Who's In Charge Here?

by hilzoy

From the WSJ:

"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'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.""

Of course what's happening to the economy is bigger than Citigroup. And perhaps, if housing prices had continued to go up indefinitely, and we hadn't encountered any other shock, things would be fine. But that's irrelevant. If Mssrs. Rubin and Pandit want to know whether or not they are responsible for Citigroup's troubles, they need to ask: are there choices they could have and should have made differently that would have left Citigroup better off than it is now?

Suppose the answer is 'no'. In that case, there are several possibilities. First, Mssrs. Rubin and Pandit are not capable of making any choices at all, perhaps because they are completely controlled by our robot overlords. Second, they can make choices, but none of the choices they might have made would have left Citi better prepared for the present crisis. If so, that would say something pretty alarming about Citi's corporate governance structure. Third, there are choices they could have made that would have left Citi better prepared, but Mssrs. Rubin and Pandit had no reason to make those choices, since no one could have predicted the problems we now face.

Guess what? None of these things is true. And yet, oddly, Mssrs. Rubin and Pandit seem to think they are not responsible for what's happening to the organization they are allegedly running.

That in itself would explain a lot.

Comments

[Mike Schilling]

An oddity about top management: when things are going well, they deserve their huge salaries and giant bonuses for their company's success. When things go badly, they turn out to have had no influence of any kind.

[RepubAnon]

It's really very simple: if your salary exceeds 7 figures annually, it's not your fault when things go wrong. (Of course, if things go well, it was due to your brilliant leadership).

[insomniac]

In all fairness, Mr. Pandit wasn't at the helm at Citi during their CDO spree, so you can't really blame him for inheriting this mess. His predecessor, Charles Prince, is probably a more deserving target for your snark.

[kindlingman]

Some people believe that one can only be responsible for an action one takes. If one takes no action, by choice or ignorance, one is accountable but not responsible.

[Neil the Ethical Werewolf]

As insomniac was saying, Pandit became CEO on December 11, 2007. He only joined Citi in 2007 after they bought his hedge fund.

[Ugh]

One wonders why Wells Fargo and BofA seem to be doing ok. Luck?

[jdog]

Hilzoy slays!

[John Thullen]

I rarely disagree with Ugh, but BofA is probably not doing O.K. They bought Countrywide and Merrill Lynch, which was like driving through a sh--storm to the s--- store to buy s---.

Maybe it'll be a good decision in the long-term, next year, when I'm dead.

As for Wells, yes, they seem O.K.

But commercial real estate is just beginning to topple over. We ain't seen nothing yet in that category of over-leveraged crapola.

I'm all for assigning blame and Rubin should step down, just to be polite and humor a few people for gawd sakes.

But when we're done with this mess, no one is going to be able to tell, or care, anymore who did what.

When you are hungry, you eat the person next to you. You don't fly across the country and eat Bob Rubin.

Though I may eat Larry Kudlow at some point. He is at the epicenter of the attitude that being American permits anything and everything in the world of money.

Ex-drinkers and pill poppers usually just go out and find new ways of vomiting on people and wearing their pants backwards.

In the meantime, I hope I'm wrong and I'm chewing my fingernails to the nub.

I view this as merely an hor d'oeurve.

[ThatLeftTurnInABQ]

Let me be the first to say that John Thullen nails it, in terms of getting to the nub of the matter. Something to chew over. Thought for food, that is.

[ThatLeftTurnInABQ]

Also, if Bob Rubin were to be toss'd into the cooking pot whole, I think he would come out most indigestable. Might spoil the soup, actually.

Sliced into very thin tranches and served with a dollop of Chinese mustard on the other hand, and he might make quite the hor d'oeurve, in a "Eating Raoul goes to Wall St." sort of way.

[russell]

"Nobody was prepared for this," Mr. Rubin said in an interview.

I think I heard this song before:

I didn't know the gun was loaded
And I'm so sorry, my friend
I didn't know the gun was loaded
And I'll never, ever do it again

Thanks -

[mikesdak]

I think the claims of impotence aren't entirely inaccurate. In some ways the heads of these financial firms are like generals. They can select strategy and lay out plans, but they have little knowledge of or control over what is done in the field to accomplish the goals, and like generals they spend more time dealing with people above them (shareholders, directors) than with people below. They just want results.

They also share the willingness to take more credit than is warranted when things go well, but that's as much human nature as anything. No one wants to believe that they don't matter that much. But it's probably closer to true in this case.

[russell]

I think the claims of impotence aren't entirely inaccurate.

I appreciate that you're going for a balanced point of view here, but I just don't think it will wash.

Here's what Rubin said:

Nobody was prepared for this

I have a friend named Ned. He's a drummer. His wife works for Microsoft, he does the Mr. Mom thing with his two young boys during the day, and he gigs nights and weekends.

