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March 22, 2008

The Archetypical Robert Rubin

Dear Blowhards,

A week ago or so Dean Baker was a bit peeved at Robert Rubin. According to Mr. Baker’s post of March 14, “Robert Rubin Still Doesn't Know that People Warned About the Bubble”:

Former Treasury Secretary Robert Rubin was at a session at the Brookings Institution this morning at which [he] said that "few, if any" people anticipated the sort of meltdown that we are seeing in the credit markets at present.

This should be newsworthy. Mr. Rubin is not only a former Treasury Secretary, he is in the top management at Citigroup and he is one of the top Democratic policy advisers. The failure to recognize the housing bubble and the danger it posed was an act of extraordinary negligence that would get people fired in most lines of work. The fact that he still doesn't recognize the enormity of this oversight even after the fact (economists did recognize the housing bubble and the dangers its collapse would pose to the financial system) is remarkable.

In case you didn’t guess, Mr. Baker was one of the economists who not only recognized a housing bubble when he saw it, but also warned of the dangers its collapse would pose for the financial system. If you like, you can check out Mr. Baker’s prescience in two articles, “After the Housing Bubble Bursts” and “The Menace of an Unchecked Housing Bubble”, both from 2006.

Mr. Baker’s remarks got me to thinking about Mr. Rubin’s very interesting career in finance, government and politics. It’s so interesting, in fact, I thought I would make him a case study of my “theory of everything.” As some of you may recall from my post of that name,I’ve suggested that the most important trend in American life of the past century -- political, economic and cultural -- is the profound alliance between the government and members of the New Middle Class, the New Class for short. These people are the technocratic-administrative elite of our society: financiers, professionals (lawyers, doctors, accountants, etc.) senior government and corporate manager-bureaucrats, university professors, etc. They occupy well-paid or highly prestigious positions but do not owe their status or wealth to personal risk taking, making them rather anomalous in what is often termed a capitalist economy.

As I said in my post, these people are able to float above the standard risk-reward curve that governs the rest of American society due to their ability to bend the power of government to their will:

The New Class control of government occurs through three channels: first through campaign contributions to, and lobbying of, elected governmental officials (who are often New Class members themselves), a process that was invented in its modern form by the New Class; second through capturing regulatory and administrative policy and turning it to their own benefit, another New Class specialty; and third through the revolving door between government and private-sector New Class occupations. The nexus of the risk-averse New Class with the coercive power of the state has proven so durable the New Class is becoming a privileged -- and increasingly hereditary -- group analogous to that of the aristocracy of Ancien Regime France.

Well, let’s see how this ‘three channels of control’ theory applies in the case of Mr. Rubin.

Channel of control #1: Campaign contributions to, and lobbying of, elected governmental officials

According to a 1997 story by Adam Zagorin of Time:

Rubin came to high finance by way of the Yale law school, and practiced briefly before heading to Goldman Sachs & Co., where he ran the arbitrage department and, later, the entire firm. A Democratic fund raiser in Wall Street's Republican bastion, Rubin served as the first head of Clinton's National Economic Council before taking the top Treasury job.

Channel of control #2: Capturing regulatory and administrative policy and turning it to their own benefit

According to this profile by Robert Kuttner, Mr. Rubin played a leading -- and somewhat peculiar -- role in the Clinton Administration’s trade policies:

As Clinton's adviser in trade negotiations, Rubin's top priority was less a level playing field for American exports than rapid access for U.S. financial capital. In negotiations for China's membership in the World Trade Organization, then-Chinese Prime Minister Zhu Rongji came to Washington in April 1999 to consummate the deal. According to Joseph Stiglitz, former head of Clinton's Council of Economic Advisers, Zhu, a reformer, went home empty handed because he failed to satisfy Treasury's conditions on rapid financial market liberalization and on access for foreign banks, which Rubin pushed over the objections of the State Department and the U.S. trade representative.

