Bill Clinton has a favorite Robert Rubin story. It’s 1999, and the Cabinet has gathered to discuss the business of the American people. Except no one can focus because the impeachment crisis is raging, and even the most veteran Washington power players are, for lack of a better term, freaking out. “It was amazing what he did," says Clinton of Rubin, his then-Treasury Secretary. “He often didn’t say much, and I was stunned when he wanted to speak. He just sat there and in about three minutes summed up the whole thing in a very calm way, and had an incredibly positive impact on the attitude of the Cabinet. He said, ‘What we’ve got to do is get up tomorrow and go back to work, just like we did today, make good things happen, and trust the system and trust the American people. It’s going to be fine.’ And oh my God, you would’ve thought that somebody had gone around and lifted a rock off everybody’s shoulders."
Rubin’s knack for spreading wisdom and tranquility has been the defining trait of his professional life. Whether economies across Asia are contaminating each other like kids on a school bus or the Mexican government rises one morning and decides to devalue the peso, Rubin’s hooded eyes and perpetually mussed gray hair give him the air of an ancient Galapagos tortoise. Whatever nastiness politics or the global economy may throw at him, he abides.
Photograph by Ed Quinn/CorbisRubin in the 1960 Harvard yearbook
This legendary stillness, combined with decades of economic and market expertise, keeps Rubin in constant demand. Since 2007 he’s been the co-chairman of the Council on Foreign Relations, where he maintains a disheveled office and employs his longtime assistant. He’s considered the intellectual father of the Hamilton Project at the Brookings Institution, which examines the relationship between government spending and unemployment. He’s a regular participant at the annual Bilderberg Meetings (so secretive they make Davos look like an American Idol taping) and a member of the Harvard Corporation, the discreet board that runs his alma mater. He also meets regularly with congressmen and foreign leaders and has access to the Obama administration through Timothy Geithner and other protégés. In 2010 he joined Centerview Partners, an advisory investment banking boutique, as a counselor to founders Blair Effron and Robert Pruzan.
It’s enough to keep a 74-year-old plenty busy. But not enough to shake questions about just how wise and thoughtful Robert Rubin really is, especially on the fourth anniversary of a financial crisis in which he played a pivotal, under-examined role. Rubinomics—his signature economic philosophy, in which the government balances the budget with a mix of tax increases and spending cuts, driving borrowing rates down—was the blueprint for an economy that scraped the sky. When it collapsed, due in part to bank-friendly policies that Rubin advocated, he made more than $100 million while others lost everything. “You have to view people in a fair light," says Phil Angelides, co-chair of the Financial Crisis Inquiry Commission, who credits Rubin for much of the Clinton-era prosperity. “But on the other side of the ledger are key acts, such as the deregulation of derivatives, or stopping the Commodities Futures Trading Commission from regulating derivatives, that in the end weakened our financial system and exposed us to the risk of financial disaster."
After he stepped away from Treasury in 1999, Rubin moved to Citigroup (C), and until 2009 he served as chairman of the executive committee and, briefly, chairman of the board of directors. On his watch, the federal government was forced to inject $45 billion of taxpayer money into the company and guarantee some $300 billion of illiquid assets. Taxpayers ended up with a 27 percent stake in Citigroup, which was sold in 2010 at a cumulative profit of $12 billion. Rubin gave up a portion of his contracted compensation—and was still paid around $126 million in cash and stock during a tenure in which his serenity has come to look a lot more like paralysis. “Nobody on this planet represents more vividly the scam of the banking industry," says Nassim Nicholas Taleb, author of The Black Swan. “He made $120 million from Citibank, which was technically insolvent. And now we, the taxpayers, are paying for it."
Evaluating Rubin’s role in the financial crisis is a tough task made tougher by the fact that the tortoise has retreated into his shell. Once famously adept at working the press—the author of a 2007American Prospect profile noted that he “literally could not find a single feature piece that was, on balance, unflattering"—Rubin has turned down countless interview requests over the past four years, including several for this piece.
