people. Not that I believed it to begin with, but I am terribly disgusted watching this whole spectacle.
And yet from all indications, since he’s been elected, the media is still having one big honeymoon with this guy (Camelot II). He’s Kennedy, he’s FDR, he’s Lincoln….blah, blah, blah.
The media should be systematically taking Obama and Rubin apart with no mercy. This media only cares to sell a story and entertain. The lack of critical analysis is most appalling (especially when this entire system is on the brink of total destruction).
Rome burns, and yet people still watch the circuses.
Yves,
Have been reading this excellent blog a few weeks now, but am surprised that I have seen no mention or reference to N.N. Taleb and his book The Black Swan.
This Citi/Rubin story is exactly one of the things he is talking about. Even if Citi had stacked the Audit committee with the most expert risk managers they still would have had a problem (most likely anyway).
The fault is at a deeper level. The whole knowledge base of Economics (risk mgmt, VAR, Black-Scholes etc.) is suspect. Just look at how many other institutions that are having serious problems. Did they all make the same mistake as Citi and not have enough risk people?
There is now a different lay of the land. The whole business of evaluating risk has to be looked at from a completely new and much more conservative perspective (conservative with a small c, I don’t think this is a partisan problem).
And not only that, this cycle of everyone being the expert after every bubble/crisis and explaining exactly what went wrong and how to fix it next time has to end. Be humble people! We just have to accept that the financial ecosystem is far more complex than what we can understand and control.
I haven’t seen any writing in that vein. What all this implies to me is careful (less?) regulation with much, much more conservative economic actors.
And the only consequences to Rubin will be (hopefully) lasting damage to his reputation. But he gets to keep his cash and prizes.
Thus, we practically guarantee another financial fiasco. We need a radical change in the culture on Wall Street.
Last night I got bored and switched on the tube. On Turner Classic Movies, the Gary Cooper flick, Seargent York was just winding up. At the end, after having won the Medal of Honor and being feted in NY as a huge hero, York returns to his native Tennessee and the girl he loves, thinking he is penniless. He asks her if she will wait for him for a few years while he works to save the money to buy a farm where they both can live.
(Note to Brad Pitt and George Clooney: he did not suggest that she put on 4″ heels while he robbed a casino.)
Decades after that film was made and a few more after it could ever be made again, we have Rubin slithering away from Citigroup, Obama and McCain promising us dollars dropped from helicopters, GM and the UAW begging for alms, and all manner of depravity on TV. Then we act surprised at each new event where someone flees the responsibilty for their actions.
Culture trumps all.
The looting of America took place on GW Bushs' watch. Whatever you want to say about rubin or any of the dems, the dems had no influence over the rebubblican super majority, none.
The current mess is basically the same game the rebubblicans ran to create the S&L crisis. Is rubin's self-serving behaviour deplorable ? Yes. Should he have taken on Sandi Weil and Chuck Prince ? Yes.
Greenspan's book names the day that he and rubin began lobbying the world's central banks to create the liquidity tsunami that led to this worldwide mess. "It became apparrent that the US could not continue as an island of prosperity in an ocean of poverty".
At the end of Clinton's tenure, the budget was in pseudo balance. What has come after was the rebubblicans. Let's not forget that.
Gentlemutt: Sometimes it takes awhile for the Time magazine curse — in this case extremely well-deserved and long overdue — to become evident:
http://www.time.com/time/covers/0,16641,19990215,00.html
Feb 15, 1999 issue, google ‘time magazine covers’ if need be.
With any luck these three clowns will be so brokedown in another year that they will be autographing reprints to raise cigarette money for their new husbands in jail…
Brooksley Born for Treasury Secy!
I’ve noticed a change in the portrait of Rubin in the ongoing series of stories featuring him.