Hey, what do 2 million manufacturing jobs lost to systemic Chinese currency manipulation matter to a staunch 'free trader' and advocate of a strong dollar like Mr. Rubin? I mean, it's not as if those jobs were, you know, on Wall Street or anything! They were a small price to pay for the chance that U.S. financial firms could make trillions running Chinese capital markets. And it almost worked, too, before those darn Chinese turned out to be a bunch of big fat ingrates: "Thanks for all the manufacturing jobs, Mssrs. Rubin and Paulson, but we'll keep our financial industry profits for ourselves."

Mr. Rubin also was the leading figure in financial sector deregulation:

Rubin's crowning achievement was the repeal of the 1933 Glass-Steagall Act, which had separated largely unregulated and more speculative investment banks like Goldman Sachs from government-supervised and -insured commercial banks like Citi, which play a key role in the nation's monetary policy. Glass-Steagall was designed to prevent the kinds of speculative conflicts of interests that pervaded Wall Street in the 1920s and helped bring about the Great Depression (and reappeared in the 1990s)...Financier Sanford Weill gradually assembled the empire of insurance, commercial-banking, and investment-banking pieces that ultimately became Citigroup, helped by indulgent regulatory policies promoted by Federal Reserve Chairman Alan Greenspan and Rubin. When Congress formally repealed Glass-Steagall, in November 1999, the act was termed in some circles the "Citigroup Authorization Act." Rubin had stepped down as treasury secretary that July. His new job, announced in late October, was chairman of Citi's executive committee. Rubin's initial annual compensation was around $40 million.

And even after his return to the private sector the public spirited Mr. Rubin lent his good offices to the campaign to fight efforts to regulate hedge funds :

As a top Citigroup executive, Rubin uses his unequaled Democratic contacts to resist reregulation. In a recent interview, I asked Rubin whether he saw any need for tighter regulation of hedge funds, the massive, nominally private investment funds that enjoy a wholesale exemption from the system of financial disclosure that has kept financial markets tolerably transparent since the New Deal. "I don't know why you would single out hedge funds," Rubin replied, in a sincere tone that suggested genuine puzzlement at the question. Why, indeed? Citigroup has hedge-fund and private-equity subsidiaries, lends to hedge funds, places trades for hedge funds through its brokerage affiliates, and works with hedge funds through its investment-banking arms.

Channel of control #3: The revolving door between government and private-sector New Class occupations

Again, from Mr. Kuttner’s profile:

...Goldman Sachs, which Rubin left to join Clinton, was a prime underwriter of Mexican bonds both before and immediately after the passage of NAFTA…. Goldman was also the investment bank that underwrote the privatization of the Mexican national phone company, Telmex, in the late ‘80s. After NAFTA created a gold rush of foreign money into Mexico, enriching Goldman Sachs and its clients and triggering an unsustainable speculative boom followed by a crash, Rubin promoted the bailout of Mexico that made foreign bondholders whole. A little-noticed provision of NAFTA permitted foreign banks to acquire Mexican ones. In 2001, Rubin, back in the private sector, negotiated Citigroup's $12.5 billion acquisition of Mexico's leading bank, Banamex.

Well, that’s three for three. Meanwhile, I trust you haven’t forgotten the last part of my original paragraph:

The nexus of the risk-averse New Class with the coercive power of the state has proven so durable the New Class is becoming a privileged -- and increasingly hereditary -- group analogous to that of the aristocracy of Ancien Regime France.

Robert Rubin is himself the son of an attorney and the grandson of a prominent Brooklyn Democratic lawyer-politician. In turn, Mr. Rubin’s son Jamie is a managing director at a private equity firm, One Equity Partners, after having served as a vice president at Allen & Company, LLC, the entertainment-focused investment bank. The younger Rubin -- who, like his father, is a graduate of both Harvard and Yale Law School -- is also following in his father’s footsteps as a financier-fundraiser, as Mr. Kuttner notes:

In presidential politics, [Robert] Rubin is personally close to Hillary Clinton, but this trader covers his bets. His son, Jamie Rubin, is a major Wall Street fund-raiser for Barack Obama.

