Robert Rubin's Detail Deficit

Robert Rubin has always been known for his calm steadiness—perfect, one might say, for the age of "No-Drama Obama." At cabinet meetings in the Clinton administration, after the jabbering and posturing in the room had died down, the president would turn to his Treasury secretary, who had been quietly listening, and ask, "Bob, what do you think?" Rubin would modestly tell the president what to do. Rubin's self-effacement was always a bit of shtick. Asked about, say, the German economy, he would throw up his hands, feign ignorance, and mention in passing that he had just spoken to the German finance minister. Unlike his partner, former Federal Reserve Chairman Alan Greenspan, Rubin was not a free market ideologue. But by the end of the 1990s, economic orthodoxy in the Democratic party was known as Rubinomics (a term Rubin himself would never use), meaning, roughly, a belief in free trade, fiscal restraint, and deregulation of financial markets. Pretty much everyone who really knew and understood the interaction of Washington and the marketplace had worked for Rubin. It is no wonder that so many of President-elect Obama's top economic players, including his Treasury Secretary Tim Geithner and his chief economic adviser Larry Summers, are Rubin protégés.

It's all perfectly logical and explicable, except that Rubin arguably helped create the financial crisis that Obama now must fix. As Treasury secretary, Rubin pushed to allow banks to get into riskier businesses, and as a high-level official at Citigroup for the past nine years he and his colleagues at Citi have presided over the near collapse of an institution that will require a massive taxpayer bailout because it is too big to fail. Citi got $25 billion as part of the original bailout; last week it got an additional $20 billion, as well as a guarantee from the government to backstop losses it takes on $306 billion in bad assets.

"Everyone agrees we have to save Citi, so we're throwing hundreds of billions at it because it was so poorly managed, and yet there's Robert Rubin sitting right there in the middle of it and he's been looked to as a wise man," says Dean Baker, cofounder of the Center for Economic and Policy Research, a left-leaning think tank in Washington. "It's outrageous. We're turning to the same people who made this mess in the first place."

Rubin has said very little to rebut such harsh criticism, but last week he spoke to NEWSWEEK and, in his usual low-key, seemingly modest way tried to give some perspective on his role on the woes of Citigroup and the economy as a whole. For starters, he offered a sort of anti-smoking-gun defense. Many financial institutions have been brought low by the use of complex financial instruments called derivatives. At Citigroup, the lethal derivative was called a "CDO liquidity put"—a kind of option that would allow the buyers of collateralized debt obligations to sell them back to Citibank at cost. The chance that these options would be exercised en masse was seen as extremely remote, but in the general financial collapse, that's just what happened—costing Citigroup about $25 billion. Rubin says he never recommended that Citigroup use these instruments. In fact, he says, he did not even know what a CDO liquidity put was when he first heard the term. When Rubin came to Citigroup in 1999, initially as chairman of the executive committee (later as vice chairman, then co-chairman of the company), he was seen as a rock star: traders lined up to get him to sign their dollar bills. But Rubin said part of the deal was that he would have no operational control; he wanted, he said, to maintain "a high-level strategic view" as an adviser and frontman for clients. A lengthy investigative piece in The New York Times on Nov. 23 asserted that Rubin urged the bank to get into more high-risk markets, like real-estate debt. Not true, says Rubin. When Citigroup promoted Chuck Prince, a lawyer, to run the company in 2003, it was widely assumed inside and outside the company that Rubin, a onetime brilliant risk arbitrager from Goldman Sachs, would be the wise old hand on how markets work. But Rubin suggests those people didn't understand that he always intended to stick to his role as a gray eminence, steering clear of specific business recommendations. The thing is, Rubin says, markets change fast, and his knowledge was about 15 years old. Recollecting, Rubin paused, and in his aw-shucks way said, "Actually, I'm probably close to 20 years beyond which I had a granular knowledge [of financial details]. Conceptually I can fully understand what Libor's doing versus three-year swaps. But if you say, 'How do you design a "swaption"?' that goes beyond where I am today."

Rubin is thoughtful, good-humored, convincing—but perhaps he protests too much. He may not have been the architect of the financial world that has been imploding for the last year or so. But he was, as the great Cold War Secretary of State Dean Acheson once wrote of his own role, "present at the creation." At Treasury, Rubin was a proponent of loosening the Depression-era laws barring banks from becoming investors, and he opposed attempts to regulate those newfangled (and hard-to-understand) financial instruments called derivatives. At Citigroup, he was paid many millions every year and his job description included strategic advice. Shouldn't he have done a better job warning that there was trouble ahead?

Rubin somewhat uncharacteristically bridled when asked about his compensation, saying he could have been paid more elsewhere. "I didn't get paid a bonus last year. I actually turned it down," he added. He said that everyone was caught by surprise by the severity of the collapse. Ups and downs were to be expected (and at Treasury, Rubin had been a master at defusing smaller time bombs like the 1997-98 Asian financial crisis), but the global financial collapse amounted to a "perfect storm," he said.

Rubin did not support lower-level federal bureaucrats when they tried to impose more controls on derivatives back in the late '90s. But that's because such regulation was "not politically doable"—the industry itself would have resisted it, and Republicans and Wall Street free marketers were riding high in the late Clinton era. "The view I have now, which I've had for 20 years, is that derivatives are useful in normal times but create substantial risk in stressed times," he says, adding that he had long supported large increases in margin requirements on derivatives trading. Now he thinks these changes may actually happen. Rubin says he has also warned for years against under-pricing risk—that is to say, making it too easy to borrow vast sums to make financial bets that might not pay off.

Indeed, Rubin has often been a model of fiscal probity. He set up the Hamilton Group, a think tank aimed at keeping Democrats from spending too wildly and running up dangerous deficits. He has been advising President-elect Obama to be careful when it comes to launching a giant stimulus package. It's a good idea to pump money into the economy during a recession, he argues, but it's just as important to turn the spigot off once the economy improves—lest the massive deficits cause high interest rates that can throttle the economy all over again.

Rubin always sounds statesmanlike, but he suffers from an affliction that has seized earlier wise men. They become icons, revered for their wisdom; asked to serve on university boards (Rubin is a member of the seven-person Harvard Corporation) and trotted out to impress clients. As time goes on, they know less about the details (and in the financial world, the details are everything), but at the same time their attitudes sometimes harden. Acheson was a great secretary of state under Harry Truman, but brought back to advise JFK and LBJ, he was too much of a hard-line hawk. Beneath Rubin's modesty there lies a substantial ego and an almost Rumsfeldian certainty that he has done no real wrong. Rubin may not fully grasp what he has helped bring about—that the unregulated markets he and Greenspan embraced so completely a decade ago are out of control. Maybe Obama understands Rubin's limitations. Last week, when the president-elect created an outside board of economic advisers, he did not pick as its chairman Bob Rubin—the obvious choice. Rather, he named Paul Volcker, Reagan's Federal Reserve chairman and the man who guided the nation through the last really serious recession in the early '80s.