He's a smart, smart guy, he pays attention to stuff. But he's not, by profession, in the finance industry.

About two years ago Ned and I were talking and he says, "When the variable rate mortgages reset, the shit is really going to hit the fan".

Not rocket science.

It might actually be true that "nobody was prepared". But that is, exactly, the heart of the problem.

"Not prepared" is not the same as "could not have foreseen".

It was somebody's freaking job to *be* prepared, and they did not do it. In this case, I'd say "somebody" and "Rubin" are more or less indistinguishable.

Thanks -

[DrDick]

And these bozos are paid multimillion dollar salaries for what exactly? If you are going to take credit for successes (along with all that cash), then you have to take credit for the failures as well. In the real world (as opposed to the fantasy world occupied by corporate CEOs), that would come with extreme financial penalties as well.

[DKD]

Shitty elites. That is the problem. Hooray for Obama, but we are still stuck with the shitty elites who got us here in the first place, and they're not going to just fade away.

[mikesdak]

russell,you're quite correct that Rubin's excuses are hogwash. To beat the general comparison to death, good generals have a "field sense". They can smell potential trouble and take steps to avoid it. If he had been honest he would have said "I should have been more aware of what the company was doing and asked hard questions. I didn't do my job. Whether or not anyone else failed is irrelevent."

[mikesdak]

russell,you're quite correct that Rubin's excuses are hogwash. To beat the general comparison to death, good generals have a "field sense". They can smell potential trouble and take steps to avoid it. If he had been honest he would have said "I should have been more aware of what the company was doing and asked hard questions. I didn't do my job. Whether or not anyone else failed is irrelevent."

[mikesdak]

argh!...double post.....and it's spelled irrelevant.

[AIMAI]

Uh, isn't "what the company was doing" exactly what he was reporting on to higher ups/shareholders/ etc...? It simply isn't possible to argue that he was a genious when he was running things and making fake money hand over fist buying and selling gambling credits and then suddenly not involved when the gambling debts come do. Which is all this is. Its like saying Bill Bennet was virtuous while he was peddling his book and gambling degenerately but only when he was caught did he become unvirtuous. Being really good at your job in banking might actually entail grasping that you are working on and profiting from a massive bubble and getting out ahead of other people. This whole economy reminds me of the simpsons episode when Homer decides to make a killing on cornering the Pumpkin market and holds his pumpkins, watching the price rise, until the day after Halloween. Wow. Who could have known that the price would drop then? No one could have forseen it?

This is a joke of hideous proportions. The entire country and the shareholders of Citi etc...should demand back all salary and perks that they gave Rubin if his own account of his inabilities is accurate, and even if its not.

aimai

[AIMAI]

sorry for all the missed misspellings up above. I'm turkey sodden.

aimai

[Sabina's Hat]

Here is a possible defense. Rubin can say that he made the correct bets, but the long-odds disaster that would lead to drastic losses happened and so he lost his bets. If true, this is a legitimate defense. There is no way to completely remove risk from a portfolio--in fact, an attempt to do so would have been an error.

Many would respond by saying that Citi, under Rubin's leadership (and advice) made the wrong bets. If they had correctly identified the housing bubble and foreseen the problems with subprime mortgages, they would have made different bets and not incurred such great losses.

Rubin's response would be that he was going according to the conventional wisdom at the time. He was relying on the expertise of his risk analysts--which would seem at minimum epistemically justified. In fact, we should ordinarily say that it requires a higher degree of warrant to disagree with the claims of his experts.

However, Rubin's experts were not uniquely wrong--their analysis was much the same as throughout the financial system. So the question should be: Is Rubin at least partially responsible for a systemwide failure to correctly analyze risk? My guess is that the answer is probably yes. But this is a much more diffuse responsibility. This is more like saying that Rubin is responsible for not fixing the hiring or salary system at Citi to properly incentivize his risk analysts. It would have required a visionary CEO to do that. Rubin would come off as at best competent.

[Tony P.]

Taking this post and the previous one together, can anybody lay out a good case that this country would have been worse off if Sarah Palin had been running the government and Joe the Plumber running Citigroup for the last eight years? Could they possibly have screwed things up any worse?

--TP

[J. Michael Neal]

Without excusing any individuals, the problem is systemic. Chuck Prince was self-serving when he said that as long as the music is playing, you have to dance, but he was also right. One thing missing in this post is that it's not just that you could hire someone else who could do as good a job for less. All of the investment banks did hire someone who would do just what the competition does.

Something that reinforces the magnitude of the crisis is that all of these clowns made the same trades. There wasn't a whole lot of originality. Someone (usually Goldman) comes up with a new idea, and everyone else piles in.