In fact, there is strong speculation that Mr. Rubin may return to Washington as Secretary of the Treasury if either Ms. Clinton or Mr. Obama wins the presidency. Rubin’s ties to the Clintons are profound; according to this story in the L.A. Times, they are part of a generally tight relationship between Mrs. Clinton and the FIRE (“Finance, Insurance and Real Estate”) economy of Wall Street:

Clinton is a top beneficiary of large Wall Street firms in part because she represents New York. And Clinton's ties to the financial services industry extend beyond donations: A senior economic advisor to her campaign is Robert Rubin, Treasury secretary during her husband's administration and now a top official at Citigroup. The consulting firm of Mark Penn, her chief campaign strategist, worked for Calabasas-based Countrywide.

However, Mr. Rubin’s connections with the Obama campaign aren’t trivial either. As Mr. Kuttner remarks:

[Mr. Rubin’s] former deputy chief of staff, Karen Kornbluh, is Obama's chief domestic policy adviser, and Rubin is also close to Obama's chief of staff, Steve Hildebrand, who used to hold the same position for former Senate Democratic Leader Tom Daschle, another Rubin ally.

Mr. Rubins’ current policy recommendation? Summarized in this story, “Rubin Calls for Urgent Government Action to Stem Foreclosures,” his ideas seem, well, strangely predictable:

March 21 (Bloomberg) -- Former Treasury Secretary Robert Rubin called for quick government action to tackle the rising level of home foreclosures and he indicated taxpayer money will have to be used.

"There is a strong need for urgent action," Rubin, who is chairman of Citigroup Inc.'s executive committee, said. "I would be very, very seriously considering the possibility of using public funds in one form or another."

Not that Mr. Rubin seems all that troubled about people losing their homes, per se:

Rubin, 69, said the rising level of foreclosures is at the heart of the credit crunch. The world's biggest banks and securities firms have reported $195 billion in asset writedowns and credit losses since 2007 stemming from the collapse of the U.S. subprime mortgage market.

"The credit markets themselves are really in uncharted waters," Rubin said. "A lot of trouble could lie ahead."

In short, what's good for the New Class is good for America! Remember the New Class mantra: "Privatize the profits, socialize the losses!"



P.S. If you recall, one of the other themes of my "theory of everything" was that current ideological labels are generally (and purposefully) quite misleading in contemporary America. The L.A. Times story above makes this point fairly clearly:

Hillary Rodham Clinton and Barack Obama, who are running for president as economic populists, are benefiting handsomely from Wall Street donations, easily surpassing Republican John McCain in campaign contributions from the troubled financial services sector.

...Some Democrats worry that the influx of money will make their candidates less willing to call for increased regulation of financial markets, which have been in turmoil after a wave of foreclosures on sub-prime mortgages.

Gee, you think?!

posted by Friedrich at March 22, 2008


While I don't disagree with the line of reasoning here, I do wonder whether the focus on the Democrats is reasonable. The Republicans have not exactly been known as champions of regulating the financial industry (or any industry for that matter). And whatever Rubin might have had to say about the real estate bubble, he and the Democrats weren't in the Administration when Dean Baker made his predictions back in 2006.

I think of the two major parties as the Good Cop & Bad Cop parties. Both serve the same (New Class) interests, but one does it with a night stick and a sneer. It generally seems that the worst times for anyone NOT in the New Class occur well into Republican administrations. I recognize that Good Cop or Bad Cop, it is still the New Class who benefit most, but until there is a different political dynamic I will continue to fear the Bad Cops more.

Posted by: Chris White on March 22, 2008 9:34 AM

You over-generalize a bit about lawyers, doctors, accountants, etc. I'm a lawyer(albeit a small town lawyer, not a biglaw lawyer), and I'm not part of the elite, and my job is not prestigious. I'm subject to the risk-reward curve, as I've taken out 6 figures in school loans and business loans, and I in no way can bend even local government to my will. The doctors, lawyers and accountants I know are in the same position, and I've seen many of them lose their businesses in the past few years due to over-regulation and the inherent riskiness of business.