Last week, he was portrayed as having understood clearly that these new financial innovations were based on increased leverage and risk. In fact, he said that is how investors make more money. Which is true, but doesn’t justify these particular products. However, in admitting that, say, CDOs are meant to push the envelope of risk for more profits, he did manage to clearly state a fact that many people are trying to deny in justifying their investments. Many people are trying to claim that they saw these investments as less risky.So, I found Rubin’s admission very valuable.
Now, he seems to be focusing less on the risk of the products than on the financial crisis we are in, and saying that no one could have predicted the crisis we’re in. However, even if that’s true, it doesn’t deny the fact that Citi’s investments are part of the root cause of the current crisis, which are poor loans and over-leveraged investments. In other words, as he said earlier, pushing the envelope on risk.
I don’t see it working, precisely because of the Citi bailout. From my perspective, he was clearly a believer in the view that if there was a financial crisis, the government and Fed had implicitly and explicitly agreed to intervene in a financial crisis, and save the major financial institutions. It is this belief in a guarantor which helped the big guys to laugh in the face of ultimate moral hazard. So, he’s correct. He never predicted this. He never predicted this reaction by citizens to this bailout. After all, it was part of our system, and what we have now is just the guarantors of the system, taxpayers, paying the bill. How can he be blamed for clearly seeing how the system works, while the rest of us do not?
Don the libertarian Democrat
Yes Yves, you hit on the fundamental problem of contemporary American society, power is not accountable, we no longer have self-government.
It was obvious to all who were paying attention what the Clinton/Rubin lot were doing, but gas was a dollar a gallon and the Nasdaq was 5000.
Now the piper’s being paid, but those who had the best seats at the party, get to ditch the tab, and many still hold power.
Until people start consuming ‘news’, including in particular that form of news eminating from the Wall St. Journal with a bit of skepticism, this society will continue to be on a path to doom.
I’m as much a faulter of the decision making process throughout our society for the last 30 years as anyone I read, or know. I am also extremely opposed to the pay given to Wall St. Execs, and the dominance of politics by corporate money controlled not by shareholders but by the same execs. I have long said that the history of the last 60 years is of the Democrats playing ‘Me Too’ to the Republican excesses in pursuit of votes by rubes. And I have long maintained that the reason the right wing has decided to hate the clintons is because the Clintons are the most right wing democrats ever, particularly with regard to economics. The republicans hate them because they stole their fire, only republicans foot soldiers — fools — don’t know that.
In the current situation the right wing is mobilizing rapidly to steer blame away from themselves and onto democrats in general, and the incoming administration in particular. They are working over time to blame the coming disaster on the incoming administration.
That is all this piece is. Sure Rubin was in on the party. So was the Wall St. Journal. You don’t hear the WSJ talking about how ‘oh I guess we were over doing it on that whole social security thingy seeing as how we just spent 10 times more (not including interest) for wall st’ do you? The single most widely read advocate of free market economics in the world, is blaming Rubin for being a free marketer? Tee Hee sure, right.
Even now there exist many on the right who insist that the problems we are experiencing arise from too much regulation, not too little, and they are using the incoming administration as targets for their blame game. The purpose of these articles is not to correctly ascertain cause and effect, nor is it to take responsibility (see the WSJ taking responsibility yet?) it rather to confuse and manipulate the public in an attempt to prop up the fortunes of the very people that created this mess. And yes, they will sacrifice one of their own, particularly if he’s a democrat, to achieve their goals. When it comes right down to it, no organically defined group ever forgets that it’s in the interest of the group to sacrifice the individual — only groups that have completely fragmented are confused about this.
You want to find a real light at the end of the tunnel? You want a voice to follow, words to interpret your world by? Look for someone taking responsibility, not someone casting blame.
Take a look at this largely laudatory Bloomberg article about (former Citigroup Capital Markets chief) “Tommy” Maheras from Sept., 2006. Apparently Bob Rubin was one of his biggest cheerleaders
Maheras, Citigroup’s High Roller, Sheds Caution in Profit Quest
It includes this about Rubin:
‘Lifting revenue, at least in capital markets, sometimes means taking more chances. That’s where Maheras comes in. An ex-Salomon Brothers Inc. trader known to friends and colleagues as Tommy, Maheras is no stranger to risk. “You have to stick your neck out in trading,” he says. “And in management.”’
