Nobody Could Have Predicted…
Robert Rubin speaks up for himself:
“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.
This seems like a pretty serious dodge here. Presumably the reason the top executives at a giant financial services firm get paid such extravagant salaries is that it’s their job to be prepared for the stuff that “nobody” is prepared for. If the idea is just that you make money while the market goes up, and then when the market goes down the government steps in to rescue you, probably a lot of people could do the job. And if a lot of people could do the job, there’s no need for compensation packages to run into the tens of millions of dollars. But if there is a need for compensation packages that run into the tens of millions of dollars, then people have a responsibility to prove themselves to be super-genius titans of capitalism who can navigate the shoals of the global economy flawlessly.
I don’t, personally, believe that there’s anyone like that out there. So nobody should be blamed for failing to live up to that hype. But people can be blamed for participating in the hype and profiting from it.
100 Responses to “Nobody Could Have Predicted…”
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November 29th, 2008 at 10:50 am
Oh, that Mr. Rubin is so loathsome.
As I’ve said before, I when I hear Wall Street “experts” saying this kind of crap, I imagine some French general in 1940 saying that “nobody was prepared” for a German attack, and after all, it had been “reasonable to assume” that the Maginot Line had “eliminated all risk.”
November 29th, 2008 at 11:00 am
Brooksley Born argued strongly in 1998 that Derivatives needed to be strongly regulated and overseen. Robert Rubin, Alan Greenspan, and Larry Summers ran over her like a train.
Their GUILT for the coming cataclysm needs to shouted from the rooftops. Obama is a fool to appoint Summers to any kind of position.
Oh, and let’s not forget the Great Whore Bill Clinton and his faithful spouse, Hillary.
See http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?_r=1&pagewanted=print
But of course, the deceitful shit-eating WSJ is the last newspaper to ever ask embarrassing questions of someone like Rubin.
November 29th, 2008 at 11:01 am
So when the economy goes sour and a company suffers, poor management is helpless to stop the rushing tide. But when the economy booms and a business prospers, it is all due to the might efforts of management who control the seas themselves with their mighty powers. Sweet gig. I am reminded of a old joking job application: “I’d like to be a vice-president of a big company, or some fake deal like that, where I can scoop a lot of cheese.”
November 29th, 2008 at 11:01 am
Right, nobody could have predicted this, except Roubini, Fleckenstein, Prechter, Denninger, Shedlock, Jantzen etc. etc….
Meanwhile, our “leaders” were saying things like this:
“House price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.”
– Fed Chairman Ben Bernanke, Oct. 20, 2005
And then there’s Rubin:
From: http://finance.yahoo.com/tech-ticker/article/135690/Rubin-Weil-Pandit-Prince-Many-to-Blame-for-Citi-Debacle-None-Owning-Up?tickers=C,T,AA,CVX,%5EDJI,%5EGSPC,XLF
“Then there’s board member and former Treasury Secretary Robert Rubin, who has received over $100 million in compensation from Citi in 10-plus years…
“I don’t feel responsible, in light of the facts as I knew them in my role,” Rubin told the New York Times back in April. “In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.”
Rubin is one of several directors, including current chairman Sir Win Bischoff, who’ve been on Citi’s board for at least 10 years, the WSJ notes.
To this point, not one of the directors has been fired, stepped down or even had the decency to apologize to shareholders or U.S. taxpayers.
Yep, there’s billions of losses at Citi but no one willing to take any responsibility.”
November 29th, 2008 at 11:03 am
if there is a need for compensation packages that run into the tens of millions of dollars, then people have a responsibility to prove themselves to be super-genius titans of capitalism who can navigate the shoals of the global economy flawlessly
Or at least accept that in their high-reward world, the [supposedly] corresponding high risks mean that they’ll sometimes be among capitalism’s losers. Tough luck, but hey, that’s the free market for ya.
November 29th, 2008 at 11:14 am
Don – Oh, and let’s not forget the Great Whore Bill Clinton and his faithful spouse, Hillary.
You know what? You need a time-out.
You sound like a 7 year old.
November 29th, 2008 at 11:16 am
Fucking a-right, Yglesias. You nail it.
mdh — If your 7-year-old says “whore” (or “spouse”), a timeout won’t do it. More like an exorcism.
November 29th, 2008 at 11:23 am
The problem is not people profiting from it. The problem is their not taking the losses.
November 29th, 2008 at 11:24 am
Could meeting the competition be fairly described as mediocrity?
November 29th, 2008 at 11:28 am
is subject to unpredicted bad events…
Nice use of the passive voice there, DTM. Ruin just “occurred” to this industry, they didn’t, you know, cause it. But playing with you competition frame, isn’t it telling that some in the industry have suffered some losses but appear to be in okay shape and some have been utterly destroyed and need extensive use of the public teat? Like, say, Citi?
November 29th, 2008 at 11:37 am
I’d say that Matthew is being unfair to management, except that nobody could possibly be unfair to management.
Banks’ sins were clear at the time. The consequences of the sins were not.
Everybody in the business (and their dog) knew that residential real estate was unsustainable, lending practices to everybody were shoddy, and that the credit card “sweatbox” model was as unsustainable as it was immoral. This was common knowledge in 2005-06, and probably before. Everybody also knew that nobody understood the market structure of derivatives. And finally, everybody knew that the economy was much worse than the headline figures (GDP, unemployment) said it was.
What nobody knew were the consequences of this. Most financial folk, looking at the Asian mess of 97-98, thought that banks knew how to lay off the risk (onto the usual chumps: insurers, municipalities, frisky corporate treasurers, pensions, endowments, doctors and dentists). Everybody thought that banks’ balance sheets were strong. And people were beginning to suspect that new legal and market technologies had made large-financial-firm insolvency a less scary proposition: e.g., Enron, Refco, Amaranth.
So Rubin is, in large part, correct. But fuck him anyway. The banks deliberately laid the seeds for this, and thought they could wriggle out of the consequences.
November 29th, 2008 at 11:42 am
I think what Yglesias is saying (not necessarily in this post but in the general narrative he’s setting up with posts like this) is that there doesn’t, to us laypeople, seem to be any actual evidence that the current class of people at the top couldn’t easily be replaced by other people at much lower cost who could do at least as good a job.
