Forget the criminals on Wall Street. What is more telling, troubling and almost bizarre is how quickly the chattering classes and political power brokers have shaken off the stain of the financial crisis, inviting back to center stage some of the very people responsible for destroying trillions of dollars in wealth and costing millions of people their jobs. To explain, let's look at the re-emergence of Robert Rubin as Democratic Party economic sage. Strap yourself in, folks, because this takes a little explanation.
Why even care about Robert Rubin? Robert Rubin was at the center of creating the world that spawned the collapse of the financial system, and, in the process, he acquired a personal fortune for himself. His whole persona and ego were wrapped up in his role as a major "fixer": a Wall Street Democrat who could be an emissary to all corners of the political and economic world. He was, along with his political patron, Bill Clinton, seen as the architect of the economic "good years" in the 1990s.
He has now spent the past 2-3 years, evading his responsibility for the financial crisis, (mainly, in his role at Citigroup) by blaming others and, then, dropping below the radar screen. And it could be said, after reading his sworn testimony before the Financial Crisis Inquiry Commission, that he outright lied; if not lies of an indictable nature, then, certainly he had a convenient loss of memory and recollection. I'll come back to the Commission report in a moment.
Let's start with the most recent twist to the story. On February 25th 2011, Rubin was the moderator of a panel on job creation at the Democratic Governors Association meeting. The panel itself was a typical yawn, a self-congratulating pile of mush (a la "we are great, we want to create jobs, look at us"). The only fascinating part of the panel was Rubin's introduction:
“If you look at the shorter term almost all project, forecasters are raising their estimates with respect to economic growth. That not withstanding, it seems to me, there are serious risks, there are vulnerabilities and we face unfortunately a very slow, or at least it’s expected, that unemployment will decline at a very slow rate. In addition, the recovery, even with the more optimistic estimates, will be the longest recovery from recession in the post World War Two period. If you look to the longer term, our country has enormous strengths, the dynamism of our society, the flexible labor and capital markets, our entrepreneurial culture, our demographics…it seems to me that we have a tremendous opportunity to succeed in the long run in a transforming global economy.
But if were going to realize that potential we must meet hugely consequential challenges. One, we must address unsustainable federal fiscal deficits that pose multiple serious and I would say dangerous risks to our economy. Two, we must make public investments that are absolutely critical with respect to competitiveness growth and broadbased participation in that growth. And three we must make changes in the way we conduct many of our governmental functions…”
So, here is the first point: Rubin's resurfacing at a Democratic Party forum presents a choice made between two visions. One vision--Rubin's--frames the challenges we face pretty much with the same foolish, and economically bankrupt, garbage that many Republicans are flogging: the deficit "crisis" is the main problem, that government is a problem and that our national economic crisis is about something called "competitiveness", and, if we are "serious" about all those issues, we can be a great nation again. Rubin makes a brief reference to the need to consider “tax rates and tax structures”, with no details.
The second vision of the crisis--one I share, with many others--is something very different: we are locked in the greatest class warfare we've seen in 100 years; that Rubin's vision of the world, in fact, has accelerated that warfare and the widening divide between rich and poor; that the deficit and debt "crisis" is phony and manufactured; that we have plenty of money in the country if we had political leaders with the spine to tax the wealthy in a serious way; that "competitiveness" is a distraction from the urgent crisis of the complete collapse of a decent wage and standard of living in the world; and that being a great nation is about something bigger than "beating" other countries around the world. For example, valuing communities over profits. Oh, pshaw.
It strikes me that, in choosing Rubin to embody what Democrats stand for, the party is embracing a bankrupt philosophy--and Rubin's failure, if you just judge simple competence, trumpets the bankruptcy of that philosophy. We'll come to that.
There is a reason Rubin fails to refer directly to the financial crisis, bringing it up obliquely as part of the employment crisis. To do so would re-frame the entire discussion to, well, Rubin himself.
