If we've made any progress as a nation since the crisis, it's that people these days know the word "derivatives." They may not know exactly what it means, but that's okay, because as I like to tell them, the most powerful men in the world didn't really know a whole lot about them until the damned things blew up the financial system.
Then I often wind up explaining how I got to learn this early on, after the company where I'd been employed trading energy derivatives blew up and I took a job at Harvard, where former Treasury Secretary Larry Summers had just been named president. My job was at Harvard Management Company, which "manages" the university's twenty something billion dollar endowment. They used to have thirtysomething billion, but from what I saw they weren't the most stringent risk "managers," specifically when it came to derivatives.
Derivatives aren't conceptually that complicated: they're mainly just side-bets that the price of some other thing will rise or fall over a certain time horizon based on some "underlying asset". That's why they are called derivatives: their value is derived from another asset - like a stock, a commodity, etc. -- the stuff Eddie Murphy learned about in the movie Trading Places.
What's tough, especially if the bet at hand is -- unlike what Murphy was getting into -- thinly traded, is putting a price on a derivative; that's where the fancy math (and even fancier creative accounting) comes in. On any trading floor, at the end of the day you've got to count your money and reconcile your book (the way most mere mortals have to balance their checkbooks) and make an attempt to calculate your risk (you know like, trying not to spend more money than you have!). There are a few major algorithms the industry uses to try and do this for derivatives, but they're all just basically guesstimates. Depending on data, models, and who is handling (or manipulating) the data and models, etc., things can get pretty bogus (or what we called in the business GIGO - "garbage in/garbage out" - sort of like what the rating agencies have been doing a lot lately! Moodys and S&P were paid by banks to use some GIGO models and data to slap AAA ratings on lots of funky derivatives!)
In my humble opinion I have earned my right to say that; I got a PhD. in applied math from Harvard and an MBA from London Business School. But Larry Summers should have drawn the same conclusion back in 1998, after the implosion of a little hedge fund run by some of the Nobel geniuses who formulated the most widely-celebrated of all derivatives models, threatened a trillion dollar run on the banks.
But don't let me get off track. The thing is, what we were obviously dealing with at Harvard was not guys who understood the math but didn't appreciate (as in the case of Long Term Capital) the limitations of the sophisticated financial engineering models. We were more dealing with guys who understood neither one and sometimes really didn't seem to care. Guys like that get into derivatives purely and simply for all the fancy creative accounting opportunities they afford, but you've got to remember that kind of mentality had just sunk my last employer, and many of Enron's smartest guys in the room were a lot smarter than the guys I worked with at Harvard Management Company. So long story short, following the example of Enron's own Sharron Watkins, I tried to blow the whistle on some shenanigans and serious derivatives and risk management issues by detailing them in an email and fax to Larry Summers. Even though he held the lofty perch of president, Summers was well-known to be deeply involved in the financial strategies of the Harvard endowment fund; still, I naively figured he'd be removed enough from the trading floor politics to recognize good intentions for what they were. Instead, those good intentions got me quickly fired, but as a consolation prize they helped win me a modest settlement when I subsequently sued for wrongful termination.
My lawyer and I felt that one of the main reasons Harvard was forced into a legal settlement is because they had no legal justification for firing me once they found out my boss had just given me an excellent job performance review and a very nice bonus. So to avoid an embarrassing public legal fight, they settled. Anyway, I moved down to Miami Beach to teach, consult and be closer to my family in New Orleans. I founded a small math "edutainment" firm dedicated to encouraging math achievement in disadvantaged communities, and generally enjoyed life from thereon.
Okay now, fast forward five years later and we get to the good stuff.