Which is not to say he dismissed the idea lightly. After an April event at the Council on Foreign Relations, Rubin appeared in the building’s Park Avenue lobby. His white Brooks Brothers shirt was fraying, and his gray suit looked rumpled enough that he might well have slept in it the night before. He was carrying an old-fashioned Redweld legal folder, filled with papers, when he pulled me aside. “I have been working hard to try to balance my work-life issues," he said, explaining why he’d deliberated for months about whether to talk on the record. “I have been really busy, and I am not sure I have the right balance." A few weeks later a representative conveyed that it was a close call, but Rubin would be heeding advisers who urged him not to speak. Instead, he dispatched his friends to speak for him.
During his 26 years at Goldman Sachs (GS), Rubin rose from trader to the corner office, and along with his partner, Stephen Friedman, helped transform Goldman from an investment bank into shorthand for financial dominance. Goldman has made thousands of people, including Rubin, very rich. But the firm’s reputation for avarice has also created a cloud that follows its all-star alumni into civic life. The case against Rubin’s performance as a public servant is mainly about that cloud. As Treasury Secretary, was he motivated by a desire to serve the people, or an opportunity to serve himself and his friends?
“Most people see him as your sort of archetypical buttoned-down Wall Street guy," says President Clinton, acknowledging the perception that Rubin favored the financial sector. Clinton, for one, doesn’t buy it, and cites numerous examples of Rubin advocating for policies that ran counter to his own economic interest. “When we had to give up the broad-based middle-class tax cut to reach our deficit reduction targets, he was one of the strongest supporters I had in not giving up the proposal to double the Earned Income Tax Credit. He said, ‘We can’t do that. It’ll move millions of poor people who are working out of poverty.’ You wouldn’t expect somebody who had spent a career on Wall Street, making and helping other people make millions and millions of dollars, to be in there arguing. But he was just as strong as [Secretary of Labor Robert] Reich was. He said, ‘We’ve got to keep that.’ And we took a lot of heat for it."
Rubin’s selflessness, whether in economic policy or the day-to-day management of the Treasury, is a frequent theme of his admirers. Sheryl Sandberg, the chief operating officer of Facebook (FB), worked at Treasury after she graduated from Harvard Business School in 1995. In her first meeting with Rubin and a dozen senior staffers, she hid in the back of the room, hoping to turn invisible. “I’m young and brand new at Treasury, and I did not know much," says Sandberg, now 43. Rubin called on her anyway. “He said, ‘You’re new. You may see things we’re missing.’ And it was a really powerful lesson, because he was showing everyone that you take opinions and you get feedback from everyone. He wasn’t going to be curtailed by hierarchy or titles."
She says Rubin was spectacularly self-aware, and taught her that people will “overreact to things you do when you are senior," especially in places like Goldman Sachs and the U.S. Department of Treasury. “He’d start, ‘I’m going to say this really carefully. Here’s what I mean. Here’s what I don’t mean,’ " recalls Sandberg. “More importantly, he encouraged everyone to ask questions. He said, ‘If you have questions, come to me.’ "
Peter Orszag, another Rubin protégé who later became President Obama’s director of the Office of Management and Budget (and is now a managing director at Citigroup and a contributor to Bloomberg View), had a similar experience as a junior White House staffer. In a meeting with Rubin, the Secretary bungled a calculation, transposing a billion dollars for a trillion. Orszag scribbled a correction on a note in an attempt to help Rubin save face. A week later, Orszag’s phone rang. “[Rubin] was abroad, like in Italy or somewhere," Orszag says. “He called to tell me he was going through his briefcase and he came upon my note, and I was right. He just wanted to tell me that I was right. Most Treasury Secretaries would not do that."