If there is such evidence, that would disprove Matt’s point. Is there?
APS
November 29th, 2008 at 11:43 am
Matt really doesn’t understand the basics of business.
In this case he understands it just fine. Japanese companies do not pay their executives as disproportionately as American companies do, and they do just fine in attracting good talent and being competitive. Furthermore, there was a recent study that demonstrated in some cases paying people a lot more actually resulted in lower quality work.
But regardless, you are arguing against a straw man. Matt’s complaint is not that they get paid a lot. It is that they get paid a lot and then bailed out when they fail – privatization of profits and socialization of losses. For those competitive companies that do not work that way, good for them. We aren’t spending tax payer money on them.
Rubin should not be allowed to work in finance ever again.
November 29th, 2008 at 11:43 am
Rubin, Greenspan and the rest refused or were unable to understand that any increase in asset prices, stocks or real estate, above the inflation rate is inflation. It is a crucial thing to understand. ‘Values’ don’t increase because ‘value’ is a phony concept. There is price, and that’s it.
A gigantic edifice of credit creation was born that lay outside the banking system and the stupendous increase in credit mainly went into inflating asset prices. Rubin was there at the creation of it and Greenspan was it’s shepard. For the Fed member banks and its primary dealers were really the founders of this system and he made sure that it stayed outside the Feds purview.
When it’s all done taxpayers are going to give the banks at least two trillion dollars and get nothing in return. It must be understood that such was always the plan. The mega bailout was always a certainty. A bump along the road to even greater concentration of assets distribution into corporate hands. Income and asset distribution is going to skew even more strongly now to the top. If it doesn’t or if there is a backlash against it then the army will take to the streets and there will be blood atonement.
November 29th, 2008 at 11:46 am
For more on Rubin:
http://globaleconomicanalysis.blogspot.com/
After you read this, you’ll be saying “What the hell was Obama thinking?”
November 29th, 2008 at 11:50 am
When it’s all done taxpayers are going to give the banks at least two trillion dollars and get nothing in return.
*bzzzzzt* wrong.
November 29th, 2008 at 11:51 am
Matt, you might want to check out Brad DeLong’s defense of Rubin in his November 23 posting “Le Citi Toujours Dormer . . .” [Sorry--I couldn't get the permalink to come up on my browser]. DeLong is his usual self here; starting with a rant against the NYT’s allegedly shoddy reporting of the Citi crisis, followed by a lengthy analysis so recondite that no MSM institution in its right mind would have published it. But I think he makes a good case: that Citi’s troubles aren’t the result of bad management, but of a crisis that no reasonable manager could have planned for while still seeking profit for her shareholders. The best way to have anticipated this mess, after all, would have been to keep all the money in the mattress–but money in the mattress does neither the firm nor the economy any good whatsoever. Those in the comments who say that umpteen people saw a crisis coming–why didn’t Rubin?–miss an important point: hardly anyone foresaw *this* crisis [DeLong, who's no dolt, confesses that he didn't], which increasingly appears to be the fabled Black Swan. And you simply can’t run a business, or live your life, anticipating a Black Swan event; the perfectly risk-averse life is no life at all.
November 29th, 2008 at 11:51 am
Shorter Rubin:It was already broken when I got here.
November 29th, 2008 at 11:52 am
Bank executives aren’t paid ridiculous amounts of money because they can predict the direction of the markets. They are paid ridiculous amounts of money for the same reason that any other executive in any other public company gets paid a lot of money: someone has determined that they are the best suited at managing the company and crafting strategy (which includes assuming the right level of risk in both the short term and the long term) with the singular goal of maximizing shareholder value.
Some managers are good at it, some are bad at it, some are good at it and get unlucky, some are bad at it and are lucky. In my humble opinion, the real travesty at Citi isn’t that Rubin failed to foresee this crisis. The real travesty of Citi, etc, was that its managers allowed the company to lever up to amazing levels, which all but guaranteed bad things to happen in even a slight downturn. The fact that they sort of abdicated their responsibility for strategic risk taking is not forgivable.
November 29th, 2008 at 11:53 am
Matt really doesn’t understand the basics of business.
Rubin sock-puppet?
November 29th, 2008 at 11:56 am
Leo’s Law:
Whenever you personally profit from an action short-term and thus contribute to cause a desaster for your community mid-term – you will deny this future effect no matter how obvious it is – and feel innocent when desaster strikes.
(And maybe hide your personal gains in a secure place?)
I am not sure whether this “law” only applies to our modern short-termist times … SHORT-TERMISM is the root of our professional incompetence.
How could we get back to mid-term and long-term responsibility again? — I don’t see a way. Do you?
November 29th, 2008 at 11:59 am
So even now, there are meaningful consequences to executive decisions. Now there is a legitimate question as to how easy it is to pick better executives in light of the inherent uncertainty about what conditions they will face, but Matt is very much wrong when he paints a picture of rising and falling tides affecting all boats equally.
The problem with the cutthroat competition is that everyone involved says they don’t need any checks and balances, i.e. government regulation, just as the Bush adminstration tried to strip away checks and balances from executive power. Just trust us. The free market is all wise and all knowing. I agree with Krugman that Obama needs to try to financial regulation soon.
November 29th, 2008 at 12:01 pm
now given that the superior beings running our corporations get compensation in the many $millions to mega $millions PRECISELY to be able to foresee calamity and steer their corporations clear of them, I would think that “nobody could have predicted” dodge would be grounds for summary dismissal without golden parachute or severance. But being that in today’s America, accountability is strictly reserved for commoners, and our ruling elite plutocrats are completely exempt, Rubin’s dodge will be filed away and nothing will happen as a result: no penalty to Rubin for his failures, and no changes in governance at any level to prevent a recurrence.
November 29th, 2008 at 12:04 pm
When guys like Rubin say “nobody could have predicted” they mean nobody could have known the shit was going to hit the fan so hard. They damn sure knew this stuff would blow up at some point – and yes there were lots of people predicting – for years – that it would and Rubin, Greenspan, Summers et.al., and the DC politicians can read.