A bit of back story helps set the stage. In my 2009 book, "The Audacity of Greed", I dug into Rubin's central role as a member of The Club: a global network of political and economic leaders who enforced the beliefs and policies of the so-called "free market". A bit of this:
When Bill Clinton entered the White House in 1993, he tapped Rubin to be the first director of the National Economic Council. Rubin was, in many ways, the point person on pushing NAFTA and expanding the so-called “free trade” agenda, which was, as I pointed out in chapter one, simply about expanding the opportunities for United States based firms to pour investment and capital into developed and emerging economies without being hindered by troublesome restraints such as country-specific rules about protecting agriculture, labor or the environment. Of course, as a full-fledged member of The Club, Rubin was always looking out for his sidekicks. Robert Kuttner astutely observed that, “After NAFTA created a gold rush of foreign money pouring into Mexico, enriching Goldman Sachs and its clients and triggering an unsustainable speculative boom followed by a crash, Rubin promoted the bailout of Mexico that made foreign bondholders whole. A little-noticed provision of NAFTA permitted foreign banks to acquire Mexican ones. In 2001, Rubin, back in the private sector, negotiated Citigroup’s $12.5 billion acquisition of Mexico’s leading bank, Banamex.”
Part of the allure of Rubin--and Bill Clinton--is the myth that they handed the country a great economic boom. This is false.
However, there is one thing wrong with the legend of the Clinton-Rubin economic miracle of the 1990s—it isn’t true. As economist Dean Baker points out, “The growth burst of the late 1990s had little to do with deficit reduction (at least directly) and had everything to do with two unsustainable bubbles—a stock market bubble and a dollar bubble. The Clinton administration chose to ride the prosperity from these bubbles, even though it should have recognized that this prosperity was artificial, and would inevitably lead to a crash, followed by a painful adjustment process.
These twin bubbles fostered the illusion among many Americans that they were worth a lot of money, despite the fact that their wealth existed only on paper, and did not come from actual wage increases. The result was a Wal-Mart wet-dream: as the high dollar
made imports cheap, people snapped up these cheap goods, which fattened the bottom line of companies that trafficked in these products, such as Wal-Mart. At the same time, perceiving themselves to be richer than they actually were thanks to the stock market bubble, and feeling that they were heading towards a comfortable retirement, people saved less...
....Rather than being an anomaly, the Clinton-Rubin era was simply another link in the three-decade “free market” push, and actually set up the vast financial collapse of 2008, as it came to be accepted wisdom that economic bubbles could be substituted for real wage growth.
And, moreover, Rubin was a very important figure in what would ultimately prove to be the on-doing of the financial system in 2008.
Rubin also was front and center in the drive to tear down the wall between commercial and investment banks—a wall that had existed since the 1933 Glass-Steagall Act and had been erected precisely to prevent the kind of speculation that had ripped through the heart of the economy in the 1920s, triggering the collapse of the stock market and ushering in the Great Depression.
The record is clear that Rubin played a central role in destroying Glass-Steagall. Brooksley Born, then the chair of the Commodity Futures Trading Commission told Congress in 1997 that trading of derivatives without any kind of regulation could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it.”. What happened?
By saying out loud what we would learn in 2007 and 2008 was the truth, Born drew the ire of some very powerful members of The Club. “[Alan] Greenspan told Brooksley that she essentially didn’t know what she was doing and she’d cause a financial crisis,” recalled Michael Greenberger, who was a senior director at the Commodity Futures Trading Commission. Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University added: “Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury. I think of him as consistently cheerleading on derivatives.”6 The “various people” Blinder referred to included Robert Rubin. (Among the many companies lobbying against any regulation was Enron, which would use derivatives to construct a phony financial pyramid that would spectacularly collapse.) Ultimately, Rubin’s opposition to Born and the role he played in removing Glass-Steagall lead to the rapid growth of derivatives, particularly the credit-default swaps which fueled the 2008 financial crisis.
Rubin's image was in deep trouble in the wake of the financial crisis:
At the end of 2008, Rubin was drawing a lot of flack, given the bailout of Citigroup, and the news that he had earned $115 million at the company (not including stock options) since 1999. That’s a lot of money for someone to make whose defense against the collapse of his company, in an extraordinary November 2008 interview with The Wall Street Journal, boiled down to: I was not responsible and/or I didn’t know. The seer of the markets, the man who had forged the country’s economic destiny in the 1990s, whose links to investment banking firms went back three decades, who brought Congressional hearings to a hush as he dispensed advice roundly perceived as The Word From The Mountaintop, and who was one of the leaders of one of the largest banks in the world—in short, the president of The Club—was reduced, apparently, to being an innocent bystander as Cititgroup disintegrated around him.
