Robert Rubin: The Nexus Of Big Government and Wall Street
by Charles GasparinoFor anyone who thinks that big Wall Street and Big Government aren’t joined at the hip, promoting policies and laws that keep each other fat and happy often at the expense of the American taxpayer, consider the career of Robert Rubin.
Rubin, of course, is largely gone from the public scene after spending 10 disastrous years as a board member and senior executive at Citigroup, the banking giant that epitomizes all that is wrong with American finance, and before that, a largely successful run as Treasury Secretary in the Clinton Administration, which he joined after running another controversial bank, Goldman Sachs. But his legacy looms large, mainly because I believe he was one of the reasons why the financial crisis occurred in the first place.
Citigroup, with nearly $1 trillion in customer deposits, is and always was Too Big To Fail, meaning that because of its size and scope, and the fact that it safe keeps FDIC insured customer deposits, the Federal government wouldn’t just let the bank implode as it did Lehman Brothers.
Too many people would be hurt, and not just the Wall Street types. That’s why during the height of the financial crisis, policy makers in both parties threw hundreds of billions of dollars at Citigroup to save it from going bust.
Despite all of this, as I show in my new book about the financial crisis, The Sellout, Rubin advocated policies at Citigroup that put the massive bank in jeopardy, and with that put the entire financial system in peril. He was one of the strongest supporters for the bank to begin taking more risk through bond trading, which ultimately led to the firm’s downfall, and its government bailout. He had a seat on the Citigroup board, but from that vantage point, he never saw how the firm’s risk profile was growing out of control. He was a senior executive at the firm with the lofty title of “Chairman of the Executive Committee,” and yet he has time and again explained to me that he had “no operating responsibilities” to monitor the bad behavior that got the firm in trouble in the first place.
More than that, Bob Rubin helped kill the very law that would have prevented Citigroup from being a company in the first place, and would have saved taxpayers a lot of money. The law is known as Glass-Steagall, named after Depression era lawmakers who believed it was a pretty good idea not to mix the risk taking of investment banking and trading, with traditional banking practices such as safeguarding deposits and making loans to small businesses.
Wall Street had made a concerted effort to eliminate Glass-Steagall since at least the early 1980s when the business model of the financial business began to change from one that provided advice to customers—individual investors and corporations-to one that was focused on taking risk, namely trading complex bonds and derivatives where the returns are much larger.
Rubin at the time was at Goldman Sachs. He wasn’t one of Glass-Steagall’s fiercest opponents, at least at first. When he went to the Clinton Administration as a top economic adviser and later as Treasury Secretary he was still on the fence; published reports show him speaking both in favor and against the law’s continued existence.
By the time he had announced that he would resign from Treasury in 1999, the now infamous Citigroup deal had been announced with John Reed the CEO of Citicorp and Sandy Weill who ran the brokerage giant Travelers Group shocking the world with the mega merger, which was technically illegal since Glass-Steagall was still in effect.
But not for long. Rubin had now fully joined the Wall Street gang in pushing for the law to be dumped. And it was, and as it was, Rubin took his private sector job with Citigroup, the biggest beneficiary of the end of Glass Steagall.
Robert Rubin isn’t the only reason why Glass Steagall was killed; Wall Street had had been showering their favorite Congressmen and Senators from both parties with campaign contribution and buying their votes. The theory of Citigroup was widely accepted in business circles as the future of the financial business; combining commercial and investment banking services under one roof and allowing firms to sell all sorts of products was a step forward toward “financial modernization.”
Nor is Rubin the only beneficiary of the revolving door of Big Government and Wall Street. But his career is useful in showing the problems that this unholy alliance between major financial firms and our ever-expanding government are one of the major contributing factors to last year’s financial meltdown.
Citigroup, with its mandate now in hand, and with Rubin approving the effort, became one of the biggest creators of mortgage bonds, the main vehicle used by government bureaucrats of both parties to transform home ownership from something that must be earned to something close to a civil right. With Wall Street buying these loans en mass from the banks to pack into their ever-riskier bonds, lending to so-called “subprime” borrowers became an accepted practice fully sanctioned by the federal government. When Citigroup couldn’t sell the bonds to investors, it horded them on their balance sheet, earning the high interest rates the bonds threw off.
