Of all the disgraceful moments following the implosion of Citigroup, this Wall Street Journal interview with Citigroup director and Bill Clinton's former Treasury honcho Robert Rubin probably takes the cake.
Rubin claims innocence about Citi, insisting that no-one saw it coming. This is coming from someone who was instrumental to Citigroup's decisions three years ago to take on more risk to boost flagging profits.
For his part, Rubin claims it's the bank's risk managers who are to blame, not the board.
"Mr. Rubin said it is a company's risk-management executives who are responsible for avoiding problems like the ones Citigroup faces. "The board can't run the risk book of a company," he said. 'The board as a whole is not going to have a granular knowledge' of operations.
"Still, Mr. Rubin was deeply involved in a decision in late 2004 and early 2005 to take on more risk to boost flagging profit growth, according to people familiar with the discussions. They say he would comment that Citigroup's competitors were taking more risks, leading to higher profits. Colleagues deferred to him, as the only board member with experience as a trader or risk manager. 'I knew what a CDO was,' Mr. Rubin said, referring to collateralized debt obligations, instruments tied to mortgages and other debt that led to many of Citigroup's losses.
"Mr. Rubin said the decision to increase risk followed a presentation to the board by a consultant who said the bank had committed less of the capital on its balance sheet, on a risk-adjusted basis, than competitors. 'It gave room to do more, assuming you're doing intelligent risk-reward decisions,' Mr. Rubin said. He said success would have been based on having 'the right people, the right oversight, the right technology.'
"The decision has been blamed in part for Citigroup's problems, including the growth of its CDO holdings amid signs the mortgage market was unraveling. Mr. Rubin doubts that is true. 'It was not an inflection point," he said, but 'I just don't know what would have happened' if the decision had been different.
"At the time, Mr. Rubin was saying in speeches that most assets were overvalued. He would quote a noted investor he knew as saying that 'the only undervalued asset class in the world is risk.'
"But it wouldn't have been right for the board to act on his concerns, Mr. Rubin said in the interview: 'I wouldn't run a financial institution based on someone's view about what markets would do.' He noted that the stock market kept rising for more than three years after Mr. Greenspan, in late 1996, wondered aloud about possible 'irrational exuberance.'
Mr. Rubin said he believed in 2004 and '05 that, while a cyclical downturn such as the 1994 Mexican devaluation or 1997 Asian financial crisis was possible, the losses the bank might suffer wouldn't come close to wiping out the profits made during the good times.
"In the current crisis, 'what came together was not only a cyclical undervaluing of risk [but also] a housing bubble, and triple-A ratings were misguided,' he said. 'There was virtually nobody who saw that low-probability event as a possibility.'
He said the Citigroup board could bear some responsibility. 'Maybe there are things, in the context of the facts we knew then, we should have done differently,' he said.
As Newsweek points out, Robert Rubin did the groundwork for this financial crisis. As Treasury secretary he was a proponent of letting banks get into risky investments and he eased back the Depression-era laws barring banks from becoming investors. He also opposed attempts to regulate derivatives.
What we are now seeing is part of his legacy.
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