One consequence of this is that, as a banking executive, you had to play. If you didn't, you would have been replaced. A purely commercial bank like Wells Fargo was in a different position from the big investment banks, such as Citi had. Really, the two choices facing Citi were to play this game, or stop doing business. Not surprisingly, they opted to keep doing business.

This is a long-winded way to agree that bonuses were out of control. It's just the problem was systemic.

[Michael Cain]

One thing missing in this post is that it's not just that you could hire someone else who could do as good a job for less. All of the investment banks did hire someone who would do just what the competition does.

When an industry is consolidated to a small number of players, groupthink becomes more likely. Senior management all listen to each other speak at the same conferences. Middle management move back and forth in search of promotion. The proper answer to "too big too fail" is to stop the mergers and acquisitions before anyone gets to that point.

[Tony P.]

Something that reinforces the magnitude of the crisis is that all of these clowns made the same trades.

J. Michael Neal:

Could you expand on, or link to, the meaning of "the same trades"? In layman's language, I mean. Who were the trades with? If the trades were essentially bets, how could the parties on both sides of the bet end up losing?

--TP

[ThatLeftTurnInABQ]

The proper answer to "too big too fail" is to stop the mergers and acquisitions before anyone gets to that point.

What he said.

Also, I'm glad somebody else is picking up the group-think torch. I think a big part of the problem was that people like Rubin didn't have enough contact with or respect for folks who thought differently than them. It was a deeply inbred environment, sort of like the hemophiliac royal families of late 19th Cen. Europe.

Another contributing factor was the removal of regulatory barriers (e.g. Glass-Steagall) which while they were still in place had the effect of compartmentalizing the industry so if one sector made bad decisions the damage would not spread so easily to all the other sectors as well. If you don't put any bulkheads in a submarine, then one leak is enough to take the whole boat down.

This crisis is a classic example of a tightly coupled system imploding due to systemic instability and a lack of robustness with regard to shocks. Any good systems analyst could have predicted this would happen (and many did, but people like Rubin weren't listening).

[J. Michael Neal]

Tony:

There are reasons, some having to do with accounting and regulatory issues, that make it more likely that the investment banks will take the sell side, with hedge funds as the counterparties. That isn't my main point, though. While there are two sides to each trade, what I'm focusing on is that the trades are all of the same stuff. Everyone decided to get involved with derivatives based on mortgages.

That was a large part of the balance sheets of all the major banks. They both were competing to make more mortgages, because that's what they thought of as their business model, and wrote contracts based on mortgages that meant that the trades they made exceeded the value of the actual loans originated.

All of that meant that, when the mortgage market collapsed, it caused greater losses, and turned into a much bigger drag, than it would have if there hadn't been such a "me, too" approach to investment banking.

[russell]

Rubin can say that he made the correct bets, but the long-odds disaster that would lead to drastic losses happened and so he lost his bets.

The problem here begins with the word "bet".

Thanks -

[ThatLeftTurnInABQ]

what I'm focusing on is that the trades are all of the same stuff. Everyone decided to get involved with derivatives based on mortgages.

Was this because of the very hight profitability of these trades per unit cost of the analysis required (or so they thought) to sell them? Sort of like how everybody in Detroit wanted to sell SUV's?

From the stories I've read it scans as if the IB's outsourced almost all of the analytical work on MBS to the rating agencies, and then let the monoline insurers take some of the risk on as frosting on the cake. That sounds like a very low cost model for making trades, at least until it blows up in your face, that is.

[Fraud Guy]

While I was looking for work last year (starting in October '07), some of the financial news was coming out, but there was little or nothing on Citibank's position on all this.

However, strangely enough, I ran across oodles of positions open in Citibank's risk management services for various divisions, ranging from analysts, senior analysts, managers, and directors. There was a concentration in mortgages, but I saw many in their card divisions and some in investments on their site. I didn't apply, as my metier is fraud not risk, but there were literally dozens of openings for several months. They were either adding much staff, cleaning house, or replacing many leave takers.

[Fledermaus]

jm neal -

I'm sorry but "all the other kids were doing it" was not a valid excuse when I was 7. It certanly doesn't cut it for a CEO making 7 or 8 figures. As I like to say excuses are like assholes, everyone's got one

[J. Michael Neal]

I'm sorry but "all the other kids were doing it" was not a valid excuse when I was 7.

That's probably why I said it doesn't excuse any individual.

[J. Michael Neal]

Was this because of the very hight profitability of these trades per unit cost of the analysis required (or so they thought) to sell them? Sort of like how everybody in Detroit wanted to sell SUV's?

Detroit has the excuse that selling SUVs really was the only way for them to make the kind of margins they needed. For the investment banks, it was laziness. Why bother coming up with a different idea for making money when you can just do what everyone else is doing?

[From Google Reader]

Wow you fixed the quoteformatting in the feed!