That is until reality set in, as it did last year when the entire financial system, burdened by investments in these mortgage bonds on their way to default, Wall Street, began to collapse and the economy fell into the Great Recession, now with 10.2% unemployment that shows no signs of letting up. Citigroup was the biggest casualties of the collapse; its risk takers had lost so much money that it needed tens of billions in guarantees and handouts, as well as the government becoming the bank’s largest shareholder.
When the dust finally cleared, it became obvious that the demise of Glass-Steagall allowed the risk-taking traders at Citigroup to jeopardize nearly $1 trillion worth of customers deposits, which is the main reason the feds had to spend so much bailing it out. With that, Bob Rubin’s Wall Street career was over. He was forced to resign from the Citi board and the firm itself with his reputation in tatters, but not without earning more than $100 million.
There are plenty of media types who blame last years implosion and the bailout on greedy bankers, but that’s only part of the story. Wall Street needed a co conspirator, and for me, that co-conspirator is Big Government. They are an odd couple; the ultimate free marketers teaming up with the bureaucrats. But as I show in The Sellout, the relationship worked, at least for them.
As for the rest of us, we’re still paying the price.
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31 Comments
Nothing is more big government then this health care bill. Don't worry , it won't pass because of the war in The Democrat Party and what side won:
http://americaspeaksink.com/2009/11/the-democrat-...
Excellent article.
People are not aware of how tightly Wall Street and Big Government are joined.
If it weren't so disastrous – it would be funny how these guys KNOW how to make money the Capitalistic way (and some of them are VERY good at that – more power to them at that), …but… now that they HAVE theirs, they sure don't want anyone else to get up there.
The corporatism for wall street firms is something all of us don't want. We need to effect some change NOW. The president better come through…
[...] Cross-posted from Big Government [...]
So the individual cannot trust big government, and now big financial business is suspect aw well? Well, more than we had previously suspected.
What can we do? Stay local. People have somewhat more trust of their local politicians, since it is their own community that elects them and they are more accessible and accountable. Compared to your US Senator, at least. Likewise we should keep our finances local, small neighborhood banks where perhaps you can still ask to speak with the upper management, even the head.
You know the expression, politics is local? That refers to the issues, how the man-on-the-street feels about things around town. But we can now see the issues affecting the nation and the world are the ones affecting us, our true enemies operate in national, multi-national, global terms, and are trying to stretch their grasp over each and every individual one of us.
Time for a new expression: Freedom is local, tyranny is global. Vote accordingly, with your wallet as well.
I think you've got this wrong. Glass-Steagal would not have prevented the financial crisis. Glass-Steagal was a regulation, and should have been struck down as nearly all regulations should be. G-S, like the FDIC, was a policy of the New Deal, an era when politcians like FDR wanted to limit the market. What caused the crisis was massive liquidity injected into the market by the Fed in the early part of this decade. The solution was to not bail out these guys and let them assume the risks.
@James – huh? all of us? I think you missed the whole point of the article. speak for yourself.
Corporatism itself isn't a problem. It's the government stepping in thinking they know enough about it to help it that is the problem.
Congresses plans to ensure everybody who couldn't afford home ownership had their chance, despite huge risk to the financial sector, basically held hands with the top group on Wall Street while they destroyed the economy.
Because the government decided that home ownership should be an entitlement, and renting just wasn't acceptable anymore for some reason. Just go ahead and take huge risks on lending to the poor and if it doesn't work out, we'll just buy the banks with taxpayer money. No prob.
There's no shortage of crooks on Wall Street, but corporatism isn't the problem. It was regulations that the government was happy to lift for them that let them be irresponsible with money they never should have been handling. The govt. urged the bad decisions and even threatened banks who didn't play along.
Our president does not need to save us. He has no intentions of having govt. step out of running banks, and he never will.
