Bailout

Time for contrition from Rubin and Goldman

By Felix Salmon

Robert Rubin ought to be feeling a bit uncomfortable this morning, in the wake of public comments from two men he is very closely associated with. First, there’s Bill Clinton:

Clinton acknowledged that he was wrong to take what he now views as bad advice from his Treasury secretaries, Robert Rubin and Larry Summers, who told him the market for complex financial instruments known as derivatives ought to remain unregulated.

“On derivatives, yeah, I think they were wrong and I think I was wrong to take [their advice],” Clinton said.

Then there’s Vikram Pandit:

“All of us at Citi recognize that we would not be where we are without the assistance of American taxpayers. We are gratified that Citi has been able to repay their TARP investment in our company, with a substantial return, as well as create a significant increase in the value of their equity in Citi.

“Still, that is not enough. We owe taxpayers a huge debt of gratitude for assisting us at a critical time.”

The connection here is a direct one: the single biggest reason that Citi needed its US government bailout was its misadventures in the derivatives markets which Rubin played such a central role in deregulating, and which he then sought to exploit when he was at Citi.

Rubin was a huge cheerleader for Tommy Maheras, the fixed-income king at Citigroup; the two of them, together, encouraged Citi’s mortgage desk to take on ever-greater risks and to stuff Citi’s balance sheet full of the nuclear waste that soon became notorious as “liquidity puts” and “super-senior CDOs”. What both of those things have in common, of course, is that they were derivatives against which Citi didn’t need to put up any capital.

So given the clear and forthright apologies emanating from Clinton and Pandit, why is it that Rubin is still so supercilious and unapologetic? I suspect it might be an attitude which he picked up at Goldman Sachs and which was also responsible for their tone-deaf response to the SEC’s case against them.

At this point, both Goldman and Rubin have seen their reputations trashed — but Goldman has a lot more to lose. I know that Rubin is still highly respected in Goldmanite circles, but it’s long past time that these people stopped trying to defend the indefensible and started getting a lot more contrite.

Full post as published by Macroprudential on April 19, 2010 (boomark / email).