My commenters are pretty unanimous that I shouldn’t have published yesterday’s post on Bob Rubin. So I’ll not mention the subject again, and leave that debate to the comments of that post. For there’s more than enough Rubin debate to go around, especially now that Jacob Weisberg, who co-wrote Rubin’s memoir, has published an essay entitled “In Defense of Robert Rubin“.
It’s far from convincing, boiling down as it does to what might be called the Hypocrite’s Defense: “never mind what he did, look at what he said!”
To me, the most wrongheaded of the accusations is that Rubin prevented effective financial regulation when he was in government. I smile when I hear this claim because of the hours I spent listening to him argue the opposite. Rubin’s view has always been that the financial system needs to be protected from the excesses of markets. He was the first person I ever heard talk about the risk of derivatives… After the Asian financial crisis, one of Rubin’s refrains was: I think at some point we could have a derivatives-driven financial crisis.
If this is true — and I have no reason to believe that it isn’t — then that makes Rubin more culpable, not less. For there’s no doubt that over the course of the Clinton administration, financial services industry in general, and trade in derivatives in particular, were deregulated to an unprecedented degree. From a financial and economic point of view, the two darkest spots on Clinton’s record are the Gramm-Leach-Bliley Act and the Commodity Futures Modernization Act. And while Rubin might not have been at Treasury any more when those acts were signed into law, there’s no doubt that he personifies, more than anybody else, the economic and financial policy of the Clinton administration. And there’s no evidence whatsoever that he ever stood up in opposition to either of them.
So what’s Weisberg’s excuse for this disastrous failure?
When he was in the Clinton administration, Rubin thought that absent a crisis, it would be politically impossible to pass new rules because of the intensity of the opposition from his former colleagues on Wall Street. He also faced disagreement from Fed Chairman Alan Greenspan, who believed that markets were essentially self-regulating, and some skepticism from his own deputy at Treasury, Larry Summers. Rubin goes into this at length in his book, noting that Summers later ridiculed the kind of comprehensive margin requirements Rubin favored as “playing tennis with wooden rackets.” The three did agree, however, that a legally ambiguous effort by the Commodity Futures Trading Corp., then led by Brooksley Born, to regulate over-the-counter derivatives could have created dangerous market uncertainty.
Let’s take this one item at a time. First of all, Rubin thought he couldn’t pass new laws because Wall Street wouldn’t like them. This is just another way of saying that Rubin was so completely captured by Wall Street that he considered any legislation which might slow it down to be a political impossibility. He never even tried.
Secondly, Rubin was afraid of opposition from Greenspan — an unelected official at an independent central bank which was at the time proud of the fact that it has no control over legislation. (Today, of course, things are different, to the degree that a leaked Fed memo is playing a huge role on Capitol Hill with respect to the prospects for Blanche Lincoln’s derivatives proposals making it into law.)
Thirdly, Rubin faced “some skepticism” from his deputy, Larry Summers. This one hardly needs comment — but for the fact that Rubin not only was overly solicitous to his deputy on this subject, but was also instrumental in promoting him to Secretary upon his own departure, thereby installing as his successor someone who had no desire to regulate derivatives at all.
Finally, faced with a real-life proposal to regulate derivatives, Rubin opposed it, on the grounds that it “could have created dangerous market uncertainty”. I know what dangerous market uncertainty looks like, Bob: it looks like the TED spread gapping out to more than 450bp, as uncertainty over derivatives-related counterparty risk brings the global financial system to the edge of the precipice. I’d love to know what kind of dangerous market uncertainty Rubin was worried about: maybe the danger that senior Goldman Sachs derivatives traders would no longer be able to afford their fourth house?
Back to Weisberg:
Rubin was not wrong about the risk of unregulated derivatives, nor was he opposed to regulating them. To the contrary, he was prophetic about the risk and correct in his prescription.
Well, Rubin was opposed to regulating derivatives when someone (Born) tried to come along and actually do it. And he never bothered to try to enact his prescient precription. It’s a bit like seeing someone’s house burn down, and then saying “you know it’s OK, he really knew — and even said in public — that he ought to buy fire insurance”. Being prophetic, Jacob, is no defense at all. Quite the opposite.
