Rubin, under fire, defends his role at Citi

By Ken Brown and David Enrich
The Wall Street Journal
Saturday, November 29, 2008

http://online.wsj.com/article/SB122791795940965645.html

Under fire for his role in the near-collapse of Citigroup Inc., Robert Rubin said its problems were due to the buckling financial system, not its own mistakes, and that his role was peripheral to the bank's main operations even though he was one of its highest-paid officials.

"Nobody was prepared for this," Mr. Rubin said in an
interview. He cited former Federal Reserve Chairman Alan Greenspan as another example of someone whose reputation has been unfairly damaged by the crisis.

Mr. Rubin, senior counselor and a director at Citigroup, acknowledged that he was involved in a board decision to ramp up risk-taking in 2004 and 2005, even though he was warning publicly that investors were taking too much risk. He said if executives had executed the plan properly, the bank's losses would have been less.

Its troubles have put the former Treasury secretary in the awkward position of having to justify $115 million in pay since 1999, excluding stock options, while explaining Citigroup's $20 billion in losses over the past year and a government bailout of at least $45 billion.

Mr. Rubin's salary made him one of Wall Street's highest-paid officials -- and a controversial figure among Citigroup shareholders and some executives, who questioned whether his limited duties justified the big paydays.

"Even though he has no 'operating' responsibilities, he still has a fiduciary responsibility as a board member," said William Smith, a New York money manager and frequent critic of Citigroup's current management and board. "He has overseen the entire meltdown, yet been compensated as an operating employee while bragging about having no operating responsibility." Mr. Rubin can't "have it both ways," Mr. Smith added.

Mr. Rubin said his pay was justified and that there were higher-paying opportunities available to him. "I bet there's not a single year where I couldn't have gone somewhere else and made more," he said. He turned down his bonus last year, telling the board the money could be better spent elsewhere.

Asked if he had any regrets, Mr. Rubin said: "I guess that I don't think of it quite that way," adding that "if you look back from now, there's an enormous amount that needs to be learned."

Mr. Rubin's effort to salvage his reputation comes just after Chief Executive Vikram Pandit appeared on PBS's Charlie Rose show. Mr. Pandit, too, blamed the overall financial crisis, not Citigroup, for the problems that led the government to decide to inject money into the bank for a second time this fall.

"This was something that was bigger than Citi," Mr. Pandit said. "It was about confidence in the financial system. It was about stability of the financial system."

From the time Mr. Rubin joined Citigroup in October 1999, shortly after leaving the Treasury, the former Goldman Sachs Group Inc. co-chairman said he didn't want to run any of Citigroup's businesses. At the time, he told colleagues he wanted more time for activities such as fly fishing. In the recent interview, he said his task was to meet with clients and have an advisory role as an "experienced senior person who has no ax to grind."
Since 1999, the bank has lurched from crisis to crisis, first with regulatory authorities, then with investors who grumbled that the bank lacked a strong strategy and was bloated.

Since the housing market turned down, Citigroup has grappled with its worst crisis ever. Besides an initial $25 billion injection as part of a broad rescue of financial firms, the government recently agreed to put in $20 billion more and vowed to protect Citigroup against most losses on $306 billion of its assets.

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's 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.

Mr. Rubin, who was instrumental in getting Mr. Pandit appointed as chief executive last December, said the CEO is doing a good job and the bank will thrive in its current structure once the crisis recedes.

"Vikram runs this company based on a worst reasonable case for this economy," he said, adding that Citigroup's global reach will help it. "Essentially, the pieces of Citi will look how they do today," he said, consistent with what he said a year ago after Charles O. Prince resigned as CEO. "The direction that Chuck set is exactly where the institution needs to go," Mr. Rubin said at the time.

But he said in the interview that businesses such as securitization, which packages bonds and other debt into securities, and leveraged lending, which is used to fund buyouts, won't rebound to their old levels for the foreseeable future. He said the business of trading for the bank's own account -- once highly profitable -- would change.

This is a "major issue facing this company and every company in this industry," he said.

The 70-year-old Mr. Rubin, whose Manhattan office suite near Mr. Pandit's is cluttered with political and financial memorabilia, said he has committed to staying on. "I have told Vikram that I will remain part of this and try to be helpful."

With Citigroup shares at $8.29, the stock is down 86% from its all-time high about two years ago and 70% since Mr. Rubin came aboard. The recent stock collapse "was a systemic problem of which Citi was a piece," said Mr. Rubin, who added that one cause was short sellers ganging up on the stock, selling borrowed shares in the hope of driving the share price down.

Asked about what he feels he's accomplished, he responded: "It's a funny way to think about it. I think I've been a very constructive part of the Citigroup environment. That has become particularly manifest since August '07. I have been very involved."

* * *

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at http://www.gata.org/.