“Under fire for his role in the near-collapse of Citigroup Inc.,” the Journal reported, “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.” The article also stated that despite the fact that Rubin was involved in the decision of the Citigroup board to ramp up risk-taking in 2004 and 2005, he was “warning publicly that investors were taking too much risk.”
Whatever you think of Rubin’s tenure at Citigroup, that last statement is simply false, as there is not a single public pronouncement that he made about investors taking on too much risk in the years leading up to the financial crisis of 2008[emphasis added here]. As a matter of fact, when he was Treasury Secretary, Rubin was well aware of the dangers of leverage and either tried to downplay those dangers or else encouraged people to look the other way. For example, at the World Economic Forum in Davos in January 1999, in a talk that addressed the Asian financial crisis (which, ironically given today’s crisis, he called “the most serious financial crisis of the last 50 years”), Rubin said:
"Leverage throughout the international financial system has been substantially reduced over recent months, and that probably makes the financial system safer today than it was last summer. Without prejudging anything, it does seem to me that this whole question of leverage merits further examination. As a related matter, while I do not believe that hedge funds have been a significant factor in the financial crisis, their activities may well have amplified market movements in some cases for some period of time. I think questions about hedge funds should be addressed, but as part of a broader review of financial institutions generally with respect to leverage, the appropriate scope of prudential regulation, risk management and disclosure."
By acknowledging that leverage had been reduced and that it, by inference, had been a significant factor in the Asian financial crisis, you would think that Rubin would have been similarly warning us in recent years about the leverage of Wall Street firms. Yet, there is no public record of the warnings Rubin claims he made. In fact, if Rubin had learned anything from the Asian crisis, then why did he let Citigroup effectively go down the same leveraged road?
Because it was someone else’s fault, he told the Wall Street Journal, saying that it was the company’s “risk-management executives” who were responsible for the problems that Citigroup faced. “The board can’t run the risk book of a company,” Rubin said, exonerating both himself and his fellow board members. “The board as a whole is not going to have a granular knowledge” of operations. Rubin made this extraordinary statement of ignorance despite the fact that the Journal article said that, “Colleagues deferred to him [Rubin], as the only board member with experience as a trader or risk manager.” Ultimately, Rubin said that the decision by Citigroup to increase risk “followed a presentation to the board by a consultant who said the bank had committed less of the capital on its balance sheet, on a risk-adjusted basis, than competitors.” So again, it wasn’t the board’s fault—a board Rubin sat on at quite a large expense to the company. Instead, it was an unnamed consultant’s fault. Despite his status as an economic leader, we are supposed to believe that Rubin was incapable of seeing the economic dangers of increased risk— which he himself had spoken against in reference to the Asian financial crisis.
Here, I want to jump right to Rubin's deposition before the Financial Crisis Inquiry Commission--which I read, all 178 pages of it. While the Commission has stated that it has referred information to the Justice Department for possible criminal indictments, no one has a clue who might be fingered. What is clear when reading Rubin's deposition--given under the watchful eye of a team of high-powered corporate defense lawyers--is that he plays the role of an individual who cannot remember details and downplays any influential role he might have had at Citigroup. He claims not to remember whether agendas were set or minutes were kept for the executive committee discussions. Mind you, this is someone who served, for a time, as chairman of the company, was a director and member of the bank's executive committee and was one of its highest paid officials.
He is asked what he did as a member of the Executive Committee:
[Rubin] And the only function of the executive committee, it sounds like a big thing, but the only function of the executive committee was to have a forum, if you will, that could convene in between board meetings if there was something the board needed to focus on.
And I was chairman of it, and it met I think two, three times a year until Citi got in trouble. And if it met, what would happen is I was chairman, so we would meet in the
library or someplace, and I would convene the meeting and then turn it over to the CEO and he would run it. It had no other function.
Q: And functionally, who were typically the other members of the executive committee? Specifically were they the chairs of the other board committees?
A: You know, I do not know the answer to that. The executive committee for practical purposes was a non, it was just a way of getting some directors together. It was a formal apparatus for getting some directors together if something had to be done between the board meetings, and I think -- you could check this, but I think there was even an invitation to other board members to attend if they wanted to.
Rubin is, then, shown an exhibit:
Q: Calling your attention to the second block under executive committee, does that prompt any recollections in terms of who functionally might have been on the committee typically?
A: It looks like what the committee looked like, but if you had a totally different set of names I would have said the same thing.
