Rubin to be Grilled by Financial Crisis Inquiry Commission

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.

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29 comments

  1. i on the ball patriot

    STANDARD OF
    UNACCEPTABLE BEHAVIOR

    RUBIN AND THE
    LIMP DICK DREAMERS

    Behind the curtain,
    Of co-opted media prose,
    There exists a world,
    Of losers with no clothes,

    Insecure economists,
    With shit for brains,
    Sell out politicians,
    With greed in their veins,

    Pimply, preppy, quant tools,
    Products of the jivy league schools.
    Used by selfish effete old men.
    Who will never see an erection again,

    To justify and mask,
    Their Ponzi schemes,
    Created to fund,
    Their limp dick dreams,

    And crooked judges,
    And crooked cops,
    Insecure bullies,
    That are human flops,

    Behind the curtain,
    There is nothing to fear,
    Just human trash,
    That you should not revere …

    Deception is the strongest political force on the planet.

    1. NotTimothyGeithner

      Only a bi-partisan committe can solve problems in this country, and by “solve problems,” I mean manage to make a bad situation worse.

  2. jake chase

    As to Rubin only being at Citi to provide “advice”, we don’t know what if anything Bob did as Chairman of Citigroup, but we know what he got paid for doing whatever it was he did assuming he did something, or at least we pretty much know.

    According to the Company’s year 2000 proxy statement, Bob owned as of February 28, 2000 a maximum of 38,310 Citigroup shares; whether he bought them or received them as a corporate signing bonus is not stated, but as we shall see it hardly matters. Those shares had a closing value on the New York Stock Exchange of $49.00 per share on that date. On February 28, 2007, seven years later by my calendar, he owned beneficially a total of 5,290,334 Citigroup shares, which had a closing value on that date of $50.37, representing a total of $266,474,123.

    During the first eight of the nine calendar years he spent as Citigroup Chairman, Bob received $7,183,333 in salary, $68,081,994 in bonus, $1,739,193 in other annual compensation, $41,217,863 in restricted stock awards (that is money, not stock, although the amount of money is calculated somehow on the basis of stock values, just how is interesting but not important), 5,404,170 shares underlying stock options (that isn’t money, now, don’t start adding all these numbers up), and $338,403 in all other compensation (although what he could have needed that for I have no idea). No doubt Bob also accrued some retirement money too, but I haven’t bothered about that or his social security benefits either. I don’t know what if anything Bob got paid in 2007. Citigroup doesn’t tell us in its 2008 Proxy Statement and I expect the rules say it doesn’t have to because he didn’t get enough to qualify as one of the highest paid celebrities whose compensation had to be disclosed.

    I have no idea how many Citigroup shares Bob may have sold during his internship as Citigroup Chairman. A person could find this out of course by digging through the Form 4s all of which are available electronically on the SEC Edgar platform which is where I found the data being retailed here. I am hardly one to suggest that during the years 2000 to 2007 Bob sold any of his Citigroup shares, but of course he could have which would change the picture in any number of ways about which I would not care to speculate.

    Incidentally, during the Rubin reign at Citigroup, the company’s shares fell to roughly $3.00, which gives him a nearly unmatched record for corporate futility. I don’t remember reading about his giving any of that Citigroup money back, but I suppose he could have donated a few million shares to charity or relieved himself of them through an equity swap.

  3. Jim the skeptic

    “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.”

    The US Supreme Court asserts that corporations have constitutional rights that their governmental creators can not modify. But I can not divine what their reward was.

    Perhaps lead water pipes in Washington DC are causing the fall of the United States.

  4. john bougearel

    Great Post Yves,

    So, in effect the Robin Rubin’s of the world were intent on corporate/banking practices that allowed them the skirt principles of good faith and fair dealing valued by a democracy and law. The industry never liked the straightjacket imposed upon CBs and IBs in the 1930s and spent the majority of the next 75 years lobbying in a Houdini like fashion to get around good faith and fair dealings or legal as Martin Mayer put it.

    In short, their aim or intent has always been to foster instability and crises into the system (ala Naomi Klein’s Shock Doctrine), and so they have been disaster capitalists all along, creating conditions for instability, blowing up the system, creating a crisis, and then preserving the instability that caused the crises in the first place. And throughout, they profit during all three phases of the cycle: Instability > Crises > Preservation of instability.

    Yves, your concerns about interviewing/interrogating the major players/ instigators is spot on target. The reason the concerns are valid has been born out by testimony by Geithner, Paulson, Bernanke, and others on AIG and the financial crisis to date. It gives the major players an opportunity to make authoritative and revisionist statements about the crisis. The major players are the “Defenders of the Faith” doing God’s work (no Lloyd B, we won’t let that one die, that is a noose we hope you hang yourself from)that is disaster capitalism. The trajectory of their argumentation in testimony thus far is that how they handled the crisis was of the highest integrity and always in the public interest first. In short, saving/preserving the corrupt financial system was the first order of business, no matter the long term cost inflicted on the public of these preservation policies.