But, why would Rubin or his ilk care about that? Their “job” was to make as much money as possible for their firms – and themselves – as possible – and they did! . . If “others” lost, well, so what? Survival of the fittest and all that. . .
Now, it is all about denial – and it will work! . . . Wall Street money ran DC and nobody there wants to look at this very closely. . . So, lots of “smart” people made lots of money and nobody is going to be fined or go to jail. As far as all the collateral damage – well, in War there are civilian casualties – but the Generals are always safe.
November 29th, 2008 at 12:05 pm
It isn’t simply that these jackasses are denying that other people foresaw EXACTLY the problem and its implications. No. The other problem is that few of these bozos (if any) recognize that this crisis does exactly for their brand of economics what the Soviet Union (et alia) did for its brand of economics. There are still people who believe in “no regulations” and that “free markets” are going to save us.
November 29th, 2008 at 12:08 pm
Those in the comments who say that umpteen people saw a crisis coming–why didn’t Rubin?–miss an important point: hardly anyone foresaw *this* crisis
This is a very important point. The firms that are in bad trouble, by and large, could have survived the sort of crisis that some people saw coming. The lessons to take from this meltdown are that we need more transparency and smarter regulation. Kicking around CEOs who trusted in the risk models that the entire industry believed is just a distraction: a systemic problem goes beyond the individuals involved.
November 29th, 2008 at 12:09 pm
Hey David in Nashville–
Your little mash-note to DeLong at 11:51 is not very persuasive.
Trotting out the tired assertions that Really Smart People Know More Than You Do and It Was All The Work Of The Mysterious Black Swan is unlikely to win you many converts.
November 29th, 2008 at 12:09 pm
Look, the monarchy knew better when times seemed good, and we can’t just go around blaming royalty when things go bad. It’s destiny that puts us in our places, and outrageous talks of meritocracy will get us nowhere.
November 29th, 2008 at 12:10 pm
DTM, you’d be a much more convincing oracle on how a business works if you didn’t spout a bunch of uninformed gibberish. Citi had terrible risk management. They’ve always had terrible risk management. That’s how they got caught in the Mexican sovereign debt default. That’s why they have to run to the Treasury, just like they did last time. Rubin was irresponsible because he took Citi’s worst problem — and everyone knew this was Citi’s worst problem — and made it even worse. It would be like Microsoft fired all of their software testers so that Ballmer could annouce record profits from short-term cost savings. (Really, it’s a lot worse than that, but I can’t think of a non-banking analogy.)
November 29th, 2008 at 12:15 pm
“…Citi’s troubles aren’t the result of bad management, but of a crisis that no reasonable manager could have planned for while still seeking profit for her shareholders….”
There are many, many banks and other financial institutions that DIDN’T get caught up in the madness, and will survive on their own without becoming welfare queens at taxpayer expense. Rubin’s Citi isn’t one of them.
And there were many, many people who foresaw this crisis coming for years. They just don’t happen to be the people that Rubin and the other plutocrats pal around with.
November 29th, 2008 at 12:24 pm
there’s no need for compensation packages to run into the tens of millions of dollars. Well, yeah. As a general rule. People being paid a humongous amount over what they can realistically spend (if they’re not buying small countries) is a grotesque mis-distribution of wealth. Whether they do a good job or not.
November 29th, 2008 at 12:39 pm
I can’t be the only one who thought that home values would not continue to rise forever, especially at the rate they were climbing. And despite the lenders willingness to lend more to unqualified buyers.
I saw the dotcom bubble coming (talk about irrational exuberance) and the housing bubble, too. It appears Wall Street ‘hears what it wants to hear and disregards the rest” (Paul simon’s The Boxer).
If I were Queen, none of this would have happened.
November 29th, 2008 at 12:39 pm
Rubin was being paid for big picture thinking, and no doubt political connections. He may have earned his keep just by making sure that the powers that be would be kind to Citi when the bailout came.
November 29th, 2008 at 12:41 pm
If the banks were operated with the understanding of an implied insurance guarantee by the public, then they were not exactly corporations, really, but quasi-public entitites, and the corporate form was in fact misused by them. The bailout is one aspect of recognizing their non-corporate nature; demanding the return of profits extracted through the misuse of the corporate form of organization is another. If they were quasi-public entities all along, executive compensation should have been in line with standard– a few hundred thousand a year, perhaps, not millions.
Piercing the corporate veil and disgorgement of “corporate” profits paid to executives should be pursued in court, perhaps by the government or by an attorney representing one of the buyers of the bad loan packages. Swindled municipalities etc. should see Rubin’s personal wealth as possible source of compensation.
November 29th, 2008 at 12:53 pm
A conscientious, dispositionally conservative person with an IQ of 90 – someone who refused to make liar loans, for example – would have done better than the people who actually ran Citibank.
November 29th, 2008 at 12:57 pm
Anytime your economy rest on a greater fool willing to buy what you have to sell, your economy is headed for a disaster. And the Greater Fool theory was what drove the housing market and the economy as a whole. What did Krugman write a couple of years back? America’s economy basically rested on people buying and selling houses to one another.
As for whokoodanode, I had enough sense two years ago to put almost all our investments in Treasuries and buy our house outright because I knew things were going to get really nasty, so this meltdown is having relatively little effect on us. Maybe I should be Treasury Secretary?
November 29th, 2008 at 12:58 pm
http://makkale.blogcu.com/fenerbahce-2-besiktas-1-maci-canli-mac-yayini-cisse-ye-kirmizi-kart-ve-ilk-yari-sona-erdi-cisse-yine-ugur-boral-i-dusurdu_30012701.html
November 29th, 2008 at 12:58 pm
dean baker has been calling this thing since WAAAAYYYY back.
November 29th, 2008 at 1:06 pm
Once there were two financial firm CEOs out managing in the woods, when they were surprised by a big bear market.
“Yikes,” said one of the CEOs, “we’ve got to manage really good now to get away from this bear market!”
“Don’t be silly,” said the other, “I don’t have to manage really good to get away, I just have to manage better than you! Ha!”
But he was wrong, bear markets are not just like bears!