Q: But would it have been typical, or was it typical of your experience while you were chair of the executive committee that the audit chair would also be on that committee?
A: I truly don't know.
This is essentially the tenor of the deposition--gee, I don't know, I don't remember, I wasn't all that influential, though he does recall details of meetings regarding a Worldcom settlement, buying a bank in China and some technology projects.
It simply is not credible. It is not credible for a man who was a star at Goldman Sachs, who could master the details of a bailout of Mexico (for which he was much praised by the governing elites), who was a cornerstone of the country's economic policy, who served as Treasury Secretary and who built his legacy and reputation as the master, the old-knowing expert--to all of a sudden suffer from a broad loss of memory about his role in one of the highest positions at Citigroup.
And, while the Commission did not explicitly come out and say it, there is at least one revealing passage, in my view, that gives a hint of the insider view at the Commission of Rubin's credibility. It comes early in the Commission's written report (here in the electronic versionand page 19 of the book version):
At Citigroup, meanwhile, Richard Bowen, a veteran banker in the consumer lending group, received a promotion in early 2006 when he was named business chief under writer. He would go on to oversee loan quality for over $90 billion a year of mortgages underwritten and purchased by CitiFinancial. These mortgages were sold to Fannie Mae, Freddie Mac, and others. In June 2006, Bowen discovered that as much as 60% of the loans that Citi was buying were defective. They did not meet Citigroup’s loan guidelines and thus endangered the company—if the borrowers were to default on their loans, the investors could force Citi to buy them back. Bowen told the Commission that he tried to alert top managers at the firm by “email, weekly reports,committee presentations, and discussions”; but though they expressed concern, it “never translated into any action.” Instead, he said, “there was a considerable push to
build volumes, to increase market share.” Indeed, Bowen recalled, Citi began to loosen its own standards during these years up to 2005: specifically, it started to purchase stated-income loans. “So we joined the other lemmings headed for the cliff,” he said in an interview with the FCIC.
He finally took his warnings to the highest level he could reach—Robert Rubin, the chairman of the Executive Committee of the Board of Directors and a former U.S. treasury secretary in the Clinton administration, and three other bank officials. He sent Rubin and the others a memo with the words “URGENT—READ IMMEDIATELY” in the subject line. Sharing his concerns, he stressed to top managers that Citi faced billions of dollars in losses if investors were to demand that Citi repurchase the defective loans.
Rubin told the Commission in a public hearing in April 2010 that Citibank handled the Bowen matter promptly and effectively. “I do recollect this and that either I or somebody else, and I truly do not remember who, but either I or somebody else sent it to the appropriate people, and I do know factually that that was acted on promptly and actions were taken in response to it.” According to Citigroup, the bank undertook an investigation in response to Bowen’s claims and the system of underwriting reviews was revised.
Bowen told the Commission that after he alerted management by sending emails, he went from supervising 220 people to supervising only 2, his bonus was reduced, and he was downgraded in his performance review.[emphasis added]
You cannot read that portion without sensing the Commission's clear message: Rubin was warned about the trouble and directly, or indirectly, was responsible for silencing and punishing an individual who sought to raise an alarm about the bank's exposure. If there was no criminality, it must at least raise a question of competence and responsibility: why would anyone take Rubin's advice in the future after, based on the public record, he stood by as Citigroup almost collapsed under the weight of huge losses?
I want to briefly go back to a more significant question: Rubin's role in eviscerating the regulatory protections. To recall, the record is clear--from various sources like Brooksley Born--that Rubin played a significant role in undoing the regulatory safeguards under Glass-Steagall. Here is what he tells the Commission:
Rubin: First of all, I don't remember any deregulation at that time, but if there was deregulation it would have been in the interpretation of Glass-Steagall by the Fed, which of course I would not have been involved in at all. Tell me what you mean, because I don't think there was any other deregulation.
Question: I am wondering what role you might have had in the precursors for Gramm-Leach-Bliley or what became the Commodity Futures Modernization Act that was the leader?
A: It was all later.
Q: Did you have a role as Secretary of Treasury with respect to advocacy that might have led to those laws?
