Robert Rubin On the Job He Never Wanted

The reluctant chairman tells Fortune's Carol Loomis why Citi didn't see the subprime mess coming.

By Carol Loomis

November 29, 2007

When the new chairman of Citigroup, Robert Rubin, is asked why he was so tenacious and outspoken in supporting the chairman who just left, Charles "Chuck" Prince, Rubin delivers a typically introspective answer: "People are what they are, and that's what I am." Besides, he asserts, Prince deserved to stay: "He was doing what was right and what needed to be done."

Rubin, 69, goes on to recall that he similarly supported Larry Summers in 2006 when the Harvard president was about to be forced out and that he also defended President Clinton in September 1998 during the bonfire days of the Monica Lewinsky affair. Just after prosecutor Kenneth Starr submitted his inflammatory report to Congress, Secretary of the Treasury Rubin declared on Tom Brokaw's NBC Nightly News that, regardless of the obvious problems, he believed Clinton to be doing "a very good job" as President.

An extreme irony in all this is that it is Rubin who could right now use a Rubinesque defender. On Sunday, Nov. 4, the same day Rubin reluctantly moved from the job of chairman of the executive committee to chairman of the board, the company announced the startling news that it had $55 billion of collateralized debt obligations (CDOs) and other subprime-related securities on its balance sheet and that large write-offs of an estimated $8 billion to $11 billion were imminent.

Within Citi, many employees - highly aware that Rubin was a risk wizard at both Goldman Sachs and the Treasury - are angry at what he didn't do to avoid both this disaster and earlier write-downs that Citi reported. Yes, the critics know Rubin has adamantly restricted himself to playing a nonoperating role at Citi, sticking mainly to advising the troops, from CEO on down, and dealing with important clients. Still, the burning question being asked today, outside Citi as well as in, is how all this CDO stuff could have gone on under his nose.

Though surely detesting the mere utterance of this question, Rubin contents himself with dismissing it. "The answer is very simple," he says. "It didn't go on under my nose." At Citi, as in any large company, he explains in a Business 101 way, you have people who are specifically responsible for certain areas - trading and risk, for example - and you have senior management making sure that they are highly qualified for the job and monitoring their work. And, Rubin says, "I am not senior management. I have this side role."

Okay, noted - except that this sideman of the dissonant Citi orchestra was paid $17.3 million last year. Rewards of that variety in other years have ordinarily left Rubin trailing only Prince and his predecessor, Sandy Weill, in compensation. That sure leaves Rubin looking a lot like senior management. In addition, what more important assignment could a consigliere to the CEO have than trying to anticipate risks? Both Prince and Weill, in fact, have talked in the past about the value of their conversations with Rubin, though Prince isn't available to be queried about that matter now.

A larger part of Rubin's explanation as to why Citi failed to avert its CDO train wreck concerns the sheer difficulty of heading it off. True, worries about a "housing bubble" abounded. Rubin himself gave countless speeches in recent years that talked about investors, in all manner of asset classes, "underweighting" risk - that is, sloughing off its importance. But he wasn't on the trading floors where the mortgage-related decisions had to be made, and he knows from deep experience that's where the buck stops.

Only the rare investor, Rubin points out, was able to anticipate the collapse. As an illustration, he refers to the New York private equity and hedge fund community, which he knows well. In the first six months of this year, he says, there may have been a few people in this club who positioned themselves to profit when things went bad. He measures them as no more than "a handful." Ditto the people who successfully hedged their positions, thereby offsetting some of the trouble in July and August. That would be another handful, he thinks.

Rubin doesn't need the reminder, but this writer injects it into the conversation anyway, remarking that the handful included Goldman Sachs, which this year has made large profits by shorting mortgage-related securities. Rubin acknowledges the fact quietly: "Some people did."

Goldman appears also to have scored by hedging long positions early this year. At a Citi analyst call on Nov. 5, just after the impending write-downs had been announced, Citi CFO Gary Crittenden said the company did some hedging in the first part of the year too. But by July and August, when the need for protection was terrifyingly apparent, the ability to hedge, especially in the large amounts that Citi needed, was virtually nonexistent. Citi had by that time, starting in July, organized daily meetings in which Rubin participated. He says, "I tried to help people as they thought their way through this. Myself, at that point, I had no familiarity at all with CDOs."

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