November 29th, 2008 at 1:21 pm
The best thing I’ve ever read about mis-estimation of risk is Richard Feynman’s addendum to the investigation of the Challenger disaster. Feynman found that the NASA line engineers who really understood the shuttle estimated the chance of a catastrophic failure at 1 in 100, while their managers estimated it at 1 in 100,000. How could the people at the top be so utterly out of touch with their own organization? The answer is that they shaped their understanding of the facts to believe what the political appointees wanted them to believe, in order to keep their jobs:
“Official management, on the other hand, claims to believe the probability of failure is a thousand times less. One reason for this may be an attempt to assure the government of NASA perfection and success in order to ensure the supply of funds. The other may be that they sincerely believed it to be true, demonstrating an almost incredible lack of communication between themselves and their working engineers.”
http://www.fotuva.org/feynman/challenger-appendix.html
I have concluded from my own experience that the absolutely necessary quality in a manager is to be able to believe obvious falsehoods – really believe them – while in all other ways not being insane.
November 29th, 2008 at 1:24 pm
Who’s to say that the corporate elites haven’t earned their keep?
If they make money while the market rises, and convince the Government to prop up their companies up in a downturn, what’s your beef?
Hah!
November 29th, 2008 at 1:39 pm
Stop with the bullshit that Rubin and Greenspan could not have seen *this* crisis coming. Even I, with a lowly BS from a second rate state universtiy saw catastrophe coming at least 5 years ago (an being from the 2nd rate state whose governor stole the WH, I had a good inkling even before then).
Anyone serious could have seen the catastrophe coming, and could have seen the causes behind with a little bit of work. But there was a conspiracy of silence because all those people we’re talking about didn’t want to shit in the kool ade bowl that was keeping their compensation packages so handsome.
November 29th, 2008 at 1:51 pm
If the idea is just that you make money while the market goes up, and then when the market goes down the government steps in to rescue you, probably a lot of people could do the job. And if a lot of people could do the job, there’s no need for compensation packages to run into the tens of millions of dollars. But if there is a need for compensation packages that run into the tens of millions of dollars, then people have a responsibility to prove themselves to be super-genius titans of capitalism who can navigate the shoals of the global economy flawlessly.
That’s not the idea though. These are extraordinary circumstances. The government has allowed a number of banks to cause collateral damage to the capital markets causing negative externalities that affect everyone globally even non-financial companies. Under normal circumstances the market would swallow up the offenders, but the market itself is damaged. So, the government must step in and rescue them. But, we don’t have global credit crunches of these proportions to any degree of frequency that companies will now factor a bailout into their risk management plans. Seems a little far-fetched. They’d need to know when it was going to happen so they could time their very risky bets in the hopes of a bailout lest they fail the old fashioned way.
I think its a bit misguided to attack executive pay. First off its a private matter between companies and the executive. Companies pay what they can get away with paying. Not saying that that is right. But, executives and any worker for that matter should be able to bid their wages up as much as they can up to the point where it equals the value they add. In many cases, especially in financial services thats well above tens of millions of dollars. It seems more egregious to me to allow the company to keep the surplus between executive income and value added. If anyone could do the job, they wouldn’t be making tens of millions of dollars. And to pick a year like this one as the representing the average of executive performance is a little disingenuous.
November 29th, 2008 at 2:04 pm
Well, Robert, shrill Paul Krugman predicted it.
In fact, he has correctly predicted an awful lot these past eight years, He predicted things when it was not PC to do so.
That is why he is shrill. That is why he is “nobody” even though he is a Nobel prize winning economist with an NYT column. That is why the establishment still doesn’t listen to him.
He made predictions that he wasn’t supposed to make. When they come true he is ignored because he is annoying or in some way not a team player.
He isn’t a team player. He was a voice of sanity in insane times.
November 29th, 2008 at 2:18 pm
If Mr. Bush is going to lead a communist revolution here, why doesn’t the proletariat get to line the capitalists up against a wall?
The nationalization of our financial industry shows that the Chinese won the cold war. (Thank you HW & Clinton!)
November 29th, 2008 at 2:54 pm
DTM wrote:
Matt really doesn’t understand the basics of business. In most industries, business are highly competitive…the baseline is the competition: an executive is living up to promise if he or she ends up making as good or better decisions as the competitions’ executives.
***********************************************************
Methinks DTM doesn’t understand. He is right that the measure of CEO performance is beating the competition. The median CEO beats half the competition and loses to half the competition. That is, median CEO performance is always the same.
The question Matt addresses is why does the *median* CEO today make so much more than did the median CEO 40 years ago when their performance was the same?
There are only two possible answers. Either pay is *not* related to performance (as I believe Matt suspects) or the *absolute* performance of CEOs as a whole is better today than it ws 40 years ago.
Back in the 1990’s bull market it was at least superficially possible to assert that CEO performance was as a whole better than it was in the 1950’s or 1960’s because the stock market was rising much faster than it did then. People like Rubin made this assertion.
Today such an argument is much more difficult to make and Matt is simply calling Rubin on it.
November 29th, 2008 at 2:59 pm
Take a look at this largely laudatory Bloomberg article about (disgraced former Citigroup Capital Markets chief) “Tommy” Maheras from Sept., 2006. Apparently Bob Rubin was one of his biggest cheerleaders
Maheras, Citigroup’s High Roller, Sheds Caution in Profit Quest
It includes this about Rubin:
‘Lifting revenue, at least in capital markets, sometimes means taking more chances. That’s where Maheras comes in. An ex-Salomon Brothers Inc. trader known to friends and colleagues as Tommy, Maheras is no stranger to risk. “You have to stick your neck out in trading,” he says. “And in management.”’
‘Maheras has an instinct for both, says ex-U.S. Treasury Secretary Robert Rubin, now chairman of Citigroup’s executive committee. “When Jon Corzine was running all of fixed income at Goldman, he would walk the trading room and just know this stuff,” says Rubin, who preceded Corzine, now governor of New Jersey, as Goldman Sachs Group Inc.’s co-chairman. “He had it in his bones. He had it in his fingers. And so does Tommy.”‘
November 29th, 2008 at 3:00 pm
Robert Rubin is a liar…if Krugman and other observers of the financial scene could warn of coming disaster, it’s
just unbelievable that this smartass didn’t see the collapse of the capital markets…a collapse he profitably helped
along…the probelm now is, the very same thugs that
ruined the capital markets have now been ordered by a
fragile political structure to put it back together…
is this the land of Oz or what…
November 29th, 2008 at 3:02 pm
Feckless. The financial world is not being socialized. Rather the Treasury has been privatized. It just so happens they get to play the role of last sucker. (the Fed doing much of the buying, acting as the agent of the Treasury) No more suckers could be found to buy the worst crap so one had to be found. Admittedly is a rearguard action but it’s their last best hope. They being our elites. All of them, corporate and political.