It’s not his personality that riles critics of Rubin’s four-and-a-half-year tenure at Treasury. It’s his failure to tame the 1999 repeal of Glass-Steagall and the wild expansion of over-the-counter derivatives, which were traded between banks, out of the public eye. “The changes that Robert Rubin drove through in the 1990s certainly helped plant the seed for [the] collapse," says Angelides.
Rubin’s legion of defenders stir at any mention of Glass-Steagall, the 1933 law that separated the activities of commercial and investment banks. “There is an assumption that Bob was pushing hard for the repeal," says Michael Schlein, a former chief of staff at the Securities and Exchange Commission and a former Citigroup executive. “I was there. That’s not the way it happened."
In testimony before the Financial Crisis Inquiry Commission in March 2010, Rubin conceded that he “was an advocate of rescinding Glass-Steagall." But: “By the time we rescinded it, there were no restrictions left in it at all except for the insurance underwriting, which had no relevance to anything that has happened since then." What Rubin meant was that commercial banks had long been able to underwrite debt and equity and advise on mergers and acquisitions, and they had been buying investment banks through much of the 1990s. Rubin told the FCIC that ditching Glass-Steagall removed the “cumbersomeness" experienced by banks already in those businesses. In other words, he argued, he pushed for the removal of a law that was a phantom.
“Of course, it would have been better if we’d had the foresight and political strength to put in place the protections that were put in place in 2010 after the financial crisis occurred," says Larry Summers, Rubin’s friend and successor as Treasury Secretary. “But this does not relate to the repeal of Glass-Steagall. There were virtually no restrictions on the investment banking activities of the major banks after the Federal Reserve’s undertakings during the decade before Glass-Steagall was repealed." Speaking at a CNBC forum on July 18, Rubin said simply, “It is a myth that the repeal of Glass-Steagall contributed to the financial crisis."
This is no longer the consensus. Aside from Paul Volcker, several of Rubin’s ex-Citigroup colleagues have recently revised their opinions. In an October 2009 letter to the New York Times, John Reed, the co-chief executive officer of Citigroup from 1998 to 2000, wrote: “As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense." Richard Parsons, the former Citigroup board chairman, told a Washington audience this past spring that “to some extent, what we saw in the 2007-2008 crash was the result of the throwing off of Glass-Steagall." Most famously, Sandy Weill told CNBC in July 2012 that the law’s reinstatement in some form is necessary to restore confidence in the financial system. “Have banks be deposit takers, have banks make commercial and real estate loans," Weill said. “And have banks do something that will not risk taxpayer dollars."
Summers dismisses this as revisionism, warped by hindsight and political convenience. Instead, he offers a syllogism: If permitting the combination of commercial and investment banks caused the financial crisis, why was fixing it so dependent on commercial banks buying investment banks? True enough, many companies that took advantage of Glass-Steagall’s repeal (Citigroup, JPMorgan Chase (JPM), Bank of America (BAC)) still exist. Souvenirs from the standalone investment banks (Bear Stearns, Lehman Brothers, Merrill Lynch) are available on EBay (EBAY).
In part because of its complexity, less attention has been paid to Rubin’s role in the unleashing of the over-the-counter derivatives market. In March 1998, Brooksley Born, chairman of the CFTC, wanted to release a “concept paper" that would raise a series of questions about the possible regulation of derivatives. “I was very concerned about the dark nature of these markets," Born told the Washington Post in 2009. “I didn’t think we knew enough about them."
With Greenspan and Summers on the cover of ‘Time’ in February 1999
Born’s plan was to have the CFTC oversee these new, often inexplicable financial products. Rubin, Summers, Federal Reserve Chairman Alan Greenspan, and Securities and Exchange Commission Chairman Arthur Levitt countered that Born was out of her depth. (Levitt is a board member of Bloomberg LP, which owns Bloomberg Businessweek.) They argued that the CFTC, created in the 1970s to regulate futures contracts bought by farmers, didn’t have the authority or expertise to regulate complex derivatives in a fast-expanding market. Born was no match for their firepower. They persuaded Congress to ignore her.