Bloomberg reports that former Treasury Secretary and Citigroup board member Robert Rubin will be summoned before the Financial Crisis Inquiry Commission in April, with Alan Greenspan and Chuck Prince likely to be tapped as well.
On the one hand, it’s a welcome sign that the FCIC will be interviewing many of the major figures responsible for the crisis. On the other, the Q&A format is almost certain to prove mighty unsatisfying. Although Angelides has been more effective a questioner than expected, none of the committee members is a litigator (as in practiced in dealing with witnesses in public forums) and it shows. Imagine what these hearings would be like if David Boies, who was devastatingly effective in the Microsoft antitrust trial, had a go at the likes of Bob Rubin, who bears far more responsibility for the crisis than most realize.
Greenspan, while a key actor, is unlikely to provide new information. He has been grilled repeatedly over his record; he has defended it verbally and in print; he therefore has already been subjected to every major line of attack and has practiced responses. Prince never seemed up to the task of managing Citi; a year into his tenure, he was having difficulty asserting control over the sprawling bank.
But Rubin was either the architect or the moving force behind so many of the flawed policies and practices that fed the crisis that it is difficult to come up with a complete list. For starters, he was an advocate of a finance-centric view of the economy and ultimately of US interests (notice how often trade negotiations have made opening financial markets a priority item. It’s due to the near certainty that American firms would easily secure a significant share. Just look at the inroads they made in the UK and Europe). He was a persistent advocate of a strong dollar policy (and he meant it; his stance represented a 180 degree change from earlier Clinton Administration efforts to weaken the dollar to put pressure on Japan). One of the reasons is that prolonged currency weakness was believed to be unfavorable to the standing of financial centers.
Rubin also pioneered covert banking bailouts. US financial firms were heavily exposed to the 1994 peso crisis. Congress rejected a rescue package for Mexico. Rubin then raided the Exchange Stablilzation Fund, a large kitty created in the Depression and under Treasury’s control, to do exactly what Congress had nixed, which was help the banks (a motive not openly discussed) by assisting Mexico.
Surprising as it amy seem, Rubin also bears considerable responsibility for global imbalances. In the 1997 Asian crisis, Japan wanted to lead a rescue effort within Asia, relying primarily on Asean. Rubin and his protege Larry Summers beat that back aggressively and insisted the IMF lead the rescue efforts (which by the way, all called for greater opening of capital markets, when hot money inflows had been the proximate cause of the Thai and Indonesian booms and busts). And the overly aggressive, inappropriate measures imposed on Thailand, Indonesia, and South Korea left a strong impression on all countries in the region: never never get in the position where you might need help from the IMF. That led them all to peg their currencies low in order to build up large foreign exchange reserves. If you look at charts showing the level of private debt to GDP in the US, the increase goes parabolic starting roughly in 1999.
Rubin was also famously the leader of the successful fight against Brooksley Born’s efforts to regulate credit default swaps.
Yet Rubin somehow has the aura of being untouchable. From Bloomberg:
Rubin, 71, has been perceived as “bullet-proof” because his Citigroup job was “framed as if he was only there to give advice,” said Charles Geisst, author of “Wall Street: A History” and a finance professor at Manhattan College in Riverdale, New York. “Unless they’ve actually got some stuff where he advised on some surreptitious deal that went bad or his advice was purposely misleading, they’re going to have a very difficult time with him.”
Yves here. Ahem, the problem isn’t that there probably isn’t dirty laundry, it’s that Rubin normally limits his interventions to those at a similarly lofty level who will therefore never rat him out. And no one will go in and demand a data/e-mail dump. Rubin did call Treasury to try to get it to intercede to avoid a downgrade of Enron, and the press for the most part politely ignored this hot potato. Similarly, Rubin repeatedly pushed Citi management to take MORE risk in the credit markets. So even the little we can see of Rubin’s record at Citi is far from clean.
Mind you, I am not suggesting he did anything criminal, and that it the problem with the standard that the FCIC and SIGTARP seem to be using. Reader Andrew Dittmer describes why “Were crimes committed?” is the wrong question to be asking:
A substantial fraction of financial services industry activity over the last couple of decades has been directed toward “financial innovation” in the sense of Martin Mayer: “finding legal
ways to do things that used to be illegal under the old rules.” The periodic blowups have been dealt with by producing a scapegoat whose misbehavior was so blatant that it could be punished under the criminal code. The result is actually to support a framework in which enormous rewards are granted to people
who devote their lives toward freeing corporate organizations from the pain of democratic supervision. I don’t think any compromise is possible on this point – if Congress resolves the tension through symbolically punishing a couple of egregious offenders, that would signify a step backwards on the road towards a non-predatory financial system.
The only way to get out of this trap is to focus attention on what it means to maintain a sector that is addicted to finding ways to turn the rules that bind it into dead letter, and to supplying this skill to others as a paid service.
Yves here. In other words, we need to come up with standards of what should be unacceptable behavior. Rather than focusing on what was legal, which gives an industry that devised overly lax rules an easy out, we need to identify what products and practices were destructive. If they happened to be legal, that is prima facie evidence that we need new rules.