They are right that if trillions are not thrown into the gigantic financial institutions that there will be a profound systematic failure. Well systems come and systems go. The system where 40% of all profits went to or came through a tiny universe of financial entities is not a system that should be saved.
Distributed systems are superior. They are more stable, more robust. Science and mathematics are proving it again and again every day. It isn’t a new idea but one that continues to gain intellectual power.
We don’t need no stinking Citi Bank and it’s trillions of off balance sheet ‘entities’. I spit on Walter Wriston’s grave.
November 29th, 2008 at 3:19 pm
I am a painter, not an economist.
I knew house prices could not go up forever because the levels were too high for first time buyers to get into the market with sane (an important clue) mortgage practices.
I knew people had been encouraged to take out second mortgages BY BANKS for such flimsy reasons as a vacation.
I knew that you should never buy a mortgage with a variable interest rate.
I believed in the old fashioned idea that with your personal finances you should buy nothing on credit except a house and a car.
Paul Krugman knew. Refer to his book “The Great Unraveling”.
Gretchen Morganston, a pulitzer prize winning financial journalist with the New York Times knew. John Cassidy of the New Yorker knew. George Soros who often writes about the economy for the New York Review of Books knew. Note that all of these people write for “Liberal Sources”.
I withdrew my assests from the market in August 2008
after being talked out of it in October 2007 by my broker.
Mr. Rubin, in my eyes, you have lost all credibility.
November 29th, 2008 at 3:24 pm
Three years ago I sold my first home without any Net resources. But it was very difficult for me. I heard that some services can publish ads about my home in the Internet. Can you help me to choose between Fizber and Trulia? Do you know anything about these services? My friend said that “Fizber” better than “Trulia”. But maybe he wasn’t right. So I need help.
November 29th, 2008 at 3:24 pm
Actually, I’d say the blindness most continues: few people see this crisis. See it for what it is, the end of the logic of neo-liberalism, which attempted to reconcile a central contradictions: increasing inequality of wealth, increasing consumer-based growth. This was not an academic contradiction – it was at the center of a policy to make a certain small group of people, the top 1 percent, enormously wealthy. Predictably, enormous wealth preserves itself by spending a certain margin on political protection. That money was extremely well spent, and we have a political discourse that is reliably deflected from even discussing the consequences of getting rid of equality as an ideal. Instead, we are supposed to celebrate it. One way of looking at the seven trillion now invested in a financial sector which will in all probability shrink by at least a third (and which will, at that moment, be confronted with the impossible task of either starting to pay back what it owes to the government on a number of levels, or the more politically easier task of getting the state to swallow those committments) is as confetti and fireworks for the inequality parade. Hurray!
MY, whose heart is so often swayed by the neo-liberal tough love doctrines he learned in his youth that he can’t swallow the government intervening in manufacturing and can’t imagine the government not intervening to prop up a dysfunctional financial system that has no chance of returning to the status quo ante, is certainly not the person to point his finger at Rubin. Because, in essence, his notion is that this isn’t a structural problem, but that we have to simply get better managers in that 1 percentile and keep the perpetual motion machine going.
I’d bet that the machine isn’t going to go again. Although it will be entertaining to watch the next 7 trillion being devoted to the pop pop pop of CDS’es, in the name, of course, of the national good. I recommend popcorn for the next episode, and, if you are bored, you can always attack those nasty overpayed union workers. Those guys, plus the lucky ducky poor that the government forced the poor banks to give mortgages to, are sinkin’ the country! MY should ask his important Public Intellectual friends about it. They could give him the scoop.
November 29th, 2008 at 3:33 pm
Yup, nobody could have predicted an economy based on toxic paper could fail?At least in japan they would have had the decency to kill themselves.And in china they would face the firing squad!Here they just slink away with their ill gotten gains or get a job in the administration.Whay a country!
November 29th, 2008 at 4:11 pm
By the way, not only does Matt not understand the limits of what is expected of good executives, but also the danger of bad executives.
Not only does DTM not understand the limits of what is expected of good executives – hence his favoring their ridiculously misproportioned compensation packages while Matt sensibly recommends the limiting of such excess – he also utterly fails to understand the danger of bad executives, which is why he supports the coddling of such executives while Matt and others speak in favor of seeing those bad executives pay the price for their failures.
November 29th, 2008 at 4:24 pm
In most industries, business are highly competitive, and top executives get paid a lot for two related reasons: the hope a good executive will provide a competitive advantage, and the fear a bad executive could cause the business to fall behind the competition.
And these hopes and fears are completely irrational, as a business’s competitiveness has much less to do with this or that executive than it does with the many, many people working for that firm which aren’t top executives who are doing all of the actual work.
November 29th, 2008 at 4:42 pm
@46 John Henry
I think its a bit misguided to attack executive pay. First off its a private matter between companies and the executive. Companies pay what they can get away with paying.
Well, not exactly. the stockholders need to be figured into the equation somehow.
I work for a very famous financial services company that is privately (family) owned. It is hugely profitable in good times; its brand is famous and respected worldwide. We have had company-wide layoffs to be sure, driven by the lousy market. But our layoffs, as a percentage of workforce, hover in the 3-4% range, and our company will survive. Citi’s, when this mess is all sorted out will approach 40% or more, if the company survives at all.
Now, I have no idea how our top executives (also company owners) are compensated. The consensus is that the family scion is a billionaire, but no-one outside the family really knows. But the point is, even in good years, I’d bet they make damn sight less than Rubin and his damn-near criminal buddies are making from Citi’s failure.
