Here in the Rayburn building Robert Rubin, the onetime King of American financial policy, is lecturing the Financial Commission on what he believes are the causes of the financial crisis. But that's not why he's here: He's here not as a wise elder, but as one of the key people causing the problem. A little humility is called for, but that's not what we're getting. From his overconfident smile as he took the oath of office, to his uber-salesman demeanor, Rubin's bearing shows that he has failed to understand that he's not here to opine. He's the subject of inquiry. His interlocutors should study him the way an FBI profiler studies a serial criminal: to understand his mindset so that someone like him can never cause the level of harm he has caused the nation.
Now he's saying that he had no idea there was crazy trading going on down at those traders' desk when he was at Citi - exactly what former Citi CEO Charles Prince told the committee a few minutes ago. "The financial system was subject to more downside risk than almost anyone had foreseen," Rubin is now saying -- except that he claimed to be one of the wise elders. Oh, and that "almost anyone" include a number of highly visible figures, people that others were somehow able to find.
He's listing his proposed solutions - one of which should be the absence of individuals like himself in future leadership positions.
Prince's Opening Remarks a few minutes earlier went like this:
Nobody knew. That's why we had a AAA rating.
"I was not aware of the decisions being made on the trading desk"
"It is hard for me to fault" the high-risk decisions the traders made - which, he said, were "fully transparent" to regulators.
Interesting ... he's saying it's a failure of risk management, too. Did they coordinate their testimony with Greenspan?
Citi not "too big to fail" or "too big to manage" - although, of course, he's saying he failed to manage it. He's saying size did not contribute to their losses, although he's also saying he didn't know what was happening at the trading desks ... where enormous bets were being made that far exceeded the real assets of the company.
"The financial world we live in is complex, interconnected, and global, and I think this demands diversified and global" banks.
Angelides is nailing both of them with Citi's dazzlingly bad stats and reports of their total breakdown in internal controls. "I think ... if you look at Citi prior to the crisis," answers Rubin, "but ... after the crisis emerged he (the then-CEO) looked back on what he could learn ... there was a conclusion" that he could've done something better.
"I don't believe Citi was too big to manage," says Rubin.
Angelides lists the timeline of the financial collapse. He's asking Prince ... "when all these things happen (at other firms and nationally), why didn't the potential of problems bubble up?"
Prince: "I can only speak for what other people are thinking ..." These guys always go to trainers that tell them how to handle tough questions. This tactic of discussing others and describing decision-making in the third person must've come up in the role-playing, since both Prince and Rubin are doing it. Typical line: "I believe that's what they believed at the time."
Prince is suggesting that $40 billion risk taking is "a level of granularity" that was too insignificant to come to the CEO's attention. Angelides is doing an excellent job pressing him on these issues, even as Prince insists that he felt he had the right people in place. In other words, he considered thee act of reviewing multibillion dollar decisions as micromanaging.
He's back to that third-party risk: "I would guess their thinking went like this ..."
Prince was either the worst, most irresponsible CEO is US history, or - as seems more likely - he doesn't want to acknowledge his own decision making process.
Angelides is asking Rubin what was done about the whistleblower report. "I got it to the right people," says Rubin, "and I believe it was acted upon."
Who are these "right people"? If the CEO isn't the "right person," why was he getting all the big bucks?
"You became aware mid-September" of major problems, Angelides is saying. Then "there is a call with analysts where analysts are told that Citi has a $13 bilion subprime exposure," but a private meeting identifies roughly $55 billion in exposure. The total figure isn't revealed until later.
"Why is there an announcement made to the public of $13 billion when the Board is being told the exposure is substantially more?"
I'd have to review the documents, says Prince. "The financial people" were working hard, "it was an unprecedented time," etc, "their view of exposure changed ..." On the same day?
Rubin: "I don't remember the meeting." Hmm ... seems like it should have been a memorable event.
Interesting moment: Republican Vice Chair Bill Thomas asks Prince and Rubin if they will answer questions in writing and Rubin answers for both of them. Thomas asks if part of Rubin's role is to advise current and former Citi leadership on how to handle matters of this kind. Score one for Thomas: that was a good catch.
Thomas is slapping them around for getting big bonuses for bad products without any "clawback" when the stuff hits the fan. And now he's hammering them for blaming states for regulatory requirements, and for using the excuse that "other parties" thought what they were doing is okay.
"What do you get paid for?" Thomas asks. "It's big money on the way up and no (payback) on the way down." It's a nice riff ... too bad he's probably not going to back it up with support for meaningful reform. Of course, I could be wrong ... the Pecora Commission was organized by Senate Republicans, after all.
"That was a statement," concludes Thomas, "but if anyone wants to turn it into a question, they can."
