Can’t Get Around It

November 22, 2008 10:36 p.m.

Today’s Times has a lengthy piece on what got Citigroup into trouble. In general, the plot line is not surprising — broad problems of corporate culture, lax internal oversight of potentially risky practices, a big, risky and ultimately disastrous move into mortgage-backed securities. There’s a lot of criticism of Chuck Prince who inherited the CEO job from Sandy Weill in 2003.

But through all of it, woven into the tale, is the name Robert Rubin.

Rubin, of course, was President Clinton’s second Treasury Secretary (1995-99) and his key economics advisor (perhaps even Secretary-in-waiting) as head of the National Economic Council during Clinton’s first term. During the 1990s and into this decade Rubin was credited as the key architect of Clinton’s economic turnaround and economic expansion.

The Times article notes that in the 1990s, Rubin played a key role helping “loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities.” That part we know. And it’s fair to note that there was a broad, though very ill-judged and ill-fated, consensus in favor of these reforms at the time.

After leaving Treasury, Rubin signed on as a director and senior advisor at Citigroup, an entity he had helped to make possible by advocating the aforementioned deregulation. Rubin was also, along with Alan Greenspan, a staunch opponent of regulating derivatives.

The Times article notes, with less specificity than I’d like, that Citi’s very size, not just its corporate culture, led it into such risky waters. But this passage in particular jumped out at me …

For some time after Sanford I. Weill, an architect of the merger that created Citigroup a decade ago, took control of Citigroup, he toned down the bank’s bond trading. But in late 2002, Mr. Prince, who had been Mr. Weill’s longtime legal counsel, was put in charge of Citigroup’s corporate and investment bank.

According to a former Citigroup executive, Mr. Prince started putting pressure on Mr. Maheras and others to increase earnings in the bank’s trading operations, particularly in the creation of collateralized debt obligations, or C.D.O.’s — securities that packaged mortgages and other forms of debt into bundles for resale to investors.

“Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process,” a former Citigroup executive said of the bank’s big C.D.O. push. “Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more.’ “

As you probably know, Rubin has become a key economics advisor to President-elect Obama and is advising the transition, though he seems neither in line for nor interested in a formal appointment. But Rubin’s hand does seem present at so many turns in Citigroup’s undoing that I see no way of getting around asking what sort of advice he’s giving.

Before going any further, I know this post has some of the feel of a gotcha. Some of the best or most successful reformers have been those who knew what needed fixing because they played a big part in creating the mess in the first place. And I’ve always thought there was something small-minded and immature about trying to strike this or that person from the realm of reasonable debate because they were “wrong” about, say, Iraq, whether the supposed error was in 1991 or 2003. But it’s a record that’s hard to ignore in present circumstances. And I’m curious whether anyone can point me to any recent (and in this context I’d say the last six months or so) statements or interviews with Rubin that shed light on his current thoughts on what led us to this point.

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