‘Maheras has an instinct for both, says ex-U.S. Treasury Secretary Robert Rubin, now chairman of Citigroup’s executive committee. “When Jon Corzine was running all of fixed income at Goldman, he would walk the trading room and just know this stuff,” says Rubin, who preceded Corzine, now governor of New Jersey, as Goldman Sachs Group Inc.’s co-chairman. “He had it in his bones. He had it in his fingers. And so does Tommy.”‘
Amen, Yves. You have cut right through to the heart of the matter–there is no Leadership in this country. The summary of externalization is spot on. None of this was anyone’s fault, who could have seen it coming, none of the experts told them it would happen, etc. Ayn Rand is vastly overrated as a thinker, but she was pretty good at writing the dialogue of the looters. I think Jim Taggart says “It’s not my fault. Who could have known?’ about three thousand times in Atlas Shrugged. In fact, some parts of the book are pretty close to the current situation–consider the “frozen” railroad bonds episodes or the Anti-dog eat dog laws–the government picking winners and losers and decisions being made by the Aristocracy of Pull (please don’t take me for a Randite–far from it, but in this area she was pretty close. The rest of the book is pure fantasy. The solution to the problem of societal sclerosis is much harder to solve–if it is solvable internally–and her fairy tale about Galt’s Gulch certainly is not it.) in any case, the search for scapegoats is now on in full force since the pressing danger has passed (for the moment); I expect more revisionist history and ass-covering in the coming days.
It is simply too ironic that most of the people in charge must have read Atlas Shrugged and are unable or unwilling to recognize themselves as looters
And once again, Yves, thanks for the website.
If he admits responsibility, he invites lawsuits. I’m willing to bet that he was told to say those things on advice of the corporation’s legal counsel.
One wonders what else he won’t be taking responsibility for that we have not yet discovered.
One of the many problems with representative democracy is, at that stage of a financial crisis where it becomes perfectly clear that the current leaders were in on it… our only option is to vote in a NEW team of Looters.
Our system hasn’t worked for decades, it just appeared to during our brief burst of post-War prosperity where there was no competition for American companies.
Obama is just a continuation of the broken system. He’ll waste less of our money, maybe, but the financiers will continue to get their pounds of flesh.
To everyone wondering why he gets paid so much for no responsibility and decisionmaking:
It’s simple. Executive compensation isn’t really a salary. It’s more like a special dividend class that they don’t call a dividend class in order to keep the true shareholders from getting a piece.
Viewed as a species of dividend, it makes quite a bit of sense that they don’t know what the heck is going on…
Obviously I don’t support this practice, but you should view it as a sign of the bizarre incentives that current regulations create.
Yves, your stomach is stronger than mine. I read half way through before I thought, “These are the kinds of quotes that have people look for their guns.” Fortunately for me, I live in a country where guns are really, really hard to get.
Peter Drucker: The best way to predict the future is to create it.
These idiots created their future, burned down their businesses, now blame the flammability of wood for their problems.
Enron is the more useful model to look at, not the dot.com bubble or LTCM.
In the Enron disaster, as in the current meltdown, not only were many large and complex deals secret, but the information that outsiders were given to act on was simply fraudulent.
Similarly today. Mortgage professionals lied. The ratings agencies lied. Financial actors were either fooled entirely (the public) or were forced to act as if the lies were true.
Regulators, who accept good salaries to prevent lies, looked the other way, as they had been appointed to do by an administration that doesn’t like regulation. And no wonder, when the head of that same administration, who appointed them, escaped jail only because the SEC didn’t treat him as harshly as they did a TV presenter who accepted a stock tip from her broker.
