The April 27 Sunday New York Times had an incredible article on Robert Rubin, former Treasury Secretary under President Bill Clinton and former co-chairman of Goldman Sachs. Oh, and yes, currently is on the board and is chairman of the executive committee at Citigroup, which has lost billions of dollars in the recent mortgage mess. The question asked in the article was, Where was the wise man?
Rubin has always been brilliant, perhaps one of the smartest men on the street and in politics. But he has been noticeably absent during the Citigroup crisis, and this article describes his role at Citigroup and other aspects of his career.
It's a couple insights that deal with the futures industry that make this article especially interesting.
Rubin, at least according to this article, thought the risk posed by futures exacerbated the 1987 stock crash. He wasn't alone thinking this at the time, it was the Wall Street mantra, but certainly, futures have been vindicated of this transgression since then. But look at this revealing exchange....
"As he worked his way up from Goldman’s arbitrage trading desk to the corner office, “he was very accepting of debate and disagreement,” says Stephen Friedman, who met Mr. Rubin shortly after joining Goldman Sachs in 1966 and eventually became co-chairman of the firm with him from 1990 to 1992. Nodding toward Mr. Rubin’s acute sense of the volatility of the markets, he adds that the only thing Mr. Rubin “is dismissive of is people who are certain of things that are inherently uncertain.”
Mr. Rubin encouraged Goldman to move into more treacherous markets like proprietary trading and commodities trading. Even so, he now says he was always concerned about the dangers posed by risky futures and derivatives trades, having seen how the pell-mell use of futures contracts exacerbated the 1987 stock market crash.
Shortly before leaving Goldman to head up President Clinton’s National Economic Council, Mr. Rubin says, he met with Richard B. Fisher, the chairman of Morgan Stanley, to discuss the idea of imposing stricter margin requirements on futures trading. Mr. Rubin says the idea died after the Chicago Board of Trade told him “we will make sure Goldman Sachs never trades another future on the C.B.O.T. if this went ahead.”
A spokeswoman for the CME Group, which now owns the Chicago Board, contends that “Goldman was and continues to be a valued customer and we would never deny access to our markets.”
I'm not sure what's more amazing, Rubin trying to raise margins to kill futures trading, or the CBOT, despite the denial, threatening to never allow Goldman to trade on its market again.
Further down in the article it discusses how the CFTC proposed to rein in OTC derivatives:
"He was consistently more skeptical that market discipline alone is sufficient and more often in favor of using regulation to get a better balance between innovation and stability,” says Timothy F. Geithner, president of the Federal Reserve Bank of New York, who served as a senior Treasury official under Mr. Rubin and Mr. Summers.
But on at least one occasion, Mr. Rubin lined up with Mr. Summers as well as Mr. Greenspan to block a 1998 proposal by the Commodity Futures Trading Commission that would have effectively moved many derivatives out of the shadows and made them subject to regulation.
Derivatives are privately negotiated and often complex financial contracts theoretically designed to limit risk. Their value is derived from an underlying basket of assets, like stocks, bonds or loans. Advocates say that derivatives, used wisely, foster economic activity. Critics contend that as derivatives trading has boomed over the last decade, it has led to high-octane speculation more akin to gambling than to sensible hedging of financial risk.
Opaque trading and hard-to-value derivatives tied to mortgage loans and other forms of credit have been one of the underlying causes of the current financial crisis. One former commodities commission official argues that a different approach to derivatives regulation in 1998 would have helped avert the worst of today’s credit crisis.
“Stopping this let the momentum build and led to subprime as well as soaring commodity prices today because unregulated derivatives trading soared after that,” says Michael Greenberger, then director of trading and markets at the Commodity Futures Trading Commission and now a professor of law at the University of Maryland.
At an April 21, 1998, meeting with Brooksley Born, the chairwoman of the commodities commission, Mr. Rubin made no secret of his feelings about her proposal. “It was controlled anger. He was very tough,” Mr. Greenberger recalls. “I was at several meetings with him, and I’ve never seen him like that before or after.” Ms. Born didn’t return calls for comment.
Mr. Rubin says he was against the proposal because he feared it could create chaos in the markets, rather than actually improve oversight of derivatives. He says he believes that the financial system could benefit from better regulation of derivatives, perhaps in the form of more disclosure and new rules requiring individuals and firms to put more money down when they trade.
But during his time in Washington, he says, “the politics would have made this impossible. Even if I’d taken a placard and walked up and down Pennsylvania Avenue saying the financial system would come to an end without strict regulation of derivatives, I would have had no traction.”
Mr. Greenberger is unbowed: “What do we have now, if not chaos in the markets?”
No doubt Rubin is a genius and a force to be reckoned with, however this article illustrates that he isn't above Wall Street pandering, and in many ways, it questions his wisdom.