Now Thomas is doing the political history of the early Clinton Administration and Rubin's role in it. I'll say this for ol' Bill: he's good. He's going highly political now. Wow ... I'm sorry I complimented him a few minutes ago. This is the worst tangent in the entire hearings process. There are heavy sighs throughout the hearing room, and not just in the press section.
"Is it possible for me to respond to that?" answers Rubin. (Note: In many ways Rubin was a policy liberal in the Clinton Administration. He opposed 'welfare reform,' for example.)
Thomas: "You didn't know ... you didn't understand ... do we need to change the structure? Transparency? Should you have to have (extra capitalization)? In hindsight, what would you do? I don't want to kill the goose that lays (mostly) golden eggs ..."
Yes, Mr. Thomas, but for whom?
"What could have been done ...?" Um, maybe competent management who aren't bandits?
Prince is getting testy about a reference to his quote that "if the music is playing we have to dance." He says he was asking regulators to act (which was my interpretation.) Thomas, from his right-wing frame, is asking why he didn't just stop. You wanted government to "impose" this one everyone else, too?
Thomas: So you don't want to be the lemming that stops walking?
Heather Murren questioning
She's good. She led off with a comment about "dancing" and regulation that effectively rebutted Thomas. Then she grilled Prince on compensation. His defense: Most of mine was in stock. Now she's rebutting: That encourages more risk, because you then want to pump up the stock. Besides, even if you didn't cash out, others did. And others got fat chunks of cash. (The preceding is my phrasing and not hers, of course.)
"The folks involved did not think they were reaching from a risk standpoint," Prince answers. "In hindsight that's horrible, I know. We need stronger risk parameters going forward."
Again, it's the Greenspan line: We need better risk management. But risk management is a corporate function, not a regulatory one.
Apparently Ms. Murren thinks so too, since she's now asking how Rubin interacted with regulatory agencies. Rubin is saying he wasn't involved in those interactions. I've never known a CEO who didn't take extreme interest in communications with regulators.
Prince is acknowledging that he would personally meet with regulators at least once a month. I find that response far more credible than Rubin's. "I don't think it was a failure of regulatory involvement," says Prince.
Conservative shill Peter Wallison is now beginning his questioning. Let's see if he rises above his ideological ax-grinding today.
Yep, there he goes: He's mentioning the 27 million subprime mortgages. Nothing about the commercial real estate crisis, or the massive breakdown in prime mortgage, or the bubble that has put one in four mortgage holders underwater. "Would it make it any clearer why this happened?"
Wallison's not completely wrong in his next soliloquy, in the limited sense that the bipartisan "ownership society" idea was fundamentally misguided. We've artificially pumped up home ownership, and it's overrated. But, man, is this guy not interested in getting to the real cause of this crisis. It's much easier to slam government agencies that give loans to "the wrong kind of people."
They're talking about accounting rules now. I find it interesting but you probably don't, so I'll skip it.
Wallison to Rubin: Why didn't you think subprimes were part of the problem? (Gee, does Wallison care about subprimes? I had no idea.) Now Hallison is back in full hack-mode, going after Clinton-era policies. I would've hated to see what this guy was like at his college frat parties.
Rubin, to his credit, is defending subprimes as a principle, and also defending the Community Reinvestment Act for Wallison's bitch slap. Of course the principle behind subprimes isn't bad. The greed, speculation, and banker corruption that surrounding these and all mortgages is what's bad. But that's not on Wallison's agenda.
Wallison's complaining now that Rubin's answer is taking too long. God forbid that the witness would try to take as much time as the questioner. Now Thomas is giving his comrade in the rich folks' counterrevolution five more minutes. Rubin's answer on how to fix subprime mortgages is pretty good.
Citi fun fact: Citi held about $1.1 trillion in assets off their balance sheet at one point in time-- roughly one-third of the company's total assets.
Byron Georgiou is now hitting them on the fact that they insisted all of these risks were unknowable, unpredictable, etc. He knows the numbers. Regulators, etc., everybody believed these acts were sound. "Specious accuracy of complicated financial models should not be trusted," said a staffer. But somebody believed in these models.
Or, as I used to say when I ran models myself: "Modeling is my life."
How did everybody believe this mass hallucination? asks Georgiou. "The Commission needs to think about the next issue," answers Prince. It won't be structured products like these next time, says Prince. How did the controls processes miss things so universally? "I don't know what the answer is to that," says Prince.
Hey! I've got an idea! Why not make sure banks aren't too big to fail? That way they can take risks and gather the rewards or consequences accordingly. Whaddya think, Bill Thomas and Peter Wallison?
Now Rubin's answering the modeling question. In his verbose way he's essentially saying what I said yesterday: Garbage in, garbage out. Historical models can't reflect the probabilities associated with new conditions or new financial instruments.