Federal Reserve Chairman Ben Bernanke has never been elected yet, for the first time, he hands out many trillions of taxpayer dollars to private corporations on his say-so alone; thereby, putting the US in danger of default. Where is the Congressional oversight, why does this academic with no practical financial experience have unchecked monetary power over the future of the US and why can’t we do anything about it?
Reagan was the original teflon man. He inspired both parties to believe in markets uber alles, disregarding standards of evidence, ethics, and social welfare. Reagan’s sunny temperment was the shiny coating to the bitter pill of American decline. It paved the way for the battering of American reputation, economy, competence and more with George W. Bush’s ‘gut’. Why? Because it persuaded the American political class and American voters that ‘dumbass is good enough.’ What a harsh lesson we have learned!
What is stunningly ironic is how the Republican / conservative critique of left hedonism, lack of morals, self-indulgence etc (from the hippy era) morphed (once they got into power) into their own truly catastrophic failures of character and ethics. Who woulda thought?
What if all the biggest skyscrapers in the US collapsed, and the engineers said “Nobody was prepared for this”.
Wonderful post, wonderful comments. When do we get to Geithner?
“Patrick neid” – agree 100%, but what I hope this blog helps solve is that these circumstances don’t even get asked about in the MSM. And I hope shareholders start asking, “What was he paid to DO”?” O yeah, what “Nude” said.
I am nearly certain that when I first started reading here, about a year ago, I posted a link to a NY Times story in which Rubin was quoted, or maybe paraphrased, to say that he had just recently then learned what “credit default swaps” are and how they worked (as if that’s an exactly settled question.) I’ve tried to pull the post from the archives, but have not found it – though I found elsewhere someone who also recalls Mr. Rubin’s confession:
http://www.interesting-people.org/archives/interesting-people/200804/msg00014.html
Assured that I am not suffering from false memories, I want to cite this fact about Mr. Rubin for anyone who may have missed that detail about his performance – as it goes directly to Yves Smith’s question – does his income at all correlate to any value he brought to the company?
Not that anyone here would beg to defend him, but I do recognize that the people in the front office cannot know every detail of the back room. On the other hand, imagine a Ford exec not knowing that with ethanol mandates, every vehicle made for domestic use has to be compatible with E10, or that air bags are mandated for driver’s side in passenger cars, etc. Everybody in the front office needs to have a useful description of what’s being put together in the back room, and in finance, that would seem to be financial instruments ….
Yves…thanks for pointing out that behavioral bit about inter/externalizing.
This description and descussion of Rubin couldn’t stop me from drawing a parallel with (everyone roll your eyes)…the matrix.
So here is morpheus explaining to neo the matrix for the first time. Try to substitute “modern financial oligarchy” in place of “the matrix” and “Bob Rubin and his Ilk” in place of “sentient program/agent”:
“The Matrix is a system…That system is our enemy. When you’re inside, you look around, what do you see? Businessmen [etc]…many of them are so inured, so hopelessly dependent on the system that they will fight to protect it. If you are not one of us, you are one of them. Sentient programs. They can move in and out of any software still hardwired to their system. That means that anyone we haven’t unplugged is potentially an agent. Inside the Matrix, they are everyone and they are no one. We have survived by hiding from them, by running from them. But they are the gatekeepers. They are guarding all the doors, they are holding all the keys which means that sooner or later, someone is going to have to fight them.”
Ok. That was my uber-nerd, getta-life, comment of the day.
Dear God, make everyone in Texas read this blog and help educate Americans in general.
Privatising success, socialising failure. It’s everybody else’s fault.
OK ! What about the $140 Billion bailout of GE Capital. Talk about Teflon shit. Whay are the taxpayers on the hook for this finance company masquerading as an industrial company.
That great American hero, Jack Welch and now Jeff Imelt, great Americans boy.
Just one more thing.
I second the idea that Obama and Paul Volcker should read this blog (among others) every day.