    In short, the danger is that this financial crisis inquiry falls short of what the Pecora Commision accomplished in 1933 to effect Nunca Mas financial reform (that provided stability for roughly 50 yrs) and becomes a pulpit for the powers to be to further legitimize their misbehaviors in the events leading up to, during and after the crisis (which is far from over btw). If the inquiry devolves into revisionist history by the elites that created the crisis, what the crisis inquiry will entail is little more than Kabuki theater with the major actors legitimizing the Potemkin Villages for the consumption of public chumps.

    Yves your statement that “we need to come up with standards of what should be unacceptable behavior…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” is spot on but the language I am afraid it does not go far enough.

    Unacceptable destructive behavior by whom? If we label and define the destructive players anything less than “financial enemy combatants” then we risk reform that only tweaks and preserves the system. If their innovative products are defined as hedging instruments and not predatory financial weapons of mass destruction that need banishment, then the public loses again.

    The financial industry, when all is said and done, needs to show that they “fear God” like Abraham did in Genesis. At God’s command, Abraham took his son Isaac to be offered as a sacrifice on Mount Moriah.

    The story of the Akedah, or the binding of Isaac, is a story of obedience to God. In Hebrew, to fear God is to obey God. By doing as God commanded, Abraham entered an covenantal relationship with God. Covenantal relationships are binding relationships. As Kierkagaard put it in Fear and Trembling, in that act of obedience, Abraham covenantally bound himself to the Absolute, God. In so doing Abraham became a Knight of Absolute Faith to the highest authority known to the Hebrews.

    The major players of the financial industry need to covenantally bound themselves to a higher authority as they were covenantally required to do by law in 1933-1934. The industry as a whole must be made to submit and obey a higher cause than themselves when all is said and done.

    When all is said and done, the financial industry has much to sacrifice to put themselves in a right or absolute relationship with the rest of the world.

    As Edward Luce noted and “Machiavelli famously observed, it is better for a prince to be feared than loved. For all his intelligence, nobody fears Mr Obama.” What the world needs now is an authority (not prince) that the financial industry fears and obeys.

    We are so far from that construct or paradigm shift today that it is laughable. To the extent such a construct like that is laughable shows you the extent to which we must go to get there.

    1. john c. halasz

      I’m dimly reminded of a early “theological” essay by Walter Benjamin that I read a long time ago called “Critique of Violence”, which plays around with legal philosophy, in which he makes the odd side comment that laws against fraud are not legitimate. The basic set up is roughly this: law emerges through the eruption of “divine violence” amidst the mythic powers that repetitively hold sway over human fates, thereby commanding the legitimacy of the order of justice it upholds through instilling respect for the law in those subject and adherent to it. So the reason that laws against fraud could never be legitimate is presumably because, by the time such emendations of the legal order are attempted, it is already too late, and laws against fraud are already the tell-tale sign that the “divine violence” has receded back into myth, respect for the law has collapsed and the legal order of justice is corrupted and disintegrating. Unless, of course, there is a new eruption of such “divine violence” and a new legal order of justice is instituted.

  5. Doug Terpstra

    Mmmm, grilled Rubin for the kosher dinner theater. Pass the mustard and sauerkraut please! Tonight, eat, drink, and be merry, for tomorrow your soul will be required of you.

    Matt Taibbi’s article a while back described how Obama’s Wall Street protection staff was hand-selected by Rubin with Summers assistance. These not-so-kosher banskters are beyond redemption.

  6. leeAnne

    “.. 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.”

    I recall that excessive profits was the tip off for changing the rules. The free market isn’t working when profits become excessive and remain so for any length of time. Its cause for investigation when that happens. But here we are.

    If we can’t change election financing laws so that law makers and regulators in government aren’t corrupted by money and promises of future lucrative positions, this hearing at which Rubin may attend can’t be anything but theatre. It should be interesting to see what he comes up with when a little no talent snit like Geithner can just run out the clock at hearings with no change in the rules for that.

    And as long as finance with the rest of the FIRE sector are taking the profits from the productive side of the economy and splitting it up amongst themselves, we’re toast banana republic -Bernanke saying na na nana -we’re in charge. What we do with your taxpayer money is none of your business -oh, here’s $15 billion for ya, go buy yourself a couple of big macs on me.

    Any little snit no-talent like Geithner can get up there in front of Congress and run out the clock.

  7. Tony

    On Asean + 3, I think China also learned from 97 that they need to build huge forex to defend from currency attack. Not just peg. And around that time, the did need to help Hong Kong a little to defend their peg. the early ’00 period were the good time, when USD was over valued because every central bank in asia was piling it.