A Well, by the time we got to the point where Glass-Steagall was rescinded, which was actually after I left -- I was advocating the rescission of Glass-Steagall because there was no more Glass-Steagall for practical purposes. By the time you got to the point where Glass-Steagall was rescinded, there were no restrictions -- you probably know all this, but Glass-Steagall started to get reinterpreted in the late '80s, mid- to late '80s, I don't remember exactly, and by the time you got to the rescission of Glass-Steagall which I think was in 2000 --maybe it was late '99 -- I had left Treasury, but I was an advocate of rescinding it.
But there were no restrictions left on what a large bank could do except for insurance underwriting. So yes, I was an advocate of rescinding Glass-Steagall, but by the time we rescinded it there were no restrictions left in it at all except for the insurance underwriting which had no relevance to anything that has happened since then.
Q Do you still think it was a good idea to repeal Glass-Steagall?
A Well, repealing Glass-Steagall was irrelevant.
Q Right. Well --
A I think the question -- let me, if I could say something.
Q Please.
A I think the real question at this point is, the only thing that rescinding Glass-Steagall itself did was to enable the banks to more efficiently, less cumbersomely, conduct a full range of activities they were entitled under the interpretations to conduct anyway. In other words, it was cumbersome to exercise their full range of powers, but they had the full range of powers except for insurance underwriting. So all the rescinding did was to eliminate that cumbersomeness.
And, then:
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.[emphasis added]
There are two flashing red lights about that testimony. First, the "gee-whiz-I-was- just-a-bystander-and-this-was-already-a-done-deal" argument stands on very thin ice, verging on a lie. Again, the public record is full of counter information. Yes, a whole lot of weakening of regulatory power had taken place for many years. But, Rubin et al applied the coup de grace--and it came, not surprisingly, in alliance with Rubin's future employers, Citicorp (which would be renamed Citigroup). Take a report from Demos:
In the interim, financier Sanford Weil had taken advantage of various exemptions in the law to build an empire of insurance, commercial-banking, and investment-banking units. In early 1998, he proposed a merger to Citicorp’s John Reed.
The idea was a brazen violation of Glass-Steagall. But by now, Greenspan had prevailed on the Fed to let bank holding companies own investment-bank affiliates with as much as 25 percent of their business in securities underwriting. (The previous ceiling had been 10 percent.) Meanwhile, the Clinton administration, with the ex-investment banker—and future Citigroup Chairman—Robert Rubin as Treasury Secretary, was sympathetic to the case for bigger and more diversified banks in the name of American global competitiveness.
After heads-up phone calls to Greenspan, Rubin, and Bill Clinton, Weil and Reed announced the biggest-ever corporate merger, resulting in the biggest-ever financial services company. For a brief time, it appeared that the Fed might require the new entity to sell off its insurance operations. Weil’s solution was to crank up another Glass-Steagall repeal effort and wait out the result, assuming that no one in power would object. He had figured right. The final push took a year and a half, and entailed hundreds of millions of dollars in lobbying and campaign contributions. But on November 12, 1999, Clinton signed the Financial Modernization Act (commonly known as Gramm-Leach-Bliley) into law.[emphasis added]
But, Rubin's observation, in the shorter snippet, is more relevant. Rubin's view is that companies and banks need to have an almost unfettered power to, in his words, "have cash moved round around the world very quickly...".
This is the troubling and dangerous view--and, frankly, what led us into the mess we are in, not just because of the most recent financial crisis but because of the economic system that has been constructed over the past several decades. Rather than run a national, and global, economy where governments have a strong hand in restraining the impulses of corporations--in the most benign explanation, impulses that are driven by the sort-term profit imperative--we have let the whole system run wild, governed by a fastest-around-the-world, Wild-West, corporate-profits-first-people-second mentality. That is the core of our crisis.
And Robert Rubin believes in the foolish system we have had in place for the past three decades. No, he helped put in place, guard, defend and use that very system.
Conclusion: Robert Rubin Should Be Radioactive. Giving him a forum, a way to rehabilitate himself, is a stain on the Democratic Party
There is strong evidence that he has not been truthful about his role in the financial crisis.
At best, he bungled his role at Citigroup, or, at best, was asleep at the wheel while collecting millions of dollars in compensation--so it just defies logic that anyone would turn to him for advice on how to run anything.
But, most important, he carries the flag of a discredited economic philosophy. If Democrats want to keep walking behind that standard-bearer, then, we have not learned anything--and woe to the people of this country, and the planet, if we continue to blindly repeat the mistakes of the past 30-40 years by defending an economic system that has impoverished the many while enriching the few.