I saw the comments from “random” New Yorkers about Citigroup in the Post. I’m always suspicious of “random” commentary because of sample bias, but in this case it seems even worse. Aren’t both the Post and the WSJ owned by Rup Murdoch? Is this part of an attempt to destroy Rubin’s Washington street cred? (I’m not saying he should have any credibility, but he did have some–undeserved as it was).
If the elites are fighting amongst themselves there is a chance that the whole thing could come apart. Social change only really ever came about within the cracks that occurred when the people at the top fought among themselves.
In a sense Rubin’s ‘the devil did it’ excuse has basis in the larger shift from a more production based to more financial economy, at least some of which can be seen by looking at change in the share of rentier income as percent of GDP.
An empirical study of the 1960-2000 period, Power, Epstein and Abrena found rentier income (ex-capital gains) to have risen from 14.81 percent for the decade of the 1960s to 33.49 percent for that of the 1990s, even as the nonfinancial sector profit share remained essentially flat.
(TRENDS IN THE RENTIER INCOME SHARE IN OECD COUNTRIES, 1960-2000, Political Economy Research Group, 2003)
It stands to reason, in my opinion, that such a shift must also manifest as ethical and moral change at both the societal and individual levels, and that Rubin can be seen as a posterboy for Hazem Beblawi’s contention that
there is an obvious contradiction between rentier ethics and production; the rentier mentality is associated with a break in the causational relation between work and reward. In a rentier economy, reward is not necessarily related to the effort of work but rather to a situation. Reward is not the result of the process of a long systematic and organized production circuit, as it is in a productive economy. This organization of thedistribution of rewards destroys the motivation for production, which significantly affects the developmental process. My emphasis.
(In: Assuliman, A sociological study of the problem of connectedness of nationally produced science and national needs in Saudi Arabia, 2007)
What I have not included though believe did so in a much earlier comment are causalities which drove the above mentioned shift. Perhaps more to the point, what will be the replace a failed rentier capitalism?
I’ll recall again Bernanke’s comment when he gave a speech saying that the banks would pull through this.
The reason he had confidence was that the strong overall American economy would pull the banks through this.
Wow I feel so proud that BB has so much confidence in me, that he’s willing to hitch me to a failing bank and make me pull it out of debt. What confidence that shows!
You’ve got to listen to Bernanke’s words carefully. He sees nothing wrong with making us subsidize the banks. Needless the comment was not discussed by MSM.
Please God, save us from these crooks and give them their just rewards from this episode.
Correction: Political Economy Research Institute, not Group.
To bring back productive ethics it will be necessary to clearly, visibly and heavily punish the worst exploiters. We have to see that crime is punished.
If salespeople are externalizers, then entrepreneurs are probably internalizers. They learn from each failure until they find the right formula for their ultimate success.
Does anybody know where Rubin works out? I’d like to punch him in the nose while he is on the treadmill, LOL. So how do we put this spineless jellyfish on trial?
Let’s call all our loans, now. It was a really bad mistake to bail out any of the financial institutions. We’ve been had, again. Suckers.
Anon 5:10 pm said: “What if all the biggest skyscrapers in the US collapsed, and the engineers said “Nobody was prepared for this.”
Gentlemutt: Anon 5:10 for Deputy Secy Treasury (to support Ms. Born)! This is precisely the kind of thinking we need. Nothing like genuine engineering humility.
Are any of these people going to jail?
I have yet to see anything to justify the characterization of Tim Geithner as a “protege” of Robert Rubin (or of Lawrence Summers). Mr. Geithner is a career civil servant who served under six Secretaries of the Treasury, before taking the top job at FRBNY. No one can doubt that he has had ample opportunity to trade on his public service for a Wall Street job with “Rubinesqe” compensation, but he has not done so. In recent months he has received praise from the likes of Martin Mayer, William Janeway and Nouriel Rubini, none of whom can be considered especially sympathetic to the Greenspan-Rubin-Summers approach to the regulation of financial markets. (Of course, Rubini served under Geithner at Treasury. Should we therefore refer to Dr. Rubini as a protege of Tim Geithner?)