The unholy alliance between the elite banker caste and this administration is everything our Founding Fathers warned about. Jefferson warned….."I sincerely believe… that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale."
Fast forward, for all of his hyperbole Matt Taibbi's expose of Goldman Sachs is the grim reality that Jefferson warned about:
"Any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain — an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy."
http://www.rollingstone.com/politics/story/288163...
You misunderstand what a bubble is. Since all of their data had any loans making money, no one wanted to get left behind and they would loan to anyone. Congress is at fault for allowing the deregulation to get pushed through, but you are fooling yourself if you think it's entitlement culture that did this. That's like saying the internet bubble was caused by congress setting up an "everyone is entitled to a fully-funded web business" culture.
Don't doubt the power of group think with investors in a private market. No one wants to get left behind, that's the fundamental flaw.
Onecent,
That Matt Taibbi article is excellent. I have posted it here numerous times over the course of the last two months on various threads, but I don't think people took the time to read it. It is a powerful article, and connects alot of the dots………
[...] a post for Andrew Breitbart’s Big Government, a conservative blog and website, CNBC’s Charles [...]
capitalisim vs. coperatisim ….. capitalisim works, corporatisim only works for the crooks
financial services will soon be rivaled by health insurance services if the blowbama health care comes to roost
check the origination of the Community Reinvestment Act in the 70's…. then follow the leftwing legislation from Congress in last 20 years… to see the impact and extortion on banks to lend to folks that simply had no income or money for a down payment.
These loans were Marketed and promoted by ACORN… and their 300 affiliates, all under the guise of the urban chant of "spreading the American dream" — oh yeah, forget the fact that you should have to actually work and save money for a down payment — as espoused by many cmmunity organizers like BHO.
I followed the money during the presidential campaign of 2008, all the millions in campaign contributions came from banks, and then all the stimulous money went flowing into the banks. Banks play an important role in capitalism, equal to entrepreneurs and labor, bankers need to get their act together.
[...] from Big Government Email This [...]
In the old days, bankers were personally liable for losses. Can you imagine Congress passing a bill to reinstate personal liability? We need to retake our country by limiting the Federal government to its enumerated Constitutional functions. Here is a good starting point: federalismamendment.com
Here's a post from economist Alex Tabarrok:
Many wise people are now recognizing that the repeal of Glass-Steagall was one of the few saving graces of the current crisis. Let's thank President Clinton (and Phil Gramm) for that wise bit of deregulation. Given a history like this people wonder how repealing the law could have been a good thing. The following potted history of the law, however, is all too typical:
"Glass-Steagall was one of the many necessary measures taken by Franklin Delano Roosevelt and the Democratic Congress to deal with the Great Depression. Crudely speaking, in the 1920s commercial banks (the types that took deposits, made construction loans, etc.) recklessly plunged into the bull market, making margin loans, underwriting new issues and investment pools, and trading stocks. When the bubble popped in 1929, exposure to Wall Street helped drag down the commercial banks….The policy response was to erect a wall between investment banking and commercial banking."
But a significant academic literature has investigated these claims and rejected them. Eugene White, for example, found that national banks with security affiliates were much less likely to fail than banks without affiliates. Randall Kroszner (now at the Fed.) and Raghuram Rajan found that (jstor) securities issued by unified banks were (ex-post) of higher quality that those issued by investment banks. A powerful bookby George Benston went through the entire Pecora hearings which supposedly revealed the problems with unified banking and found them to be a complete sham. My colleague, Carlos Ramirez later showed that the separation of commercial and investment banking increased the cost of external finance (jstor). Finally, my own work (pdf) unearthed the real reasons for the separation in a titanic battle between the Morgans and Rockefellers. Thus, the history of banking before Glass-Steagall and now our recent experience after is consistent, generally speaking unified banking is safer and repeal was a good idea."
It’s a stretch to call deregulation ‘Big Government’. No doubt that there are crooks and idiots at high levels of government, but MORE government regulation was needed, indicating a greater need of the so-called ‘Bug Government”. I won’t be buying your book.
