The Financial Crisis Inquiry Commission released a raft of documents from its 2010 investigation, including interviews with senior government officials like Alan Greenspan, Hank Paulson, and Sheila Bair, as well as other individuals deemed to be prominent like Warren Buffett and subprime short-seller Steve Eisman. It’s hard to see the justification for keeping information from private individuals under wraps for this long.
Here is a juicy tidbit flagged by Fortune, on the long-standing stealth power in the Democratic party, Robert Rubin, singularly responsible for its strong dollar (as in anti labor) and bank friendly policies:
According to the minutes, the commission voted on September 29, 2010, on whether to refer persons related to an item titled “Potential Fraud and False Certifications: Citigroup” to the office of the Attorney General of the United States. The staff notes that describe the item names Rubin, along with then Citi CEO Charles Prince, as having potentially violated the law. At the meeting, the commission’s general counsel Gary Cohen said that what the commissioners were voting on was just a referral and “not a recommendation for prosecution.” The vote was unanimous to refer the Rubin matter among the commission members present at the meeting, 6-to-0.
A spokesman for Rubin says, “We hadn’t heard anything about this and have no knowledge of it.” Fortune reached out but was not able to contact Prince. The Department of Justice declined to comment…..
By late summer 2007, Citi’s direct exposure to subprime bonds was $55 billion, according to the crisis commission. The staff notes of the commission say that “based on FCIC interviews and documents obtained during our investigation, it is clear that CEO Chuck Prince and Robert Rubin . . . knew this information.” It says the two top officials were made aware of the extent of Citi’s exposure “no later than September 9, 2007.”
Yet, according to the commission, on October 15, Citi executives told analysts on a call that the bank’s total exposure to subprime was just $13 million, or 76% less than it actually was. Two weeks later as pressure began to build on Citi, and values in the mortgage market fell, Citi told the market that its actual subprime exposure was $55 billion, and that its losses from mortgage-related assets could already be as big as $11 billion. Prince also announced he was resigning.
On the surface, this seems to be quite damning, in that the FCIC apparently found a smoking gun that implicated the very top executives at Citi, including Prince and Rubin, as hiding massive Citi subprime exposures. And this was not just any old subprime, but $40 billion by-then-understood-to-be-particularly rancid CDOs. And that evidence was strong enough to secure a 6-0 vote of commissioners who were present, at a body that had been designed to come to loggerheads and even had a dissenting report issued by Republican commissioners in opposition to the official document.
The Fortune story is not as crisp on what had happened prior to that date as would have been ideal. From the article:
The commission’s staff noted that the SEC had investigated similar charges against city and its executives, but had decided to only charge the bank’s chief financial officer and its head of investor relations. But based on the evidence the crisis commission had uncovered, the staff seemed to think that the SEC had not gone far enough up the chain of command, and that Citi’s top executives might have committed crimes as well. “Indeed, by naming only the CFO and the head of investor relations, the SEC appears to pin blame on those who speak a company’s line, rather than those responsible for writing it,” the crisis commissions legal staff wrote in a memo to the commission.
Mind you, the FCIC referral was made sometime after the committee vote, on September 29, 2010. But the SEC had not merely “charged” Citi officials as of that date; it had completed its settlement in late July. From our archives:
A news story today provides further confirmation of the rule by the banking classes in the US, with only token gestures to the rule of law. Per Bloomberg (hat tip Tom Adams), Citigroup is ponying up $75 million to settle SEC charges that the giant bank was not sufficiently forthcoming in the runup to the financial crisis about losses on billions of dollars of subprime exposures:
The company made misstatements on earnings calls and in financial filings in 2007 about assets tied to subprime loans, the Securities and Exchange Commission said in a federal lawsuit yesterday in Washington. Some disclosures omitted more than $40 billion in investments, it said. Citigroup’s former chief financial officer and head of investor relations agreed to pay a total of $180,000 for failing to disclose the risk….