Otherwise, I applaud this post. We should never lose sight of the fact that at the heart of this crisis is a serious problem in corporate governance, and the efforts of Mr. Rubin, et al to salvage their reputations should not be allowed to interfere with the deliberations needed to correct this problem. At the very least, Congress should act on a proposal made by Paul O’Neill in the immediate aftermath of the Enron debacle – to ban the purchase by corporations of Errors and Omissions insurance for their Officers and Directors.
Summers was a crony of Rubin and Geithner was a crony of Summers.
What kind of work did Geithner do exactly at Kissinger Associates and how did that qualify him to work in the US Treasury to begin with?
The NY Times said that Geithner moved up at Treasury because he “caught the eye” of Summers. Sure sounds like cronyism to me.
Summers blatantly tries to BS for Geithner’s very obvious lack of qualifications by saying he earned a “doctorate in financial policy” while working at Treasury.
It was Geithner that told Paulson the failure of Lehman would be OKAY because his people at the NY Fed did studies on the potential impact. We all know that this recent collapse in the financial system and economy was precipitated by the failure of Lehman Brothers.
It was Geithner that put together the special bailout for AIG. This same AIG that is becoming a bottomless pit for the US taxpayer as a result of having to meet endless collateral calls on $400 billion in CDS protection written by AIG.
They bailed out AIG to save Paulson’s cronies at Goldman Sachs. The failure of AIG would have created an immediate $20 billion hole in Goldman’s balance sheet (because they bought CDS from AIG to “hedge” their toxic mortgage exposure). It was very nice of Paulson to have his fellow Goldman CEO Blankfein at the last minute discussions of the initial AIG bailout (so that the US government/US taxpayer could take care of the special needs of Goldman Sachs).
Where does the corruption begin and where does it end? One loses track at this point. The entire body politic (corporate/financial/ government) has become fatally infected with it.
In Europe as well we are waiting for some “mea culpa”. Here is a A european perspective of the crisis.
please tell me why so may comments have to be partisan? Do all observations have to be colored by a political lens? Can we just acknowledge what someone has been reported to have said or done without pointing to a political party as being the cause of the problem. Invariably one will accuse one party and one will accuse the other party. It really takes the zip out of the discussion and IMHO causes credibility to be lost to the poster of the comment. It is definitely possible to make a comment without bringing up your party affiliation. I mean really- we have people on this post blaming Reagan, Clinton, Bush, FDR-
can we just push on already?
The comments that "Lehman should have been saved" are bad enough post hoc errors. People seem to think that the Dow would be back at 12,000 and real estate prices woild be rising again if only Geithner & Co had stepped forward with another Bear Stearns shotgun wedding.
But to say that in the same post that one laments the AIG bailout is bald self-contradiction. Either Lehman should have been turned into a govt moneypit like AIG, or it shouldn't have. (I would argue that bailouts as such ought to be fiercely resisted, but that's overly rigid "ideological" thinking unsuited to these modern times.)
Geithner's ties to repeated bailout efforts, from the Asian crises and LTCM right through to the present, are much better cause for skepticism than his ties to discredited old cronies like Rubin.
On American Accountability:
For the most part, accountability in politics and business is merely a buzzword. As a (CDN) politics nerd, I’m well acquainted with this form of pontification -we’ve had at least two federal elections on accountability in the new century. The word frequently comes up, as opposition pols call for “ministerial accountability” (resignation) for every mistake or scandal by gov’t. Of course, no one with half a brain expects the minister in question to step down just because of a call for accountability.
The calls for accountability are often accompanied by claims that the gov’t of the time is unprecendentedly unaccountable. I’ve heard similar claims on this thread today.
This is bullshit, and always was. There was (and is) only the appearance of accountability in instances where leaders deliver mea culpas or resignations. Almost entirely without exception, there is some underlying mechanism forcing the actor’s hand (share value, political party health, or even physical or financial danger).