He's "advising" again: "What you all forward is ... what we need to do is make changes that reflect on the downside risks to the system."
Georgiou's perfect answer: "Let's keep the focus on you people for a minute."
He's asking about internal meetings. "Mr. Rubin ... you had a whole history at Goldman Sachs. Careening into '07 Citi made a number of bets that put you in even further jeopardy." He's mentioning Citi's acquisition of Ameriquest, already known to be a dog, after the stuff had already hit the fan at other firms. Craziest business move in recent history, some say.
"I don't think any major firm saw the potential for the kind of crisis that we had," answers Rubin. Yeah, but nobody else bought Ameriquest, buddy: YOU did.
"It was about three months before we became aware of these Triple AAA positions," says Rubin. But that was after the Bear Stearns hedge fund failure! Everybody saw trouble coming ... but you, apparently. Georgiou's dropping this line of questioning and moving on.
Georgiou is on to Prince and the "dance" metaphor: Man, must Prince be sorry he said that. Why, asks Georgiou, did you allow leveraged lending to be tripled? I actually sympathize a little bit with Prince's point here: If you drop out of the feeding frenzy while everybody else is making millions and billions, your people will leave you en masse. Hello, Wallison and Thomas: That's why we need regulators. But Georgiou has a strong counter: You could've addressed the fact that there wasn't enough money backing up these runaway risks.
Prince and Rubin say they'd like to respond in writing. But Rubin can't resist adding a Greenspan-esque closing comment. "Whateve you do," he says, "people will always find their way around it." But Georgiou comes back swinging, with very concrete policy ideas in response. "There's a reason why you had more than a trillion dollars off your balance sheet," he says. "It seems to me that for transparency and clarity, that needs to be addressed." Rubin asks for extra time, so Georgiou just takes even more to rebut. You've got to have some risk on the line, he says.
A great day for Byron Georgiou.
Douglas Holtz-Eakin is questioning now. His resume is a conservative "usual suspects" list: Bush II's economic team, American Enterprise Institute, McCain campaign, and anti-government activist Pete Peterson's organization. His first question's okay, although it clearly reflects his absence from the rest of the hearings: How can you say you couldn't foresee what happened?
We need reform, says Rubin.
Risk management, says Holtz-Eakin. Risk assessment. I think I'm going to call it the Greenspan Doctrine: Don't regulate, just ask companies to assess their own risks more intelligently. Good luck with that ...
You placed too much reliance on credit rating agencies, says Holtz-Eakin. Didn't you?
Gee, you shoulda asked David Bushnell (chief risk officer)when he was here yesterday, says Prince. Oh, that's right - you weren't here yesterday. These guys have deferred so much of the responsibility to Bushnell ... and they're blaming him for assessing there was a 1 in 10,000 chance of failure ... that Bushnell should have been the CEO.
Bushnell ... Bushnell ... Bushnell ... I'm sure he acted in good faith, says Rubin. Yeah, but the Fed review sez you guys had been internal communication, didn't measure risk, and your regulator pals said you dropped the ball. You still have faith in your processes?
Ah, I wrote a lot of reportes like these, Rubin's saying (in effect). That was hindsight. Find the report before that, where they were just as stupid as we were. (Needless to say, that's paraphrasing too.) Or maybe they weren't. I don't know. I just pulled down the bucks.
Well, were there reports like this earlier? asks Holtz-Eakin. Beats me, answers Rubin.
Okay, Mr. GOP Insider: Thatt was a pretty good job.
She tried to sound the alarm way back, but Rubin and Greenspan and all the other guys shut her down. Did OTC derivatives ruin everything? she asks. Rubin dances. She smiles.
Should there be regulation of OTC derivatives? Yeah, probably, says Rubin (although, characteristically, he does so in about 75 words rather than two.)
Should derivatives be standardized? We're about 1,000 words into the answer, but I think he's saying yes, except for OTCs, in which case there should be a clearing house or tracking system.
BB: You've said there was no political will to regulate these things. Was that because of bank lobbying etc? Rubin: I was worried. The industry had very strong views. In other words, I'm not answering your question.
BB: Do you think there was a pervasive view that the market was essentially self-regulatory? Rubin: In the political arena, they're not that smart. It was all influence-peddling. (again, my paraphrase)
BB: You said credit-default swaps played a role in the crisis. In the bigger derivatives market there's all sorts of interconnectivity and a lack of transparency. Did some of that affect the financial panic in 07/08? Yeah, says Rubin (in about 75 words).
Rubin's very close to Greenspan's position. Nobody knows what the hell's is ever going to happen, so maybe we should raise some capital requirements.
BB: Yeah, but you guys sure leverage (borrow) a boatload of money and then gamble it. Should you have to put a few bucks down yourselves? Rubin: Oh, yeah, sure.