Citigroup executives publicly stated four times in 2007 that the New York-based bank had reduced its exposure to subprime mortgage securities by 45 percent to $13 billion, as investors and analysts clamored for information about the deteriorating market.
The Financial Times provides additional detail:
The SEC said Citi stated four times in July and October 2007 that it had reduced its subprime exposure from $24bn to $13bn at the end of 2006. Yet the bank failed to inform investors until November 2007 that it held more than $40bn in “super senior” tranches of CDOs backed by subprime mortgages and related instruments called “liquidity puts”, the SEC claimed.
Yves here. I guess I am a bit thick. In 2007, subrpime exposure was the thing investors were most worried about. Recall that the first acute phase of the financial was in August-September 2007, when the asset backed commercial paper started contracting and money market investors shunned funds that had any taint of subprime.
Recall also that Sarbanes Oxley, passed in 2002, provides that a public company’s principal executive and principal financial officers certify both annual and quarterly financial statements for accuracy and completeness. Section 906 further
contains a certification requirement subject to specific federal criminal provisions and that is separate and distinct from the certification requirement mandated by Section 302.
So….what do we have here? A $75 million fine, imposed on the company…and so coming out of Citi’s coffers, which comes (in theory) from shareholders (but given that financial firms pay high percentages of revenues in bonuses, this fine would have a microscopic impact on pay levels).
More striking is the mere slap on the wrist of the execs involved. The former Citi chief financial officer, Gary Crittenden, who held the job from March 2007 to March 2009, will pay $100,000 of the total $180,000, with Arthur Tildesley, then in charge of investor relations, agreeing to cough up $80,000 to settle charges.
To give you a sense of proportion, Crittenden was Citigroup’s second highest paid officer. From Citigroup’s 2009 proxy:
He also sits on 8 boards. Do the math: this settlement is a mere inconvenience. And note, more important, the failure of the SEC to pursue Chuck Prince (in charge through November 2007). If investors weren’t finding the answers to vital questions in the bank’s financial statements, one could argue the written disclosures weren’t adequate either (it appears the SEC wasn’t willing to pursue this angle).
And Citi virtually thumbed its nose at the charges in its statement:
Mr. Tildesley is a highly valued employee of Citi and is making significant contributions to the company.
As Tom Adams noted:
When people talk about banksters this is what they mean – lying with impunity is not only not problematic, it is critical to career advancement and company “success”.
The message seems pretty clear. Sarbox was intended to curtail phony corporate accounting in the wake of Enron. But why resort to complicated transactions like the energy company’s famed Raptors when Citi shows that mere lying will produce the same results with much less fuss?
Back to the present post. So what are we to make of the seemingly courageous vote of the FCIC to tell the Department of Justice to go after the then nearly two decade power behind the throne of the Democratic Party, ex Clinton Treasury Secretary Robert Rubin, who among many others was also a key mentor of Larry Summers, who had been promised the Fed chairmanship as an eventual consolation prize for being elbowed aside as an Obama Administration power player by another Rubin acolyte, Timothy Geithner?
Per our post, it was obvious at the time of the July 2010 SEC settlement, two months before the FCIC vote, that the very top layer at Citigroup had to have known about the subprime risks. Indeed, Rubin had already admitted to it, in a Fortune interview in Novermber 2007:
At bottom, the countdown to both Prince’s exit and Citi’s November shocks began in that summer crisis period for the credit markets. Citi started then to have ominous dealings with CDOs that carried a “liquidity put.” Never heard of a liquidity put? Google will give you a few uninformative references. But it is testimony to the obscurity of this term that Rubin says he had never heard of liquidity puts until they started harassing Citi last summer.