The biggest difference between the companies? Ours is perhaps the most risk-averse major financial company on the planet, sometimes irritatingly so. But our company and most of our employees will survive, and Rubin’s may not.
That we are socializing the losses of the public companies without somehow punishing excessive risk-taking is in itself criminal.
November 29th, 2008 at 4:51 pm
“Nobody was prepared for this,”
Why, may I ask, the f**k not?
November 29th, 2008 at 4:52 pm
Put American people to work and prosecute corruption.
November 29th, 2008 at 4:54 pm
John Henry says: “I think its a bit misguided to attack executive pay. First off its a private matter between companies and the executive. Companies pay what they can get away with paying. Not saying that that is right. But, executives and any worker for that matter should be able to bid their wages up as much as they can up to the point where it equals the value they add. In many cases, especially in financial services thats well above tens of millions of dollars. It seems more egregious to me to allow the company to keep the surplus between executive income and value added. If anyone could do the job, they wouldn’t be making tens of millions of dollars. And to pick a year like this one as the representing the average of executive performance is a little disingenuous.”
I say Bullcrap! These corporations are organized under state and federal law and owe a legal fiduciary to their investors. All too often the corporate Boards of Directors are selected and controlled by the corporated ffficers and are in reality subordinate to those officers rather than stockholders. The whole arrangement is a classic conflict of interest, if not outright collusion, in terms of compensation and benefits, golden parachutes, etc.
November 29th, 2008 at 4:59 pm
I do believe “rent,” in the economic sense, is an appropriate term. Corporate governance is badly broken.
November 29th, 2008 at 5:23 pm
The economy tanked in 2003. People borrowed against homes just to make it. The nail in the coffin was the Bankruptcy bill. MBNA and the rest that paid Bush for the bill. The credit cards get 30% interest, charge late fees(even if you pay early they post it to your account late) then the last piece the overlimit fee which they create also. Until this is stopped the economy is not going to get back on it’s feet. We are not spending because there is no money after the credit cards get their cut. The economy is trickle up. Give the money to poor and middle class then the corporations will get it. We have had 8 years of corporate welfare. When are we going to learn. The corporations do not invest in America when they get money nor do they create jobs. They didn’t during Reagan then Bush Sr and not during Bush Jr. Everytime the economy goes bad in this country is when Republican’s have control.
November 29th, 2008 at 5:35 pm
I think ALL of these knuckle heads knew what was coming financially! We {The American People} have been fleeced by our elected officials and they will continue to do so, with or without our approval. It is all, one big scam!
This 1 minute video sums it ALL UP!
http://www.youtube.com/watch?v=A1mA24yPjaY
November 29th, 2008 at 6:16 pm
There are lots of economists who warned about this but nobody listened to them. They were too busy counting their bonus money to bother.
November 29th, 2008 at 6:38 pm
I agree that no one could have foreseen the breaching of the levees … err, sorry … wrong topic. What I mean to say is that no one could have foreseen the sectarian strife in Iraq, or that chemical weapons would not be found.
November 29th, 2008 at 7:04 pm
http://www.europe2020.org, a site to be checked ; their specialists had predicted it all…a few years back!!!
November 29th, 2008 at 7:34 pm
What does foresee mean? To me, it means something simple. If you have traditional characteristics of how much debt people can take on – say, it takes three times the household income to buy a house – and this suddenly changes – which happened, as Michael Lewis points out, in 2003 – so that it becomes 4 to 1, with on the periphery ratios of 10 to 1, etc. – then you have to have a story that explains this phenomenon. Is it the case that suddenly, the mass of the house buying population was expecting greater earnings? Was this reasonable? If, in fact, as the figures from the government were showing, the earnings picture was actually worse, rather than better, than the traditional norm, then this should have been one of the structures that needed explaining. Someone who doesn’t seem to have a set job description, like Rubin, should have had people who saw these things, and asked questions about it. But, as the story in the Times makes clear – much clearer than Delong’s response – instead, the risk assessment people were out fishing with the risk maximizers. No explanation having to do with the figures presented in the NYT piece excuses this – basically, it is a defense attorney’s red herring. In Delong’s case, he worked under Rubin, I believe.
So as these measurements were leaving their traditional bounds, the banks, who should have a vested interest in this kind of thing, because this is what structural risk is and this is where risky and blind practices can destroy a bank, ignored the risk. Why? Because the vested interests in the bank had changed – the malign alignment of the compensation of the upper management with short term gains made the bankers seek to exaccerbate, rather than to mitigate, the structural perversities. Of course, they had a new story for this, which is that we had entered a new economic paradigm (another one! just like in the late nineties) in which we had insurance that allowed for these increased risks, in the form of a number of offsetting swaps – for instance, credit default swaps. This is again an area in which Rubin showed gross negligence – he was hired, presumably, because of his long experience on Wall Street, so he should have had some memory of, for instance, how portfolio insurance contributed to the 1987 crash of the market, which should have echoed with the same discourse about credit default swaps. He should have noticed that the derivatives market was unhealthily growing since 2001.
To say “he should have” means – this is what he was paid to do. Like Homer Simpson in front of the instruments of the Springfield Nuclear Power plant, he should have had the basic training to see that if the numbers started getting severely out of whack on one of those panels, that something needed to be done.
So I say: can his ass, then sue him for every penny he has. Same with the rest of the predators who inhabited the seats at the big money table at Citi.
November 29th, 2008 at 8:02 pm
Why were the FBI catagorically shut down when they exposed the danger in 2004?
November 29th, 2008 at 8:04 pm
John Henry, how do you feel about renegotiating UAW contracts?
November 29th, 2008 at 8:09 pm
Nobody could’ve predicted? I guess Robert Rubin didn’t get the same mortgage refinancing offers as my wife and I. $500 a month obviously doesn’t pay a $200,000 mortgage in 30 years.
Robert Rubin, of all people, should’ve known better than to buy stock in a million people thinking they could do exactly that.
November 29th, 2008 at 8:14 pm
Rubin’s “nobody was prepared” dodge kind of overlooks the fact that a number of major financial institutions — such as JP Morgan Chase, Bank of America, Wells Fargo, PIMCO, etc. — were actually relatively well prepared for the crisis, having avoided or minimized their exposure to subprime debt and excess leverage, and as a result are now in the process of eating his (and Citigroup’s) lunch.
