Robert Rubin's Free Ride
How does Clinton's Treasury secretary escape blame for the market meltdown?
The housing bubble has burst. The financial services industry is a ward of the state. Insurance companies and automakers are tottering on the brink of bankruptcy. Consumer credit is drying up along with consumer confidence. Banks have stopped lending money, and big corporations have started laying workers off. The stock market is at a five-year low. But amid the greatest financial panic since the Great Depression, the market for one asset stubbornly resists correction: the immaculate reputation of Robert Rubin, former Treasury secretary and pre-eminent economic wise man of the Democratic Party.
Rubin hasn't been Treasury secretary since 1999, and he certainly bears less responsibility than Alan Greenspan, Phil Gramm, Christopher Cox, and assorted other Republican pooh-bahs. American voters, who are expected to favor the Democratic presidential ticket this Tuesday, aren't wrong to assign the principal blame for this crisis to the GOP. But the financial deregulation that allowed markets to boil over began well before President George W. Bush took office. Three decisions relevant to the market meltdown—two of them unambiguously bad in retrospect, the third a likely source of future trouble—can be attributed to Rubin.
Derivatives. In 1998, Brooksley Born, chair of the Commodity Futures Trading Commission, proposed bringing derivatives under her jurisdiction. Rubin joined forces with Greenspan and Arthur Levitt Jr., then chairman of the Securities and Exchange Commission, to successfully derail the proposal in Congress. Rubin shared Born's worry about the derivative market's unregulated growth, and in his 2003 memoir, In an Uncertain World (co-authored by Jacob Weisberg, editor-in-chief of the Washington Post Co. unit that includes Slate), Rubin would later write that derivatives "should be subject to comprehensive and higher margin limits." So why did he oppose Born? Rubin doesn't discuss the episode in In an Uncertain World, but according to an Oct. 15 article by Anthony Faiola, Ellen Nakashima, and Jill Drew in the Washington Post, Rubin fought Born's plan for essentially political reasons: So "strident" a power grab by the CFTC, Rubin believed, would invite legal challenge, which in turn would create havoc in the derivatives market. Unfortunately, after killing off Born's proposal, Rubin never developed a less "strident" regulatory alternative—even after the September 1998 collapse of the Long Term Capital Management hedge fund, attributed in large part to its extensive investment in derivatives, demonstrated that concerns about these unregulated financial instruments were extremely well-founded. As a consequence of Rubin's obstruction and inaction, the market for one particular derivative—credit-default swaps—grew like a noxious weed. The credit-default swaps were unregulated insurance contracts on securities derived partly from subprime mortgages. If indiscriminate subprime mortgages were the vehicle that brought about the market meltdown, credit-default swaps were the fuel.
Greenspan. As the previous example demonstrates, in economic decision-making Rubin was often joined at the hip to Alan Greenspan, the Reagan-appointed chairman of the Federal Reserve Board who served until February 2006. (A famous February 1999 Time magazine cover dubbed Rubin, Greenspan, and Rubin's deputy and successor Lawrence Summers as "The Committee To Save the World.") Greenspan, whose press was once even more ecstatically favorable than Rubin's—Bob Woodward titled his 2000 book about Greenspan Maestro—has since been identified as the principal architect of the economic meltdown. That's not only because he resisted regulation of derivatives more emphatically than Rubin ("I think of him constantly cheerleading on derivatives," Greenspan's onetime deputy, Princeton economist Alan Blinder, recently told Peter S. Goodman of the New York Times) but also because he failed to rein in the subprime lending that created the meltdown and encouraged the housing bubble by keeping interest rates low. If Greenspan is Public Enemy No. 1, then the guy who got Bill Clinton to reappoint Greenspan surely ranks as Public Enemy No. 6 or 7. That would be Rubin. In early 1996, when Greenspan's term as Fed chairman was due to expire, Clinton considered replacing Greenspan with Felix Rohatyn. Rubin talked him out of it. In Maestro, Woodward makes clear that Rubin's view was shared by many others, including the more liberal Laura Tyson, who succeeded Rubin as director of the National Economic Council, and Vice President Al Gore. But Rubin's endorsement carried the most weight. Woodward crafts a tender homoerotic scene out of Rubin's telling Greenspan he's gotten the nod from Clinton:
Rubin was … at the G-7 meeting in Paris, where he and Greenspan had a chance to speak privately. Taking advantage of a quiet moment, they walked together toward a series of large plate-glass windows at one end of the room, with a view of Paris before them. The two men had established a feeling of trust, perhaps as much as two adult males in high government posts might find possible. For Greenspan, such friendship, closeness and agreement gave him a sense that they were working for the same firm. Greenspan had once remarked privately, and only half-jokingly, that he considered Rubin the best Republican secretary of the treasury ever, though he was a Democrat.
"When you get back," Rubin said, "the president's going to want to talk to you."
Greenspan could tell by the body language that it was all favorable.
Timothy Noah is a former Slate staffer. His book about income inequality is The Great Divergence.
Photograph of Barack Obama and adviser Director and Chairman of the Executive Committee of Citigroup Robert Rubin by Marc Serota/Getty Images.