In Defense of Robert Rubin
He's the wrong guy to blame for the financial crisis.
Seldom does a Sunday pass of late without Frank Rich, the New York Times columnist, taking a potshot at Robert Rubin. This past week he took two. But I've been having a hard time understanding what Rich and others who are angry at Rubin are angry about. Sometimes they claim he blocked financial regulation when he served in the Clinton administration. Sometimes they blame him for not preventing the troubles at Citigroup. Sometimes they argue that he has too many disciples in the Obama administration, or that he was overpaid, or—the dominant theme lately—that he's not sorry enough for whatever it is he may have done wrong.
Of course, these complaints aren't mutually exclusive. But none of them makes much sense in light of the former treasury secretary's record and his oft-stated views. Far from being responsible, Rubin is someone whose way of thinking about risk and concerns about unregulated markets could have thwarted the worst of what happened if more people had listened to him.
Let me stipulate that I'm hardly an unbiased observer. I've admired Rubin since I first covered him as a journalist in the mid-1990s and continue to think that the philosophy he championed during the Clinton years—fiscal responsibility, an appreciation of both the power and limitations of markets, and pragmatism in responding to their inevitable, periodic failures—remains the best overall approach to economic policymaking. After Rubin left office, I helped him write a memoir, published in 2003, that details his views, and we have remained friendly in the years since. What follows, however, is my view, not his.
To me, the most wrongheaded of the accusations is that Rubin prevented effective financial regulation when he was in government. I smile when I hear this claim because of the hours I spent listening to him argue the opposite. Rubin's view has always been that the financial system needs to be protected from the excesses of markets. He was the first person I ever heard talk about the risk of derivatives, and he raised it often enough at time when it wasn't on the agenda that, to be honest, he could be a bit of a bore on the subject. Rubin thought derivatives, such as the credit-default swaps that brought down AIG, were risky because of they way they could magnify market moves and implicate interconnected global financial institutions, and because traders did not read the fine print of the contracts and didn't understand how they might behave under circumstances outside their window of experience. After the Asian financial crisis, one of Rubin's refrains was: I think at some point we could have a derivatives-driven financial crisis.
Rubin thought the answer to the problem was relatively straightforward: strengthening capital, margin, and disclosure requirements. These requirements are at the core of the financial-reform bill that the Senate is considering this week. Rubin held this view long before he went to Washington, going back to the 1970s when he worked at Goldman Sachs as an arbitrage trader. But when he was in the Clinton administration, Rubin thought that absent a crisis, it would be politically impossible to pass new rules because of the intensity of the opposition from his former colleagues on Wall Street. He also faced disagreement from Fed Chairman Alan Greenspan, who believed that markets were essentially self-regulating, and some skepticism from his own deputy at Treasury, Larry Summers. Rubin goes into this at length in his book, noting that Summers later ridiculed the kind of comprehensive margin requirements Rubin favored as "playing tennis with wooden rackets." The three did agree, however, that a legally ambiguous effort by the Commodity Futures Trading Corp., then led by Brooksley Born, to regulate over-the-counter derivatives could have created dangerous market uncertainty.
I do think Rubin deserves criticism for not pushing his entirely accurate view of the danger of the derivatives harder. By the time the collapse of the massive hedge fund LTCM put a spotlight on the issue in 1998, he had built up tremendous political capital. Had he been more vocal about his worries, he might have a least made people more aware of the problem, even if no legislation passed. But Rubin was not wrong about the risk of unregulated derivatives, nor was he opposed to regulating them. To the contrary, he was prophetic about the risk and correct in his prescription.
Rubin took these views back to the private sector with him. Many a Citi executive sat in his corner office listening to the same apprehensions I heard so often about the mispricing of risk, the excesses in the credit market, and the danger of relying on mathematical models. But Rubin did not make decisions at Citigroup. His role was as a representative to clients and foreign officials and as a strategic adviser to CEO Sandy Weill and to Weill's successor Chuck Prince. After his service in government, Rubin wanted a position that would allow him to stay abreast of what was happening in the financial world while remaining involved in the public policy issues that animated him. He wanted to be able to take public positions at odds with his firm's interests and the views of other executives. He did not want management authority and had no one reporting to him.
Here again, there is a valid criticism that is far different from the one most often made. Rubin's problem wasn't power without accountability—it was accountability without power. I'm not sure he fully appreciated the risk, evident in hindsight, that he would be blamed if things went badly wrong, as they might have in any number of possible ways, at the world's largest financial institution. But even if he'd had a more conventional kind of authority, it's unrealistic to think Rubin could have prevented the mistakes that necessitated a government bailout. The assumption that the rating agencies knew their business, a key enabler of the subprime meltdown, is analogous to the view before the Iraq war that Saddam Hussein had WMD. There are a lot of people now who scoff about what an obvious fallacy that was and not many who can point to doubts expressed at the time. But even if Rubin had better understood the risks Citi traders were taking and been in a position to do something about it, he almost certainly would not have said, "sell the AAA-rated CDOs." Nor would anyone else have.
While Rubin bears no meaningful responsibility for the financial collapse, he has had, as Business Week noted in a recent article, significant impact on the recovery. The Obama administration's response has been led by a series of his disciples—Summers, Timothy Geithner, Peter Orszag—who have dealt with the crisis using the tools and lessons they learned responding to the Mexican and Asian crises of 1994 and 1997. In those instances, the problem of moral hazard had to take at temporary backseat to stopping financial contagion. Once markets were stabilized, they could take on systemic issues. That describes the current moment as well, with the Obama team pivoting from what has been their highly effective crisis response to longer-term issues of fiscal balance, future crisis prevention, and establishing the conditions for long-term growth. For a second time, Rubinomics seems to be working.