November 29th, 2008 at 8:35 pm
It may be true that nobody was prepared, but people certainly knew about this. I have a friend who works with mortgages on Wall Street who was saying over a year ago that this was going to happen. Obama was writing letters to the treasurer to make some changes. They knew, they just buried their heads in the sand, while making tons of money. Now, we, the taxpayers, have to bail them out. I’ve read that some are still getting bonuses. While I have to pay hundreds of dollars to the local PTA to pay for gym, art, music, and science classes that the state can’t afford.
November 29th, 2008 at 8:51 pm
Let’s call a spade a spade: Rubin is a scumbag, just like Greenspan…fuck them.
November 29th, 2008 at 9:42 pm
I think a lot of apologists on here keep saying no one could have predicted this. However, that is not the issue. Predicting the market is something we’re told we should never do. The problem is the fact that the fundamentals made no sense. It doesn’t take a genius to look at asset to capital ratios in excess of 50 to 1 and see there is a catastrophe brewing. How do you reconcile your belief that no one could see this coming with Buffet’s behavior? He publicly and repeatedly stated that companies were overvalued and overly exposed to risk by way of derivatives. The problem of American capitalism is that the titans of risk want the fruits of it and not any of the cost. Many of them must be fired. They chose to not observe fundamentals. Prediction is irrelevant.
November 29th, 2008 at 10:06 pm
BALONEY!
I heard Arthur Leavitt (former head of Merrill Lynch and then head of the SEC) recount recently on satellite radio how he, Robert Rubin, and Alan Greenspan were in Clinton’s office in the late 90s. Clinton was concerned about the derivative market and asking whether there should be controls. Rubin and Greenspan were vehemently against it, saying the markets had gone to far and derivatives were too complicated to control.
Leavitt reluctantly agreed to go along. He called it the greatest mistake of his life.
November 29th, 2008 at 10:11 pm
If no one could have predicted this, then why did so many Wall Street guys sell their stock — bail — before September, as reported in HuffPo.
There is no excuse for what Rubin and Greenspan did. None. Zero. Zip. Since no admin seems to want to punish him, he needs to be shamed. Publicly denounced.
November 29th, 2008 at 10:12 pm
“Nobody was prepared for this,”
A better quote would be “no body prepared for this”.
When Bush took office he threw a fit before the Senate and Congress recessed, “We” handed it the family credit card, the keys to the gun cabinet, all the while knowing he was a juvenile delinquent then – Mom and Pop went on vacation…
Then as now we settle for this.
My 94 year old father says he in all his life time has never witnessed or could imagine a situation worse than this for America.
November 29th, 2008 at 10:33 pm
We really need this economy to come back.. http://www.itosolutions.net
November 29th, 2008 at 10:38 pm
95% of the credit policy officers, risk managers, and portfolio managers at major institutions are not surprised. For years they tried to do their jobs, were overridden and sidelined by hyper-competitive decision-makers preoccupied with “shareholder value”.
November 29th, 2008 at 10:47 pm
“Then there’s board member and former Treasury Secretary Robert Rubin, who has received over $100 million in compensation from Citi in 10-plus years…
“I don’t feel responsible, in light of the facts as I knew them in my role,” Rubin told the New York Times back in April. “In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.”
Gee, I’d swear I’ve heard this exact same sentiment before, but involving another right-wing-spawned disaster which has already cost American taxpayers hundreds of billions of dollars, with projections that the final cost will be in the trillions.
Oh right, the Iraq War.
No WMD ever found. No operational link to al Qaeda, nor any connection at all to the 9/11 attacks.
And then to add insult to injury, not enough troops sent to secure the “Arab street” in Iraq following the start of the Bush/Cheney/Rumsfeld-initiated hostilities in March 2003, with further insult being the Coalition Provisional Authority, with its neo-con Republican pie-in-the-sky plans for the “liberated” Iraq, an authority staffed with right-wingers who applied for their CPA job on-line at the Heritage Foundation, with many of them having no knowledge or experience, which just poured salt into the gaping Iraq wound.
One has to wonder if any Republicans or conservatives will look deep into their souls and someday accept responsibility for their actions that have done so much damage to our nation and rest of the world.
Maybe a 12-Step Program should be established especially for them, as have others for recovering drunks or drug addicts? But they’d never attend, just as George W. Bush, a drunkard for over twenty years, never attended an Alcoholics Anonymous meeting nor went through a 12-Step Program. He, like Rubin, like so many other conservatives (drunk on power and ego hubris), can’t admit their own stupidity, their own wrongs that they’ve done to our nation and to so many other people around the world. So Congress should pass a law mandating that all these conservatives have to attend a 12-Step Program, and successfully complete each stage, during the evening, while during the day they have to go around and pick up trash on the streets and sidewalks (community service). Maybe, then, some humility might replace their blinding and dangerous right-wing denial and arrogance.
November 29th, 2008 at 10:48 pm
I agree with Wisconsin Reader.
It is not their job to predict how their policies will effect the economy. Their job is just to make money, supposedly for the company, but really for themselves. And at that they were successful, at least in regard to the latter. They didn’t listen to the nay-sayers because no one listens to the nay-sayers, ever. When there is money to made, the feeding frenzy has a logic of its own. Picture a swarm of sharks tearing into a whale carcass, bloody water boiling. Do the sharks stop and think; will this go on for ever? Will some one get hurt? No, they bite and tear at the whale, and when it is no more, upon one another. They are our celebrated lean mean competing machines in that tawdry spectacle, Survival of the Fittest! And we as a nation applauded and cheered as the numbers soared dizzyingly higher and higher. It was great while it lasted. Well the party is over now. While nursing this horrible hangover we can ask ourselves if it was all worth it. After moping around in the very unsexy reality of real work, sacrifice, and moderate sustainable growth, I would wager that the majority of Americans would be willing to do it all again. That is who we are. That is why we have chosen these people to lead our largest corporations and our government. They are just the best and worst of us. How easy it would be to point a finger at these people when all comes crashing down. But too few questioned the logic of the entire endeavor.