    At any rate, the asean +3 chiang mai agreement seems to work. The asean+3 forex doesn’t budge at all. (notice the traditionally crazy won, rupiah, and singapore dollar, compare this to australian dollar.)

    also, now everybody in asia stops piling up USD. Everybody has about enough and they have proof they have enough from last attack few months back.

    Basically, this means there is no appetite for that up coming massive US deficit Treasuries. US deficits has to come down by half or more pronto, unless US wants to do devaluation. But devaluation will put Saudi peg in such great inflation pressure, they have to unpeg. And then USD will truly has no leg and zooming all the way to natural support. Who knows what natural support is..

    My guess, after the money printing, T-bill dumping, USD asset shorting are done, followed by one or two big bank collapse…

    1. john c. halasz

      Huge Chinese and East Asian for-ex reserves defend against devaluation threats, (due to foreign investment liabilities) not upward revaluation. The exhoritant Chinese reserve accumulation is a result of sterilizing export surpluses in foreign currency, while maintaining an undervalued $ peg. If such reserve accumulation were to stop or be reversed the result would be either an increase in the value of the RMB or high domestic Chinese inflation rates or a combination of the two. Gradual US$ devaluation is needed to reverse U.S. CA deficits anyway. Only a sudden plunge would be catastrophic, but as much for China et alia as for the U.S.

      1. tony

        timing. sure it will ultimately increase RMB without accumulation. But how fast? weeks? months? several Q?

        what if other sterilization and dollar recycling be employed during sow economy? It is not unimaginable to watch China only adding small amount of dollar to reserve compared to US need to pay deficit. There are tons of external dollar that can still be purchased to keep the peg going.

        So the question then, can china hold the peg longer than US need to pay for deficit/devaluation?

        what happen if euro falls and adding pressure for china to lower rmb?

  8. Bob

    Next in line for interrogation Ex HUD SEC. Andrew Coumo. It was Coumo who forced banks to lend to less credit worthy borrowers. Now this POS is in the forefront of prosecution of the wreckage of his own doing.

    1. bob

      He’s my whipping boy, find your own.

      I’ll let you keep the name but don’t you dare not capitalize it.

      And NO ONE “forced banks to lend to less credit worthy borrowers”

      How is forcing the banks to lend working now? They don’t do anything they don’t get paid for.

      Who was buying crap from the banks? Without a willing buyer for this stuff there is no demand for it.

      And no, it wasn’t F&F, they were in competition with the banks, selling into the same market.

  9. Jackrabbit

    Class Action Suit

    Officers and Directors of TBTF Banks during the Period 2000-2008

    Breach of Fiduciary duty arising from Willful Negligence

    Let these few hundred people defend their actions and inactions in a court of law.

  10. citizen bagholder

    Excellent analysis, Yves. Thank you again for stepping in where the media has utterly failed. I hope this is seen by lots of new readers.

  11. craazyman

    No, Mr. Buffet, shareholders haven’t been the ones who’ve paid the price for the failure of CEOs and Boards of Directors and guys like Robert Rubin.

    Most of them can just bail out on the next trade, for less than $10 bucks at E-Trade or Schwab, or through their Mutual Fund or through guys like you.

    The people who’ve paid the price are folks on fixed incomes, or low salaries who aren’t “shareholders”, or folks who want to save their money rather than throw it at the Big Casino.

    You’re good at the Big Casino. You’re one of the best. But lots of folks aren’t, or don’t care to be. They have other interests — like paying rent. They’re the ones getting screwed.

    You know, if it goes on long enough like this, then all bets are off, and even the Big Casino will be in trouble. That would be a tough letter to write, I bet.

  12. bob

    If you have any money left in your wallet, look at the names on the bills.

    I do this frequently, and I have yet to see the name of a person who does not belong in jail.

    Right now, a bunch of reruns- Paulson and Snow(cerberus).

    Maybe Rubin and Summers are hoarding the bills with their names on them, hoping to pretend that they didn’t have anything to do with this.

    Larry had a bunker built(KBR no bid contract) where he can bathe naked in pools of his own filth proving to himself his own awesomeness. He doesn’t even need a mirror anymore, just a few $1’s.

  13. JTFaraday

    Rubin, in particular, highlights another problem–that of financial sector *industry people* using the Office of the Treasury as a platform from which to further the factional interests of *one* business sector, to the detriment of the public interest and other business sectors.

    It seems to me that industry insiders ought to be banned outright from working in the Treasury Department.

  14. matt6786

    i just discovered your site. great article. how long have you been writing? this is good writing. are you a journalist aswell? anyway, thanks again. subscribing to the rss :).

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