In Canada, for instance, a minister will only resign if it is the only viable option for salvaging tanking party popularity.
But thats Canada, where the relative simplicity of parliamentary politics allows people to identify culpable parties. In the US, I think we can safely say that the constitutional arrangement often serves to obfuscate the source of problems and thus seriously undermines accountability.
“Nobody was prepared for this,” Mr. Rubin said in an interview. He cited former Federal Reserve Chairman Alan Greenspan as another example of someone whose reputation has been unfairly damaged by the crisis.
Rubin’s statement is strong evidence of how reckless, greedy and inept these financial “geniuses” really are.
“Nobody was prepared for this”… OK, I hate to go here, as it leads to “conspiracy theory land”, but really???? Did nobody stop and say, “wow… this isn’t a whole lot different than taking the Skins -7 from my local bookie”?
The banking collapse of 1907 came in part because of Bucket Shops. Shops were selling “insurance” on a security, accepting payments along the way, but would leave town when the thing they were insuring went under. While the CDS market sounds a bit more legit, at the end of the day, it’s the same thing.
This isn’t that complicated. So WTF does that mean? They saw it happening, I think knew where it was heading, and did nothing to stop it. Why?
Cb…I luv ya, but do you really think that bringing down Glass Steagall was warranted bc in hindsight we can see that it allowed the glorious Merrill/BofA merger which if G-d has anything to do with it will never happen?
In terms of corruption, not to beat a dead horse, but Rubin's long-off entreaty to S&P not to downgrade Enron seems fairly milquetoast when compared to how my betters at Lb and many, many others conspired to convince the agencies to 'prop up' the ratings of the monolines starting circa 2006 followed not long after that by attempts to salvage their own ratings when the carnage started to seep through the Lb CDO portfolios.
There was an amazing female credit officer at Bear when I worked there about 100 years ago who foresaw exactly what would happen to the monolines once they started to underwrite [by this I mean, guarantee, or sell protection, of course] all manner of structured finance transactions, even though it was generally at the super-senior level. (Okay, it was in the late 1990s). She was young but had seen it all…and you did start to see them converge and eventually implode in the late, late 90s, early 00s.
And she was well-regarded, and people listened…just not enough, I suppose.
If Glass Steagall weren’t repealed, taxpayers would almost certainly be looking at another mega taxpayer funded bailout of Merrill, Goldman and Morgan Stanley.
Prior to the repeal, domestic banks were competing with European financial institutions that had no artificial barriers between insurance companies, commercial and investment banks. It was a regulatory scheme that made no sense.
We have a completely flawed concept of consumer protection vis a vis government schemes. We look to regulators and regulation for protection that doesn’t give us an adequate picture of risk.
Consumers/investors look to either government or rating agencies (who rely on government assessment). Without the regulations, competing private solutions, far superior to matrix we have, will emerge. How do I know this? Because investors/consumers want to be protected from loss.
For example, Brand X consumer protection service evaluates businesses and provides consumers with a star rating system. Businesses aren’t required to comply with information requests and access by Brand X, but as Brand X gains in popularity from consumers, businesses pay a price for not having a Brand X rating.
Brand X will have a failure but will be more nimble than government to alert consumers. Brand Y, who wasn’t as popular or widely used pops up and says, “we know why Brand X failed to identify the risk earlier which is why we’ve had our proprietary process in place since inception.” Brand Y gains on Brand X and Brand X shores up its weakness, improves its process and looks down the road to anticipate how businesses can dupe them. Brand Z emerges, founded by the woman who duped Brand X and gains a following…
The point being, regulation doesn’t work nearly as well as an incentive to comply with disclosure and to act prudently in the face of consumer/investor demands. It will also reduce costs, lower the barriers to entry as well as providing more relevant, concise information.
Banks are failing weekly and have among the most byzantine regulatory schemes in business. Insurance companies, while under pressure, have far less government regulation and with the exception of AIG, which got greedy and into some luny side business, have not folded.
CB – Forest for the trees man…