Mind you, Rubin apparently spent the bulk of the interview presenting himself as not involved in risk management and claimed that hardly anyone saw saw the collapse coming (that’s ridiculous; I went against all of my finance training and had started shorting the market as of late summer 2007). But despite trying to put himself as too remote to know and that no one on Wall Street had figured out what was about to hit the fan, Rubin admitted he had heard of liquidity puts over the summer, meaning the recognition of the magnitude of Citi’s subprime exposure had reached senior levels. Moreover, on October 13 (two days before Citi misrepresented the magnitude of its subprime black hole), Bloomberg and the Wall Street Journal revealed that Treasury Secretary Hank Paulson had been working on a structured investment vehicle (SIV) rescue plan for three weeks.*
As it came to be revealed over upcoming months, Citi was far and away the most exposed to SIV losses. And those came about via the fact that Citi’s not only had the biggest total exposure ($400 billion) but its SIVs were poorly designed. If the short-term financing for them could not be rolled upon maturity, the bank was required to step in and lend to them. Hence the “liquidity put” mentioned above.
Now let us connect the dots. Despite the overall impression faithfully conveyed in the Fortune interview, that Rubin was operating at too high a level to be held responsible, per Rubin, he admitted that he knew about the liquidity put issue as of the summer, as in well before the October misrepresentation to the public. Moreover, if you work back to when Hank Paulson started working in a serious way on the SIV rescue, it was over three weeks before the Citi confession of the size of its losses. Paulson’s going into overdrive is almost certain to be driven by concerns over Citi; the other major parties at risk were far less exposed and were foreign. And it is inconceivable, given Paulson’s and Rubin’s close personal relationship (remember, they had been co-chairmen at Goldman) that Paulson would not have been in contact directly with Rubin in early October, as in prior to the media misrepresentation (indeed, one wonders if the press about the Treasury plan is what made Citi realize its misrepresentation was untenable and forced the disclosure of the magnitude of the exposures).
In other words, there was already evidence in the public domain years before the FCIC arrived at the crime scene that Rubin knew about Citi’s massive subprime exposures. Rubin clearly was less plugged into what was afoot at Citi on a day-to-day basis than CEO Chuck Prince. This was part of the reason for our indignation at the SEC settlement: it was ludicrous to think that Prince and Rubin were in the dark, and that CFO Crittenden and chief flack Tildesley were operating as lone wolves. So it was clear that the SEC staff either was remarkably uninquisitive, or more likely, was discouraged by the political appointees (recall that the SEC’s head of enforcement, Robert Khuzami, had been the general counsel of the Americas for CDO patient zero Deutsche Bank, so any serious probe of CDOs would eventually implicate Khuzami).
In other words, statements like this from the Rubin interview (which we have embedded at the end of this post) simply confirm and add a bit more specificity to what he’d already admitted:
I don’t think CDOs ever become a subject of focus until that, I think it was September 12, ’07 meeting….Chuck Prince, called a, at a meeting — I think they had a meeting before that and I was in Korea, I think that is what happened. He had a meeting with the trading heads to look at all this and start to get at it, what was happening in the markets and what was happening to the P and L and so forth, and I was in Korea at the time. You will have to get the exact dates, I don’t know what dates we are talking about, and I got back and we had a — then the second meeting, and I was at that meeting, was on September 12th. That was really the first time that I focused on CDOs as an area of importance…then they showed us the CDO positions, and they were — the way I look at life at least, you can debate what I am about to say in some respects, but the way I looked at life, they were long billion dollars’ worth of these triple A super seniors.**
And that dim reading comes before one factors in that the Administration had clearly decided to throw its full weight behind defending the banking industry as of March 2009, and Citi even earlier. Former FDIC Chairman Sheila Bair in her memo Bull By the Horns, discussed in considerable detail her belief that Citigroup should have been put through a FDIC resolution, but that Treasury Secretary Geithner stymied her.
