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

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At bottom, the countdown to both Prince's exit and Citi's November shocks began in that summer crisis period for the credit markets. Citi started then to have ominous dealings with CDOs that carried a "liquidity put." Never heard of a liquidity put? Google will give you a few uninformative references. But it is testimony to the obscurity of this term that Rubin says he had never heard of liquidity puts until they started harassing Citi last summer.

What Citi did a couple of years ago was insert a put type of option into otherwise conventional CDOs that were backed by subprime mortgages and sold to such entities as funds set up by Wall Street firms. The put allowed any buyer of these CDOs who ran into financing problems to sell them back—at original value—to Citi. The likelihood of the put being exercised, however, was regarded as extremely remote because the CDOs were structured to be high-grade entities called "super-senior."

Meanwhile, you might think the existence of the put would make it impossible for Citi to get those CDOs entirely off its balance sheet. But in fact Citi found a complex accounting rationale for doing exactly that, and the CDOs jumped entirely to somebody else's balance sheet. All that remained in Citi's realm was this sticky little matter of the puts—which, as we shall immediately see, ultimately worked to get these CDOs right back to their creator, Citi.

Last summer, with the whole world suddenly unwilling to finance CDOs, the holders of the liquidity-put CDOs began to return them to Citi. And that's where they now reside—$25 billion of them, a very large lump in Citi's $55 billion of subprime-related securities. That entire package of trouble was the subject of Citi's Nov. 5 analyst call. This was the third presentation that Citi had made to analysts in five weeks —each of these confessionals more anguished than the last—and in that time Citi's stock and Prince's credibility had been punished.

But remarkably, Nov. 5 was the first time that Citi mentioned liquidity puts to the world. CFO Crittenden says the need to make disclosures about the puts did not arise until the last part of October, because until then the super-senior status of the put-laden securities made it appear they would largely hold their value. But that didn't take into account the rating agencies, which suddenly went on a downgrade binge. Their rating changes made it clear that Citi's super-seniors would have to be written down.

Crittenden and his staff met late on Thursday, Oct. 25, to begin sizing up the damage. Crittenden left the meeting not yet certain about the numbers. But he knew enough to tell Prince on Friday that the news would be very bad. With that, the beleaguered Prince recognized that his credit line of goodwill was used up. On the weekend, he called Rubin to say that he thought the only "honorable" action for him to take was to resign. Rubin urged Prince to stay, an expression of continuing support implying that Rubin, as a Citi director—an influential one—was prepared, despite the fresh onset of bad news, to keep backing Prince at the board level. Prince nonetheless remained determined to exit.

Rubin says unequivocally that Prince's resignation "was a Chuck-made decision." A modified view, though, is suggested by Fortune's interview with Prince Alwaleed bin Talal bin Abdul Aziz al Saud, who with a nearly 4% ownership, is Citi's biggest single shareholder. Alwaleed stayed supportive of Prince right through Citi's second earnings call, on Oct. 15.

But when word began to leak in late October that Citi would report huge new write-offs, Alwaleed was outraged and called Prince to tell him he would "withdraw" his support. That didn't necessarily mean curtains for Prince. Citi's board could conceivably have stuck with him. But it is easy to imagine that the prospect of a fight with Alwaleed was one big negative on Prince's mind as he proceeded to resign.

From that weekend when Rubin and Prince talked, it took another week of board and internal meetings for the financial news to be released and for the management scheme that included a foot-dragging Rubin to be crafted. He has been joined at the top by the head of Citigroup Europe, Sir Winfried Bischoff, 66, who will be interim CEO until the board finds a permanent boss.

Rubin has by these events been plunged into a job he wished above all to avoid: the top post in a major financial company in a period of crisis. But having made the wrenching decision to disturb what he calls "the arc of my life," Rubin seems bent on dragging this monster company out of the ditch. He says, "This is an important institution - not just to a lot of people, but also to the economy, globally. I think that this institution needs what Win Bischoff and I can bring to it." He pauses slightly: "And that's where my head is at the moment."

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