Keep up the good work Charlie! Appreciate your great books and reporting on CNBC. There seems no end of the activity that should be seen as corruption emanating from Wall Street and DC. Taxpayers are being fleeced no matter who is in charge. They should all be tar and feathered.
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I think it's time that somebody define "Wall Street". There are well over a thousand Broker Dealers operating in this country 99% of which earn a living by providing specialized financial services (including raising money for businesses which would otherwise not exist) to targeted industry sectors. The behemoths who try to walk the fine line between proprietary investing and advising are rare exceptions. Know the public knows the truth that these behemoths have one specialty and that is making money at all costs. The behemoths exist only because the government allows them to and their sheer size enables them to out muscle smaller, more specialized firms. This argument is really about BIG BUSINESS and BIG GOVERNMENT….not Wall Street.
Wall Street and "Big Government" are intertwined — to defeat regulation. The repeal of Glass-Steagall is only the most visible; both the Bush and Obama Treasury Departments are opposed to strong regulators who would work proactively to limit the abuses. The belief that Wall Street can regulate itself (with of course the federal government in the background to bail them out) is the cause of the current crisis. Competent, independent regulators actually helped prevent a brewing mortgage crisis very similar to this one in the early nineties, but by the time this crisis came along the senior regulators who actually knew what they were doing had been weeded out of the agencies, in part, because they are more expensive and in part because of ideology.
The wall street bailout should have told you who the power brokes were in this country. Its wall street and the bankers. You know the guys that can trade their own stock and no one in the government investigates unless they pissed them off over something like no campiagn bribes.
Obama and his croneis stole our money and gave it to the rich *&&&^&^% on wall street who were too stupid make honest money. There's no money for the average guy in the street except unemployment and welfare while Obama nad his boys give wall street hundreds of billions so they make the bomnus payouts of hundreds of milions to themselves. Obama only helps his friends and contributors not anyone who might actually help the economy. Ifthe stimulas had been given to the public, oh says $25,000 per adult the economy would have boomed instantly as private debt would have shrunk and consumers would have spent money. But no he gave oit to wall street who gave it to themselves and their foriegn debt holders. That's BUll hockey! Obama is as for the rich as any president has ever been. He's one of them and he's protecting his next electin by giving them our money. Obama is always talking about redistributing the wealth. What he menas by that is take from the working class and giving it to the rich and the poltical class. Wake Up America! Obama's change was to put the money in his pocket not George Bush's your his ATM!
[...] Robert Rubin: the Nexus of Big Government and Wall Street Rubin, of course, is largely gone from the public scene after spending 10 disastrous years as a board member and senior executive at Citigroup, the banking giant that epitomizes all that is wrong with American finance, and before that, a largely successful run as Treasury Secretary in the Clinton Administration, which he joined after running another controversial bank, Goldman Sachs. But his legacy looms large, mainly because I believe he was one of the reasons why the financial crisis occurred in the first place. [...]
The people need to start asking…why is Robert Rubin not in jail? He and Sandy Weill were running a massive Ponzi scam at Citigroup by using huge leverage and selling worthless mortgages. Far far larger than Madoff ever dreamed of. They have now been exposed. Someone call the cops. Keep up the good work Charlie.
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This FCIC hearing should bring out the small club of ex & current Goldman guys… Rubin, Paulson, Blankfien who have supported OTC derivatives argued to bring down Glass Steagall. Together with Weill, Greenspans & others support they made both Citi and then GS into Universal banks, effectively allowing the old Salomon Bros and now GS to access the fed window so the firms would not go under at the time of crisis. Then Lehman is allowed to fail but AIG is rescued! It would have been cheaper for the taxpayer if Lehman had been rescued! Goldman made money at the expense of AIG and now Greece. This list is probably really long if someone digs deeper. Should someone explore their dealings with Freddie Mac, Fannie Mae etc? I would also wish we could disclose on a name buy name basis, the investors in John Paulson's HF that made a killing in this crisis. To me it appears there is a small secret society in operation in the background. Let us fix the system, and replace all these people……