But Weisberg continues with the same idea when he defends Rubin’s indefensible tenure at Citigroup:
Many a Citi executive sat in his corner office listening to the same apprehensions I heard so often about the mispricing of risk, the excesses in the credit market, and the danger of relying on mathematical models.
Except after delivering his disquisitions on the dangers of derivatives, Rubin would then turn around and tell Chuck Prince to let Tommy Maheras take ever more risk in the Citigroup fixed-income department, relying on exactly the mathematical models which he had just been deprecating. Writes Weisberg:
Even if Rubin had better understood the risks Citi traders were taking and been in a position to do something about it, he almost certainly would not have said, “sell the AAA-rated CDOs.”
Actually, Rubin was in a position to do something about the risks that Citi traders were taking. And what he said was “buy even more AAA-rated CDOs”. Rubin, the golden Goldman Sachs arbitrageur, was so highly respected within Citi that neither the CEO nor the board ever thought about questioning his judgment on the proper risk exposure that the fixed-income department should be allowed to take. And so it ended up growing out of control.
Weisberg ignores most of the many other criticisms which can be made of Rubin. To repeat myself:
So let’s not try to let Rubin off the hook here: he, more than any other individual, deserves an enormous amount of blame for the financial crisis.
He’s also one hell of an orator. Life lessons delivered at a late 90s commencement address:
“I remember once, many years ago, when a securities trader at another firm told me he had purchased a large block of stock. He did this because he was sure — absolutely certain — a particular set of events would occur. I looked, and I agreed that there were no evident roadblocks. He, with his absolute belief, took a very, very large position. I, highly optimistic but recognizing uncertainty, took a large position. Something totally unexpected happened. The projected events did not occur. I caused my firm to lose a lot of money, but not more than it could absorb. He lost an amount way beyond reason — and his job.”
Get bold/risky ideas from others. Appropriate them for oneself, but with slightly less conviction. If the other dude is wrong, you’ll get to keep your job.
I read Weisberg’s article earlier today with incredulity. At the very least, wouldn’t any journalist consider such a column topic a conflict of interest? Or don’t those exist in journalism any more (just like they seem not to on Wall Street)?
“the hours I spent listening to him argue the opposite. ”
Well, why would someone lie about that?
This quote is an effort to rewrite history: “The three did agree, however, that a legally ambiguous effort by the Commodity Futures Trading Corp., then led by Brooksley Born, to regulate over-the-counter derivatives could have created dangerous market uncertainty.”
Read what Economics of Contempt had to say about (i) the nonsensical claim that Born was stopped from regulating derivatives — she was stopped from asking questions about the OTC market that would have enabled regulators to determine whether or not to regulate them, and (ii) the so-called “legal ambiguity” of Born’s efforts (in the second comment) here: http://economicsofcontempt.blogspot.com/ 2009/05/brooksley-born.html
I wonder if Rubin’s friends are doing him any favors. By the way, in the financial world, is there just one degree of separation by law?
That potato-faced old troglodyte Rubin is such a pistol. Hard to tell which is more outré "“ his appearance, his perseverance or his concupiscence.
Everything he lacks in nubility is compensated for in single-minded plagiaristic subservience to the Imperial overlords of grey-collar crime. If it weren’t for Larry Summers he’d stick out like a sore thumb.
I didn’t read the part about citibank. I don’t think that discussing what Rubin said as opposed to what he did is “the hypocrites defence.” Rubin had no power to legislate. He could only advise Clinton. The important issue is what Rubin told Clinton.
You also assert that if one thinks a law would be good then only a hypocrite won’t even try to get congress to pass it. You are an excellent journalist and I am glad you are in journalism. I am especially glad you are not advising the President or a congress person. Try to remember the congress that Rubin tried had to deal with. The only question was veto or don’t veto. As you note Rubin wasn’t at the Treasury when Clinton signed the commodities futures modernization act.
This leaves the very important issue of Brooksley Born’s proposal to regulate derivatives using existing law. Here the problem is that the CFTC under Wendy Graham had made such a mess that asserting that the commodities exchange act applied to derivatives would have rendered existing contracts null and retroactively invalid. This is asserted by Norman Carleton who pretty much claims the blame for convincing Rubin to oppose Born. This would have made non-experts extremely eager to interpret the law or change it so that contracts signed in good faith could be enforced.