Posted by: Jason on March 22, 2008 12:26 PM

Well, I admit to not reading much beyond the start of this post, but in the case of Rubin aren't we talking about that ancient bugaboo, hubris? For Rubin & Co. the law of gravity has been revoked. Until it hits...but even then it hits others, not them.

Posted by: ricpic on March 22, 2008 4:44 PM

Damn, why didn't it occur to me to invest in Robert Rubin Inc years ago. That particular stock only seems to go up!

Posted by: MIchael Blowhard on March 22, 2008 11:52 PM

1) There have always been linkages among the "power elite". Conspiracy cranks have been pointing for decades to the Council on Foreign Relations, the Masons, the Eastern elite, etc, for generations.

2) There has always been movement between top government posts and top business. Andrew Mellon, for instance, or Philander Knox.

3) The "power elite" has always had a "hereditary" component. The scions of successful families inherit access to the "corridors of power" (though unlike the French nobility, they don't inherit position). They also, I suspect, inherit talent fairly often. Note that there are many second- and third-generation successes in Hollywood, where nothing is guaranteed. However, the current American elite is far from a closed circle. The CEO of CitiBank is Vikram S. Pandit.

What is happening, IMHO, is a decline in public input, due to the transfer of power to unelected bureaucracies and courts, and the increasing non-competitiveness of elections, due to improved gerrymandering.

There is another Big Trend, though, and that is the enormous successes which successful entrepreneurs collect these days. $50 billion for Gates, $100 billion for the Waltons, $30 billion for the founder of IKEA. Centimillionaires are not even remarkable. The stock market has been an extremely effective mechanism for generating these jackpots.

Ironically, it is mainly New Entrepreneur wealth that is financing the political rise of the bureaucratic New Class. George Soros is an obvious example. Another lesser-known case is Tim Gill, who hit the jackpot with Quark Express, and spent $15M in 2006 alone to defeat Republicans opposed to same-sex marriage.

Posted by: Rich Rostrom on March 23, 2008 4:57 AM

I agree with Rich. The entrepreneurs are doing pretty well. Just remember that a lot of them were connected to begin with.

I don't disagree that there's a hereditary power elite. I don't disagree that it goes back years and years... medieval Europe was the same way. And I do think it's worth continually pointing we're a little more wary of these guys.

I do disagree with Friedrich that a government welfare bureaucrat is part of the elite and an entrepreneur isn't. As Jason says, many members of 'the professions' are subject to the same risk-reward curve as the rest of us. And, yes, as with Chris, I think the Democrats are better for the common man. The answer is to elect the Dems and steadily try to push them left on economic issues, not blow your votes on Nader.

Posted by: SFG on March 23, 2008 12:36 PM

So you guys don't see anything funny about a Democrat sacrificing 2 million manufacturing jobs for the possible enrichment of investment bankers, private equity fund managers, and commercial lenders? You don't see anything wrong in a politically connected financier orchestrating bailout after bailout of Wall Street interests (see Mexico, Korea, Russia-LCTM), thus setting up the now universally acknowledged "under-assessment of risk" in the FIRE economy and the consequent housing long as its done by a Democrat?

You might take a look at how the New Middle Class rose to a position of immense importance and power courtesy of the U.S. government claiming to represent the interests of the downtrodden and little guy, and then look carefully of how this power and influence are really being utilized today.

I am not saying that this makes Republicans any different or, heaven forbid, any better. Its just the dynamic is a tad more visible (and risible) on the left side of the aisle.

But if you like, cling to your current ideological blinders and make it easier for the Rubins and the Paulsons of tomorrow to manipulate you.

Posted by: Friedrich von Blowhard on March 23, 2008 2:32 PM

In May of 03 I refinanced my mortgage to get a substantially lower fixed rate: 5.125% from BoA.
They asked me what my salary was and I was surprised when I was not asked for proof of employment, wages, etc. They did try to push an equity loan; I said thanks but no thanks, I just wanted to get the cracker box paid off asap.
It is my opinion that this whole sorry mess began in 2003 and has snowballed to the present debacle.

A good site for the housing bubble is:

Posted by: Bill R on March 23, 2008 8:17 PM

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