Rubin and Citi

I noted last week in discussing a NYT article about Citi's downfall:

There will be a temptation to blame the individuals. I suspect, for example, that this will kill a major role for [Citi board member Robert] Rubin in the Obama administration.

But I also said that we should resist the temptation to scapegoat Rubin and focus on the deeper governance failures.

A WSJ article today spotlights Rubin's role.  The article basically wonders how Rubin could take home $115 million in pay in nine years excluding options while claiming that he had no operating responsibility, and therefore can't be blamed for the $20 billion in recent losses and the 70% stock price decline during his tenure.

Rubin is quoted as saying:

The board can't run the risk book of a company. The board as a whole is not going to have a granular knowledge" of operations.

I'm tempted to see Rubin as the Clinton-Obama version of the Enron board. Didn't Lay and Skilling also say they lacked "granular" knowledge of what was happening at Enron? Wasn't the Enron board faulted for being similarly non-granular? 

The difference is that Rubin can't even claim ignorance. The article reports that Rubin "was deeply involved in a decision in late 2004 and early 2005 to take on more risk to boost flagging profit growth." He understood the financial instruments, and was making speeches to the effect that assets were overvalued and there was a lot of risk. Indeed, Rubin insists that

I've been a very constructive part of the Citigroup environment. That has become particularly manifest since August '07. I have been very involved.

So why didn't he advise the Citi board to avoid the risks that almost brought down the bank? He says: "I wouldn't run a financial institution based on someone's view about what markets would do." He figured the potential losses were less than what the bank was making. He just didn't realize that the problem was "not only a cyclical undervaluing of risk [but also] a housing bubble, and triple-A ratings were misguided. There was virtually nobody who saw that low-probability event as a possibility." The collapse "was a systemic problem of which Citi was a piece." And, of course, the article says Rubin blames "short sellers ganging up on the stock."

In a nutshell, Rubin was involved and knowledgeable, so he deserved his $12 million or so a year, but he couldn't be expected to know what was going on.

There's a lot of nonsense here apart from the anomalies in Rubin's description of his role at Citi. Most importantly, it's now obvious that the meltdown did not result from a "low-probability event," but rather from a core design problem that somebody like Rubin surely knew: the assumption built into the valuation model that real estate prices would keep going up. This wasn't a systemic problem that swept over Citi like a hurricane. Citi wasn't New Orleans. Citi and the others who participated in the market while ignoring the manifest risks were the hurricane.

Rubin correctly points out that there was no telling how soon the market would catch on. When will there be no more "greater fools" to buy the junk? But nobody's saying Rubin should have bet against the market. Rather, he shouldn't have advised Citi to bet the pot on drawing four aces.

Henry Blodget has similar thoughts.

But as I said at the beginning, I want to focus on the broader governance issue. As I've said repeatedly, the meltdown was symptomatic of a deep-seated governance problem. If even having somebody with Rubin's sophistication on the board couldn't protect Citi, then you have to wonder about the whole concept of the board of directors and the rest of the corporate governance paraphernalia.  

Rubin was a typical part of the modern corporate governance structure. He had all the information and sophistication he needed to find out what was really happening. What he lacked was the incentive – the skin in the game that would have impelled him to get to the bottom of Citi's risk profile. 

Finally, it's worth pointing out that Rubin was in fact doing his job and earning every penny of his pay. As he pointed out in the WSJ article, it's not like he lacked other equally lucrative opportunities. He doesn't need to say that he commanded this kind of money for a non-operational advisory role not for his expertise, but as a former Treasury Secretary. In other words, you can't neatly separate politics and government from the market.  Might Rubin have something to do with the fact that, despite its huge mistakes, Citi is still standing? If so, he deserves a bonus.

Comments

[Kevin]

The parallels between the financial meltdown and the Enron bankruptcy are obvious and everywhere. Skilling's explanation for what happened to Enron is exactly what has happened to the variously failed and bailed out financial companies (it also explains the failure of ENE). Other than Fastow and friends, the effects of a loss of confidence in all these companies have been identical. I'm not advocating that Rubin, Pandit, Fuld, et al be prosecuted, rather that Skilling should be freed. Unfortunately journalists are hard at work forcing their narratives onto these events because it helps their careers.

[save_the_rustbelt]

Rubin was on the Ford board until the company started to sink and then he ginned up a conflict of interest so he had to leave.

I doubt he returned any of this paychecks.

But Robin's probable lack of ethics is business as usual on Wall Street.

[Citigroup shareholder named doug]

Rubin's attitude should draw outrage from anyone who is a Citigroup shareholder or employee. "I bet there's not a single year where I couldn't have gone somewhere else and made more." If that's his answer, then he really didn't learn anything from his time in Washington, DC." What he is saying here is, "Screw the shareholders. It's not my fault. Sure, I asked you to pay me tons of money to do minimal work, but I'm worth it. But, just because you pay me tons of money doesn't mean you're going to see results. You're just paying me this much so I don't go work for your competitors. You're basically paying me not to work." He wants to have it both ways. He wants to be paid like an operating officer, but have the responsibility of a board member and hide behind the business judgment rule. If he's right in his assessment that no one could have seen this coming, why isn't JPMorgan asking for a bailout? Clearly, they made better business decisions than Rubin & Co. Mr. Secretary, it's time for you to go.