Are they to blame? Of course they are! But so are we for allowing them to run amok. Remember, in a real democracy it is the people who call the shots. Outsource at your own peril.
November 29th, 2008 at 11:13 pm
All those who believe in ‘regulation’ should read this analysis.
November 29th, 2008 at 11:51 pm
Peter Schiff for one very precisely foretold the obvious conclusion of the failed policies and ideological financial methods of the GOP and this administration.
It’s not dodging, it’s outright cowardness and lying.
It isn’t conceiveable, that others weren’t aware; they may have been scared and justifiably politically, for their jobs; but, they knew.
That they continue not to admit their knowledge of the current financial reality and it’s cause, is just the continuation of their self protective nature and it speaks to their complicity in this financial ruin we are in.
Cowards come and go; but, some of them go away very comfortably.
America is a nation full of GOP supporting self serving cowards scratching their exsistence on the backs of the masses; it’s the GOP version of the American way.
They have no guilt, no compassion and no sense of honesty. They exsist to justify their methods, be it the family excuse or other reasons; they feel no remorse for their continued support of said lies and distortions. Among them there is a tangible unity of deceit, they protect their own in order to protect themselves. If one is honest then the house of cards may start tumbling down.
Pathetic is hardly a word used when the wealthy get away with such tactics; sinful is more befitting.
November 30th, 2008 at 12:08 am
As to “nobody” … Roubini raised the danger flag at an IMF conference in 2006.
Steven Keen (Australian) saw the crisis looming in 2005 — based on his knowledge of Minsky’s ‘instability’ idea and evidenced in the GDP-to-debt ratio. He went public in the media but nobody listened then and there’s still a state of denial about our housing bubble.
November 30th, 2008 at 1:56 am
When ex bartenders or clerks were making over million a year selling loans with no rules and Rubin,etc didnot know?
November 30th, 2008 at 8:30 am
Pretty pathetic. These people don’t seem to get it’s their job to have every single scenario covered. I hope obama’s appointments (check em out and more at http://www.spinwhip.com/obama will know better!!! Seriously, read the black swan.. unpredictable events define life, they don’t just alter it here and there. even the good things in life, happened through randomness. As many scenarios as possible must be identified and planned for. basic.
November 30th, 2008 at 8:31 am
No one saw it coming?
http://www.informationclearinghouse.info/article17145.htm
and anything else by Mike Whitney on the subject
ugh..
November 30th, 2008 at 9:23 am
People like DTM need to seriously master the difference between an explanation and an excuse.
November 30th, 2008 at 10:57 am
No one saw this coming.
But George Bush was supposed to predict it according to every liberal blog out there, MSNBC and CNN.
No one saw this coming but for 16 months while campaigning we heard Obama speak about the failed Bush policies.
Yet, no Congressional hearings on Freddie Mac and Fannie Mae, just the auto industry.
Sounds like economic terrorism to me!
November 30th, 2008 at 11:28 am
It doesn’t take a rocket scientist to figure out that “structured products” (it’s all in the lingo) based on LIAR’S LOANS are gonna end up in the crapper. And the people who profited by the selling and packaging of the loans ought to suffer consequences — but they won’t — more proof that ‘good guys finish last.’
November 30th, 2008 at 3:32 pm
They are paid ridiculous amounts of money for the same reason that any other executive in any other public company gets paid a lot of money: someone has determined that they are the best suited at managing the company and crafting strategy (which includes assuming the right level of risk in both the short term and the long term) with the singular goal of maximizing shareholder value.
A perfectly orthordox response that, in my untutored view, contains the seeds of the problem that causes repeated financial debacles. That concluding business about “maximizing shareholder value” is only true for about 3 month bits. The executives just have to hit expectations, or better, a little above, cf. Jack Welch@GE, every quarter. They don’t seem to have to consider avoiding a future quarter that wipes out, say, ten years of exceeding expectations. It’s seems to be true that that the knowing insiders here think this just shouldn’t be in their job descriptions. But given the recent history — 1980’s bank crisis, early 2000’s stock crisis, 2008 bank crisis — is this any way to run a business, much less an economy?
November 30th, 2008 at 8:03 pm
Only a complete, utter meltdown of the US financial system will create a new and better one, but that’s a helluva high price to pay.
December 1st, 2008 at 12:59 am
OBAMA WILL DO WHATEVER THE ECONOMISTS TELL HIM TO DO. PERIOD.
We have created unrestrained, and independent leadership in the form of omnipotent economists. They are not what they seem.
http://pacificgatepost.blogspot.com/2008/11/economists-our-new-philosopher-kings.html
Perhaps society has simply overplayed them.
December 1st, 2008 at 11:47 am
Matt et al,
After voting for Obama, I am worried that he might be up there with being one of the worst Presidents in history, perhaps after Bush 2 and Reagan. Clinton isn’t too far behind but at least he raised taxes on the wealthy and increased infrastructure building which did alleviate middle class downturns.
However, with Volcker, Summers, Rubin as advisors. I can see only gloom for us in the lower middle class…We who don’t have Harvard degrees to help us through the coming night.
Plan B for Obama needs to be addressed: 20 to 50 million new unemployed in the next two years. His dinky stimulus package isn’t going to do much to help them (us). Otherwise if he let’s Harvard redo a Russian type of Liquidation ala jeffrey sacks et al did in Moscow post iron curtain…..US life expectancy will likewise be going down. Hell, I hope for Plan B…we on the Left have been anticipating this kind of melt down since Reagan put a Libertarian in charge of the Fed. for example, Kevin Phillips has been predicting this for awhile….but to have it fold so quickly isn’t predictable.
remember the pain hasn’t even started yet. Most people unemployed will NOT have unemployment insurance…so what are they going to do?
so matt, you with the Harvard degree, we need you to talk about Plan B…what to do with massive unemployment? Pressure?
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March 9th, 2009 at 2:52 pm
It seems that we are putting our “hope, dreams, retirement money” into the hands of people (executives) that do not understand money or business.
That means “leverage, risk, greed, upside, downside, sideways.” This downturn is NOT complicated. It is very basic math – earn money, save money, spend money.
I do not understand Mr. Rubin’s comments at all.
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