BB: This has gotten so complicated - municipalities like Jefferson County, Greece problems (products designed to hide Greece's exposure and debt), etc. - do we need all this complexity? I don't know if regulators or anybody else can understand this stuff.
Rubin: Read my book. I think I talked about it. The complexity is useful - or maybe not - but people don't understand them. Under stress conditions they're risky. Put up more capital. (Haven't you gotten the memo yet? Alan and I think so, and when did we ever lead you wrong?)
WOW! Murren asks, did Citi ever design a product just to avoid capital requirements.
Rubin: (after hesitating) I don't know the answer to that.
John Thompson (former Symantec CEO)
First question: What product testing should take place before we roll them out? (I like this guy - that's systems thinking, and I came up practicing systems thinking.)
Rubin: Well, we test them against past history yada yada yada. But then the future happens, and we don't know the future. We need a system that can deal with the unanticipable. (Nobody could've known ... etc. Gee, Mr. Thompson, we have some Greenspan Kool-Aid in the ready room and it's awfully hot in here ...)
Thompson: Can your systems keep up with the rate and pace of innovation in a company like yours? (Alternate question: Why did you get out in front of your own understanding?)
Prince: Haven't you been listening? It's Bushnell's fault. (my phrasing) "A different question: can the intellectual capacity ... smartness of the people ... keep up with the innovations of the people?" So I tried to pick the best people I could.
You know ... like Bushnell. David David David ... "strength of the individual" ...you know, guys like David Bushnell. He looked at everything. He probably effed up now and then, though. Who'd of thought?
Thompson: "It's not clear to me that a risk management team can keep up with aggressive and innovative" sellers. Yeah. He gets it. "If I look at ... Canada ... the UK ... what are the differences" in regulation and their recovery?
"Too broad a question," says Prince. But ... our system's too inefficient ... too redundant ...
Wallison: You opposed regulating derivatives. Rubin: Oh, no I di'nt! But I didn't want legal uncertainty. That's why I kneecapped Brooksley Born (who is smiling beatifically as he speaks; though, of course, he didn't say the Brooksley Born part. But it's implicit.)
Bill Thomas: "I wouldn't be here" if the idea was to propose policy for Congress. "I like capital" - he drank the Kool-Aid, too.
I tell ya - one of the most entertaining things about being here in person is watching the faces of Heather Murren and Brooksley Born whenever somebody in the room is slinging b.s. They both have a slight smile, obviously earned from a lifetime of b.s. detection.
Thomas is back on the "clawback" thing. "I don't like government telling people what they can make" - meaning that this is all just grandstanding, of course - "but voters don't like it." And God knows we like voters.
You said you're sorry, Mr. Prince, but sorry doesn't do it. You've got a lot of money.
Angelides in conclusion: "I believe you're men of good faith ..." but we're trying to find out how you blew it so badly. You guys were way out there in risk-land, and you say you didn't know. "The two of you did not seem to have a grip on what was happening."
"Mr. Rubin, I want to ask you ... you've gone out of your way (to say) you were not involved in operations ... you've said you made speeches ... but you had direct responsibilities ... $1 million salary ... $14 million guaranteed bonus ... you two spoke every day ...do you bear central responsibility for the near collapse (but for the US government) of Citigroup?"
Here comes the verbiage. The management committee I was on didn't really do anything ... it didn't make decisions ... "all of bear ... all of us in the industry failed to see the crisis ... the multiple factors at work ... we all have a great deal to regret ... I was not involved in management or personnel ... strategic and managerial ... " he's sucking wind now ... "and I think AAA securities at the heart of the problem were understandably viewed as essentially of diminimous risk ..."
Angelides on redirect: "But it went terribly wrong ... you can't have it two ways: You were either pulling the levers or asleep at the switch. I'm not so sure apologies were important as assessment of responsibility ... I should ask, 'What didn't you know and when didn't you know it?'"
Rubin: Hey, I was just Chairman of the Board. Tens of billions or trillions at risk was below my radar. "What I did was make sure we had the proper people in place ..."
Hey, why do they sell Directors and Officers insurance if Directors like Rubin bear no responsibility?
"You were not a garden variety board member," says Angelides. Mr. Prince resigned and said it was the honorable thing to do. Rubin: I don't feel I had any responsibility. I felt I shouldn't get a bonus, but not because I did anything bad. Angelides: "You will be the only one in the end to judge your responsibility," says Angelides, with a defense from Prince.
Thomas is speaking now. The essence of his remark: I'll accept what you said, but it's hard to buy it.
Rubin insists he was only Chairman of the Board (as opposed to Chair of an Executive Committee) for four weeks after Prince left. Thomas' rebuttal: Why did they make you CEO if you didn't know anything?
Rubin's ego is so big that he can't accept any criticism. Let the record stand, says Angelides and the morning is over.