Up until now, I had a vague concept that Rubin's biggest mistake at Citi was to have spent too much time as a rainmaker, schmoozing clients, and not enough time sorting out internal problems. According to this story, however, Rubin was front and center in encouraging Citi's investment bank to take on more risk -- a strategy which had been hugely profitable at his former bank, Goldman Sachs. Did Rubin really think that he could turn Salomon Smith Barney into Goldman Sachs just by encouraging more risk-taking? I doubt it. But if Rubin wasn't spending much time on the trading floor, it's possible he was unaware of just how screwy Citi's risk management was
Rubin is one of the few icons of Wall Street who hasn't been stained with the fallout from the financial crisis--Republicans don't want to blame capitalist institutions, and Democrats don't want to imply that St. Robert of Clinton might not have miraculous economic healing powers. He thus somehow managed to survive a really colossal lapse during the Enron scandal with his reputation nearly intact. But it's looking less likely that he'll survive the Sack of the Citi.
OMG Goolsbee is out at CEA, it looks like this woman from Berkeley is going to be heading it instead! Why oh why did you not express more support for John McCain, Megan? Now the chickens are coming home to roost!!!
....and this is a BAD thing? Hey, it was Obama who campaingned on all of the change he was going to implement. Appoint some new blood, already, and live with the inevitable results......if you dare.
Rubin isn't my favorite person. But his job at Citi was diffeent from his role in Government. He encouraged additional risktaking, but with appropriate risk controls, nothing weird about that. At the end of the Clinton Admin, the government was generating surpluses. After Bush we are deep in the red with a huge recession in front of us. Those of you who have the temerity to question Rubin should ask themselves one quick question first: Did I vote for Bush? If the answer is yes, shut the f... up!
Is that the the same Clinton that left a recession and BIG busted bubble that for which Bush had to pay back all those capital gains receipts for?
Yeah, thought so. Take your own advice.
MM: A non snarky-question (well, actually a few)
Am I correct that bailing out Citi on the terms announced means essentially that we more or less wipe out the shareholders but protect the bondholders?
I understand that bondholders have priority of claims vs. shareholders, and that there are priorities within the creditor-bondholder class itself, so...
To what extent do all the government actions in the bailout devolve to a bailout of bondholders and other crditors of our various financial institutions?
Has the government decided that the money that creditors risk when they lend to or buy bonds from our major financial institutions, is somehow sacred and that the creditors-bondholders should be protected from losses?
From where I sit it looks like the financial institutions that invested in mortages directly, mortgage backed securities, CDOs, CDs et al will be allowed to lose money on those. But the investors who provided the capital to the banks that made those investments, those investors will be protected.
Am I missing something here or isn't that how this fundamentally is playing out?
Tom,
Like I said before. You voted for this economy. Now shut the f... up. I'm tired of the likes of you dimwit right wing armchair economists talking about things that you cannot possibly fathom. Before you have the urge to speak out again do everyone a favor and learn something first.
Robert Rubin is coming under a lot of fire today for pushing risk at Citi based on this quote:
“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."
Now, I want to make my position perfectly clear. Sec. Rubin should be held accountable for that advice and those decisions. Brad DeLong's comments seem to want to exonerate Sec. Rubin, but he needs to justify those decisions himself. It is a truism to say that Sec. Rubin's job was to make money by taking risks. Good point. It adds nothing to the discussion. The discussion is about how well he did that job. There's no worry about him being assessed, he'll have lots of company.
However, from my point of view, Sec. Rubin is the hero of the whole article. He seems to be one of the few people involved who admits that CDOs were riskier investments, intended to make more money by extending risk. How many times have I read the following:
These CDSs and CDOs, we were assured that, even though they were chosen because of their lower capital requirements, we were assured that they were less risky by models created by physicists, phrenologists, cosmologists,cosmetologists, all sorts of really brainy chaps,with all sorts of really obscure mathematics only they could decipher. So, we were totally unprepared for risk. We'd been told that there wasn't any. That was the beauty of these investments. Lots of money with no risk.
So, I'm exaggerating, but Sec. Rubin deserves a medal for understanding and owning up to the risky nature of CDSs and CDOs, which, although complicated, can be explained to average investors using simple phrases like "riskier", "less tested", "complicated", etc.
Gene,
You are correct. This is not a punitive deal for equity holders, although they will suffer a small dilution (due to the issuance of preferred stock and will also lose the dividend for 3 years). It is quite a crappy deal for taxpayers but unfortunately, there are very few other options on the table....at least not many that the Bush Administration would consider. My personal answer is that we hit everyone whose income over the past 8 years (in capital gains or other income) exceeds 5MM per year with a large (10% or so) one time surcharge of their net worth payable in cash to the treasury. I would call it the Patriot Act of 2008. Once this is done, we can start thinking about how to structure things in the future.
Count,
Spend some time and find out what actually happened.
Until then, like I said before, take your own advice. Jackass.
