The Subprime Three -- Rubin, Summers & Greenspan
April 28, 2008
Kudos to Nelson Schwartz and Eric Dash of The New York Times for the Sunday business section cover-story on Robert Rubin. Their article puts into place another piece of the subprime puzzle. In addition to reporting on Rubin's seemingly conflicted behavior as a director of Citigroup (NYSE:C), the overview of Rubin's policy role in blocking federal oversight of the Over-the-Counter derivatives markets is a great contribution.
Schwartz & Dash describe how former Fed Chairman Alan Greenspan, former Treasury Secretary Larry Summers and Rubin coordinated to undermine efforts by CFTC Chairperson Brooksley Born to impose greater federal oversight of OTC derivatives markets. They report: "On at least one occasion, Mr. Rubin lined up with Mr. Summers as well as Mr. Greenspan to block a 1998 proposal by the Commodity Futures Trading Commission under Ms Born that would have effectively moved many derivatives out of the shadows and made them subject to regulation."
Click here to read the entire April 27, 2008 Times profile: "Where Was the Wise Man?"
Note that Born's comments of a decade ago regarding the
LTCM collapse highlights those very same issues which led to the collapse of
Bear, Stearns (NYSE:BSC) earlier this year, namely the
systemically unstable nature of an OTC market structure. Note too that over the intervening
decade nothing happened in Washington to effectively address these
Regardless of what his employment agreement with C may say, the fact is that Rubin is a director and chair's the firm's executive committee. Rubin's confession to the Times that he was not aware of the details of C's deteriorating financial situation seems incredible and entirely at odds with his duties as a director. The revelation that the management committee rarely met before last year is another eye-opener, an admission that will doubtless delight members of the trial bar -- but may concern federal bank regulators.
Keep in mind too that Rubin does have some type of management role at C beyond his statutory role as a director, thus the references to negotiations regarding a new job description. The Times report that Rubin represented the bank earlier this year in negotiations with foreign investors seemingly shatters his protestations of not having a material operating role in the management of C. To us, shadow CEO seems more accurate to describe Rubin's role - at least to date.
In view of the normative standards of care required of directors under Delaware law, not to mention the duties of directors spelled out in the Sarbanes-Oxley legislation and the particular duties of a director of a bank, how can Rubin continue to sit as a C director given his statements to the Times? He finds time to call Ben Bernanke to congratulate the Fed Chairman on monetary policy, but Rubin does not seem to have time to review C's financial disclosure with the SEC and consider prospective risks, as required by state and federal law? Keep in mind too that the duties of care applicable to the director of a bank are more stringent than under the Sarbanes-Oxley rules.
The apparent lack of care shown by Rubin with respect to C, and
the blatant pandering to Wall Street's interest by the Subprime Three, begs the
question about how we govern the actions of
our public officials. Why did Rubin, Summers and Greenspan work
so diligently to block regulation of OTC instruments a decade ago? They
may claim that the ill-effects of their policy decision so visible today were
not apparent, but their actions and public statements say otherwise.
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