So what do we make of the FCIC’s vote to refer Rubin and Prince to the Department of Justice “as having potentially violated the law” and that they felt the SEC had not chosen to go after the truly responsible parties? If the tacit assumption was that the SEC didn’t have a smoking gun, that was remarkably naive, and that could be the driving force. Phil Angelides, the chairman, was widely seen as being over his head (and his selection was seen as cynical, to assure that the commission would be ineffective). Moreover, the commission had unrealistic deadlines for completing its work, was understaffed, and went with the “fire aim ready” approach of launching into public hearings almost immediately before doing any groundwork. We also got reports of dysfunction from FCIC staffers.
But this may also have been a “have your cake and eat it too” gesture. The commissioners, or at least the Democrats (and given the 6-0 vote, some Democrats had to have affirmed) had to have known that Rubin was far too powerful ever to be targeted. The new Fortune article confirms that by saying the Rubin camp had never heard a peep about the Department of Justice referral. Normally, an investigation would be kept secret until the advanced stages, but Rubin is so connected that one would expect he’d be alerted earlier than normal given his stature. So the Democrats could have been been pretending to throw the Republican commissioners some red meat in the hope of getting their cooperation on other issues.
While we are at it, I’m attaching the Rubin FCIC interview, which was just released last week. It looks more anodyne than it really is. The press has already picked up on the one obvious inflammatory bit, which is Rubin denying that he had anything to do with 1990s financial services deregulation. That is one of those technically accurate but substantively misleading statements, in that if nothing else, Rubin was the lead actor in blocking Brooksley Born’s efforts to regulate credit default swaps, and supported Gramm Leach Bliley, which codified that position as law. He does correctly point out (as we have) that the formal dismantling of Glass Steagall was a nothingburger (it was already so shot full of holes by then as to be meaningless) and that the Fed, not Treasury, had been the institution eroding Glass Steagall. However, Rubin conveniently omits that Treasury wanted even the weak constraints that the Fed wanted in place to be swept away (see here for an example). And consider this defense of big international banks:
My own feeling is that — you know, reasonable people can disagree on this — that in the global economy that we have today and the needs of that global economy for enormous transactions that are global in scope, so that a financing, for example, may involve credit being extended in a number of different currencies and different localities, companies need to have cash moved round around the world very quickly and so forth.
This statement is not a general defense of international banking. It’s specific to Citi, which runs an enormous international cash management system called GTS which is heavily used by large multinationals. As we discussed long-form, GTS makes Citi impossible to resolve and hence should be nationalized or alternatively, should be balkanized within Citi and operated as a utility, so the rest of Citi could be wound up without impacting the operation of GTS.
Even though this transcript is long, it’s worth reading and has some nuggets in it. The FCIC again and again bring forth damning record and Rubin goes full Teflon. For instance, the FCIC staffers walk Rubin through a damning April 2008 letter from the Fed detailing numerous serious management and supervisory failings. Even though the board saw the letter, Rubin claims to have no memory of it and characterizes it, predictably, as Monday morning quarterbacking.
So on the one level, none of this is surprising. But on the other hand, it’s a vivid, and in this case, better documented-than-most illustration of how there is a class in America that is immune not just from prosecution, but even serious questioning. The FCIC staff politely lets Rubin run his “I don’t recall” routine when people lower down the food chain would have at least had those claims cross checked with other records, like e-mails, and the memories of colleagues. But in the case of someone like Rubin, you can expect everyone to circle the wagons and feign equally bad memories to protect him as well as themselves.
* One has to wonder: did Citi hope that Paulson would be able to slap together a rescue plan quickly enough so that its subprime misrepresentation would become non-material, or at least only somewhat controversial?
**Mind you, Rubin tries playing dumb blond with the FCIC: “these were all AAA, so I thought they were fine.” By then, any reader of the Wall Street Journal or the Financial Times knew that there were concerns that CDO were not what they were cracked up to be, and Rubin, who had been head of risk arbitrage at Goldman, was no naif about trading risk. To their credit, the FCIC staffers take Rubin through documents presented at board meetings that show the extremely rapid growth of Citi’s CDO business and other data that make it hard to buy Rubin’s “I remember nothing before Sept. 12” but he does not budge.