Tom,
We all know what happened. We are living it. Your people blew a 300 Billion dollar surplus to give tax rebates to the richest americans so that they could more effectively hide their assets in offshore hedge funds while elbowing real investment out of the market. In the end, we are facing the worst economy in a generation and a huge deficit with only increase endebtedness to get us out. People like you are the reason why this country is falling apart. Pay as your go realism has been replaced by tax cutting fantasies that never made any economic sense. The fact that you cling to this sickening philosophy (as does Ms. McCardle) is only proof of your delusional ideologies.
CountOrgaz,
You're an idiot. Just want to get that out there, in case it's not entirely clear to all.
Don,
Do you even know what you're talking about? The model that spurred the development of CDO's is the Gaussian Copula model "invented" by David Li , then of CIBC. However, trading in CDO's preceded Li's model by years. The fact that such a model was created just made the market larger. But, at the same time, his model said nothing about pricing of default risk in the mortgage market. It basically said assuming you know the default risk, here's a price for a basket of bonds. But that's a big assumption. That's not a mathematical issue. Neither is the default risk of corporate bonds (which, at least theoretically, is how a CDS would be priced). Most CDS traders are flow traders (some are hedgers from the synthetic CDO market, but still). They do fundamental company research, just like stock pickers, look at the shape of their book, look at the market, and give prices accordingly. No one that I know of uses any particularly fancy math to price CDS.
Please, before opining, know what you're talking about, how these markets developed, why they developed, and how they grew. Also perhaps have some basic notion about what those models that you blame are and how they caused or didn't cause our current problems.
Rent to own is generally bad.
The landlord/mortagor tends to line it up so they have the best of both worlds; they don't have to fix anything when it breaks, but they can still evict you without bothering with foreclosure. The rent to own contracts I've read are the most lopsided thing this side of cell phone contracts.
Gene2,
It is obvious that you got your understanding of CDO's by watching Jim Cramer at Mad Money....another ignoramus in the "investainment" world created by deregulation and excessive leverage. You and other knuckle draggers like good ole Tom would be doing the world a great big service if you just went back to your caves and sat out the next 20 years.
Gene:
Foriegn depositors aren't senior to bondholders, and since they're where a 'run' would come from, in order to make them stay put, one has to bail out the bondholders. In addition, this means that Euros are the one's mostly, but not completely, being bailed out, and if you follow such stuff, the Euro and sterling rallied a lot today, as one would expect.
Count, you are making some truly devestating arguements against an economic regime of rugged individualism in general (I agree, bailouts in general are a departure from this), though I don't think you're aware of where the force of you arguements come from, which is where the force of your arguements come from.
Count Orgaz in a nutshell:
"Shut up" he explained.
Count-
You have no idea what you are talking about. Clinton signed Gramm Leach Bliley - which repealed Glass Steagall as well as requiring banks to expand subprime lending. It was under Clinton that HUD mandated Fannie and Freddie to expand into the subprime market. The seeds of this were sown under Democratic leadership. Sadly they were also watered by Bush with the loosening of leverage requirements and federal suits to prevent state and local regulation of the subprime market. There is plenty of blame to go around, but blaming this mess on Bush exclusively is moronic myopia.
Count Orgaz needs to be reminded that it was Rubin who when in the Clinton Administration thought that derivatives did not need to be regulated. He thought they were good and fought to make sure every company in the US could buy/sell/issue/trade all sorts of unregulated paper for future promises.
Unregulated derivatives are what caused much of the bubble and then the burst.
banks and investment bank and hedge funds bought fannie mae derivatives in good faith.
barney frank said it was okay.
so don't blame the banks/investors.
the whole meltdown was caused by the subprime fiasco at fannie mae and this was predicted by bush and greenspan and snow and mccain.
the dems of congress blocked more regs on fannie mae and argued fannie mae was AOK.
it's their fault not rubin's.
Wonder if anyone will care that he made 150 million bucks for his advice, or is that small change these days.
Count is delusional as are most people who believe in the "CLINTON ECONOMIC MIRACLE."
S&P from 1995 to the present shows "growth" under Clinton occurred around 18 to 24 months before Y2K and rapidly DECLINED on Jan 1, 2001.
GROWTH preceeding Y2K was 5 times greater than the DECLINE AFTER 9/11. Look at the trend chart.
The surplus would have quickly vanished even without 9/11 and was ONLY due to Y2K.
Clinton had NOTHING to do with the miracle, except to claim it was due to his policies.
Count: with all due respect, please show evidence of a surplus. Tracking debt over time would appear to indicate no surplus ever existed.
Count Orgaz
Tell the truth...you're Robert B. Reich, aren't you.
Michael Lewis (probably most famous for Liar's Poker), will be writing another devastating book on Wall Street. (Beyond the anthology due to be published in early December.)