Born’s effort would have been challenged in court and the matter would be decided by the justices who decided to put Bush in the White House. The plain meaning of the law was no defence against them and practical people knew it. More importantly, an effort by Born would have been met by a new law removing the CFTC’s power. The key question becomes again — would Clinton have vetoed it. Born and Rubin together couldn’t do anything without Clinton’s determined support. The last three words are an oxymoron.
“I didn't read the part about citibank. I don't think that discussing what Rubin said as opposed to what he did is "the hypocrites defence." Rubin had no power to legislate. He could only advise Clinton. The important issue is what Rubin told Clinton.”
Hhhhhmmmm, well one of the things he apparently “told Clinton” was that Larry Summers was a good man, perhaps the best man, for the job, thereby helping to guarantee the type of advice Bill would be receiving on these very issues going forward.
If he also told Bill things like it would be impossible to stand up to Wall Street, to get a bill through “the Congress [poor] Rubin had to deal with”, and that the “only choice was veto or don’t veto” because “absent a crisis it would be politically impossible to pass new rules” (last quote from “In Defense of Robert Rubin”), I guess we all owe our eternal gratitude to Robert Rubin for giving our 42nd president the advice of waiting for a financial crisis to hit rather than opt for the courage and pen strokes required of a veto.
I mean, hey, after a few million lost their jobs and their homes – I wonder what % of those also lost marriages or worse in the stresses that followed, we can all see the meaningful reform that’s coming now We should give Mr. Rubin credit for this as well, and I’m surprised you didn’t. The man has vision and you clearly have an eye for such things.
I feel tempted to address your decision to exclude from your argument Robert’s time at Citi, but I feel a general dirtiness from the effort to think along your lines. So, I’ll stop after noting one last premise of your argument – big Bill Clinton wouldn’t have given his “determined support” to little Robert in an effort to get proper regulation in.
I guess that Greenspan and Summers’ near market fundamentalism doesn’t matter here since neither were elected officials. Nor does it matter that what Rubin actually said and pushed for at the time is very much open to debate (http://baselinescenario.com/2010/04/21/ what-did-robert-rubin-think-about-deriva tives/).
All that matters for your argument is that Bill from Arkansas wasn’t ready to fully commit to regulating complex financial instruments and transactions in the face of opposition from Summers and Greenspan and, at best, tentativeness (is even that too generous?) from Rubin, all of whom constituted his most senior economic team.
Wow.
Truly, you are a light onto the world.
I only registered to comment on the Rubin article: I just could not believe what i was reading, a total non-story about his personal life, it’s not why we (did) read your blog. In private eye terminology: you are very much seeing my subscription cancelled!
Felix, I don’t think the case is as strong as you make it out to be. At least not during his term as Treasury Secretary.
I don’t see how you can blame Rubin for not stopping CFMA. Its possible that Gramm-Leach-Bliley should have been on Rubin’s plate, but CFMA wasn’t passed until a year and a half after Rubin stepped down. Its not enough just to say that he’s the posterboy for Clintonomics, so he gets the blame.
On Rubin being captured because he thought derivatives reform couldn’t be passed:
Yes, its possible that he thought that because he was captured. But it was completely reasonable to expect that it was politically impossible to pass derivatives reform. The Republicans controlled Congress. To get a bill brought up for a vote, they would have needed (1) the assent of Phil Gramm and Tom DeLay, (2) every Democrat, and (3) six Republican Senators [fifteen if there was a filibuster]. And all this would be done with the opposition of the most trusted economist in America, the Maestro, and with the threat of Wall Street contributions drying up for whoever supported it. (This would be especially tough for the Republicans, who were desperate to counter Clinton’s soft-money fundraising).
If you’re Arlen Specter in 1998 – the best case Republican to flip – are you going to vote to regulate something you don’t fully understand when its opposed by the guy everyone thinks is the brightest in the room, opposed by everyone involved in the market, and against your political interests?
As for Summers and Born – hindsight is 20/20. Unless he’s claiming to have foreseen the full magnitude of the crisis a decade before it happened – or unless you think he should be held to that standard – its unfair to expect him to scotch Summers over one issue, or to compare his concerns over Born to what actually happened.
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