By JLP | November 29, 2008
A front-page article in today’s Wall Street Journal talked about Robert Rubin’s role ($) during the Citigroup turmoil. From the article:
Mr. Rubin said it is a company’s risk-management executives who are responsible for avoiding problems like the ones Citigroup faces. “The board can’t run the risk book of a company,” he said. “The board as a whole is not going to have a granular knowledge” of operations.
Still, Mr. Rubin was deeply involved in a decision in late 2004 and early 2005 to take on more risk to boost flagging profit growth, according to people familiar with the discussions. They say he would comment that Citigroup’s competitors were taking more risks, leading to higher profits. Colleagues deferred to him, as the only board member with experience as a trader or risk manager. “I knew what a CDO was,” Mr. Rubin said, referring to collateralized debt obligations, instruments tied to mortgages and other debt that led to many of Citigroup’s losses.
Mr. Rubin said the decision to increase risk followed a presentation to the board by a consultant who said the bank had committed less of the capital on its balance sheet, on a risk-adjusted basis, than competitors. “It gave room to do more, assuming you’re doing intelligent risk-reward decisions,” Mr. Rubin said. He said success would have been based on having “the right people, the right oversight, the right technology.”
The decision has been blamed in part for Citigroup’s problems, including the growth of its CDO holdings amid signs the mortgage market was unraveling. Mr. Rubin doubts that’s true. “It was not an inflection point,” he said, but “I just don’t know what would have happened” if the decision had been different.
I’d like to hear an executive say, “You know what, we messed up! We packaged crappy mortgages together and sold them as safe investments. For some reason we forgot that you can’t grant mortgages to people with poor credit and little ability to pay them back and expect good things to happen. We messed up bad!”
Instead, we get guys like Rubin saying stuff like, “I just don’t know what would have happened had we done things differently.” What the heck?
This is the real kicker (emphasis mine):
Mr. Rubin said he believed in 2004 and ’05 that while a cyclical downturn such as the 1994 Mexican devaluation or 1997 Asian financial crisis was possible, the losses the bank might suffer wouldn’t come close to wiping out the profits made during the good times.
In the current crisis, “what came together was not only a cyclical undervaluing of risk [but also] a housing bubble, and triple-A ratings were misguided,” he said. “There was virtually nobody who saw that low-probability event as a possibility.”
Maybe Mr. Rubin should go back to stats class and learn the definition of “low-probability.” When you bundle together lots of subprime mortgages, there’s a high probability that they will default. That’s why they are called “subprime mortgages.” I just don’t see how someone with Mr. Rubin’s intelligence can say something like this.
This is just another case where greed trumped “doing the right thing.” And now we have all these executives saying stuff like, “I don’t know what we could have done differently?” Yeah, right…