He's also written at Portfolio.Com, explaining what he's learned about this SCAM! Where the rating agencies, including Moody's, gave AAA ratings to "C.D.O.'s" ... which are Collateralized Debt Obligations. WORTH ZERO. Keep on mind, no one on Wall Street gave a "gosh-darn" about investors! (Even though investors were their bread and butter.)
Anyway, with Triple A stamps, the CDO's, and CMO's, sold like hot cakes to pension funds. (It's possible the "bailout" is a government ploy; hoping to keep lawyers at bay. Who'd sue the pants off the ratings agencies. But what do I know? Basically, as long as real estate prices were inlating, you could "speculate." And, you could sell mortgages, attached to home prices that went through the roof.
ANd, now? No equity. As the tumbling back happened, the poor people who could never repair the loans. But who bought house after house with zero-down's. Actually would then be convinced to "borrow" on their equity. And, buy another house.
THese people are gonna be out in the cold.
The bailout, which seems so strange?
Michael Lewis interviewed Meredith Whitney, (an obscure analyst of financial firms for Oppenheimer Securities) ... published on October 31, 2007 a prediction that CITIGROUP was so mismanaged that it would need to slash its dividend or go BUST.
On this news the market crashed, back on October 31, 2007. By the end of that trading day, just to quote a little bit more from Lewis' work ...this woman (whom no one had heard of), shaved $369 billion off the value of financial firms in the market. And, "4 days later, Citigroup's C.E.O., Chuck Prince, resigned. In January of '08, Citigroup slashed its dividend. I think Michael Lewis has grabbed onto another story.
When he wrote Liar's Poker, he was sure Wall Street was going to go bust. But that was back in 1987. Lewis said after time passed, he just learned to shrug.
Shrug no more.
Now you want to know what I remember about Rubin? I remember he smelled as bad as Michael Milken. But Michael Milken was shot down by Ivan Boesky. Who got caught. And, "made a deal." And, Rudolph Guiliani became famous.
At some point you'll also learn that Hank Paulson, of Goldman Sachs, BET AGAINST his own bond traders! So he made BILLIONS.
Money doesn't disappear. It just changes hands.
One of the economy's engines is real estate development. Because people need houses. And, it's what got our economy going after WW2. But you need sane policies. Not just greedy "salesmen" working for Wall Street, getting obscene bonuses, with no one asking a single ethical question. In other words? No one asked: HOW CAN YOU SELL THIS CRAP?
More than anything else, the US is a bubble economy. It will always have steep rises, and steep declines, because of the riskier natures of americans, as well as the easy movement of capital.
While Clinton and his advisors (Rubin, Summers, etc..) may have promoted some of the bad policies that led to this mess, the fact is, they have modified their thinking in the wake of new evidence. Bush's administration, on the other hand, was completely ideologically driven, and the facts on the ground had zero effect on the administration's decision making.
So years ago, when most economists were warning about the mess that we were about to face, all the administration could do was repeat its "lower taxes" and "free markets good" mantra, while never recognizing that freedom (of markets) is not free.
That being said, this wasn't a partisan malaise. The Democrats and Republicans in Congress were as much to blame for not doing what was needed. However, as the leader of the nation, Bush never took the leadership role that he should have, which is why I am most disappointed in his administration.
Hopefully, Obama will take clear decisive steps, and not be driven by ideologies carved from stone. The appointments of both Summers, and Romer seems to indicate he will be fed at least a few different viewpoints.
A "bench" is "off the roster"? That sports metaphor needs a little work.
"Rubin is one of the few icons of Wall Street who hasn't been stained with the fallout from the financial crisis--Republicans don't want to blame capitalist institutions, and Democrats don't want to imply that St. Robert of Clinton might not have miraculous economic healing powers."
The editors of the Wall Street Journal feel no such compunction. See their editorial today, "Citi's Taxpayer Parachute: Why are Robert Rubin and other directors still employed?". Excerpt:
I voted for Kerry in 2004 and for Obama this year, so I can criticize without being called a republican stooge. For the Treasury to bail out Citigroup without requiring Rubin to resign as a director or give back any part of the $17 million in compensation that he received from Citigroup this year is simply outrageous. Citigroup may be too big to fail without some kind of government bailout. What's clear from this week's events is that Rubin is too politically well-connected to be held accountable for his poor judgement and failure to exercise proper oversight as a Citigroup director.
Somebody wanted to know when Robert Reich weighed in, check addicted...
America needs to return to fundamentals where we actually produce value not destroy it. This will only happen when Americans realize they have been living beyond reasonable and long term sustainable means.
What we have now is something we can't punch our way out of, drill or pollute our way out of, or hood wink our way out of on Wall Street. We need to be honest with ourselves and government needs to become fiscally responsible. Let's pay attention and not forget this wake up call! I have a dream...
A simple rule applies in all investment, the greater the return, the greater the risk and vice-versa. For many of the Wall Street "gurus", Rubin included, to say "We didn't think this was the case with CDS, CDO, etc... " is pure BS. Aren't all of these folks "the best and the brightest?"