It's October 2007. I've just finished my morning jog on beautiful, sun-drenched Miami Beach and I'm getting a smoothie and a pastry at my usual place, Epicure Market. The subprime mortgage crisis is heading into full-swing mode; Jim Cramer had just done his crazy thing on TV, and you can feel the sky starting to fall all around you -- and that's a literal thing in Miami, where the cranes stopped on a lot of half-finished skyscrapers, the type where a few years back you'd hear about people flipping condos three times before the project even broke ground. (If there's ever a time that I don't regret leaving finance, it's now.) Anyway, I'm in line for the checkout, and a very familiar looking guy gets in line behind me. It's one of those situations where I'm not sure if I eyed him or he eyed me first, but I noticed him shortly when I turned to the left to swipe my debit card. He was standing right behind me in the checkout line - only a few feet away. He looked very familiar and famous, and while that's no rarity in Miami, it is when you realize it's because the guy looks like the former Treasury Secretary -- but maybe no, he's maybe not tall enough? -- and then somehow you finally just blurt out,
"Hey, you look just like Bob Rubin!"
He looked startled. A little smile.
"Whoa, you are Bob Rubin!"
And what do you know, I'd crossed paths with my second former Treasury Secretary! But this one was a whole lot more receptive. I introduced myself and mentioned Phat Math, we made some small talk and how much he loved Miami Beach, where he'd grown up and where he was visiting his ailing father, how relaxed it was around here compared with New York where all anyone talked about was the economy, that sort of thing, shook hands. He told me he chaired a community outreach nonprofit, I told him about my work in derivatives, that sort of thing. Later in the day one of my colleagues suggested I send former Treasury Secretary Rubin a formal letter with my resume, and a bit of information on our work helping kids do math. And lo and behold, a few weeks later Mr. Rubin started calling me back.
It took a few rounds of phone tag for him to get in touch, because he didn't want to leave a cell phone number -- as he said on one voice mail message he left at my office (over a 14 month period he left quite a few other voicemails on my cell and home numbers) he was "for practical purposes unreachable" -- but after that I told my secretary to patch him through to my cell if he called again, and boy did he call again.
It was a hellish season back at the Citigroup office; a few days after that first call a powerful analyst had put out a damning report all but declaring Citigroup insolvent, some regulators were already calling to break up the bank and the disgraced CEO Chuck Prince was negotiating his golden parachute.
But none of this seemed to require Bob Rubin to actually do very much. On November 1 he called me four times as I was leaving for a conference in Raleigh; first while I was packing, then in the cab to the airport, then again before I went through security, then again when I was supposed to land. When I had to put the phone away he acted like a little kid who'd been told it was bedtime, and said he would call me again when I got to my destination.
"Don't you have work to do, Mr. Chairman?" I joked during our third call.
"I'm the chairman of the executive committee," he specified.
"What the hell does that mean?" By then I was confused.
"It means the word 'chairman' is in the title and I get paid very handsomely, but I don't have any actual managerial responsibilities." He seemed pleased.
"Well excuse moi," I shot back. "Nice work if you can get it!"
Three days after this chat, Prince resigned, forcing Bob Rubin to add an additional chairmanship -- of the board -- to his business cards. But he kept calling me all the while, and by December some of my friends, late mother and siblings knew about my unlikely "phone buddy" relationship with the former Treasury Secretary. He seemed kind of lonely and lost, I told them; like he didn't have a lot of close friends, and if anyone back at the office had been in the mood to joke around it wasn't going to be with him. That sounds like a cliché, but living on South Beach you often find that rich and famous people often conform to rich famous people clichés. When Bob Rubin would say -- and he said it a lot -- that all he wanted to do was retire and go fishing, I believed him. Later I learned (via Charlie Gasparino's book The Sellout) that after leaving the Clinton Administration he had interviewed with Hank Greenberg to work for AIG, and Greenberg had scoffed that he wanted $8 million a year just to travel the world, and that seemed to be what he'd been doing all those years at Citigroup.
He flew down to Miami to visit his father again on Christmas Eve. When he called he seemed disappointed to learn I was in Alabama, visiting my family in Mobile (where most of them eventually moved after losing their homes in Hurricane Katrina.) I politely explained that when you want to have a meeting with someone, it helps to inform her ahead of time. "Yes, ma'am," he said, and sure enough, a few days later he called to make a dinner date for January 10 at the Setai on South Beach.
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