The Man Who Risked The World

Zero Hedge is starting to run a series of profiles of one of the most influential living people in the world. The man in question is former Secretary of the Treasury, and the man who made Goldman Sachs into the hedge fund quasar and uber-prop trading desk (rhymes with Hedge Fund Tsar, a position Barack Obama may or may not be contemplating) that it is now, Robert Rubin. Rubin redefined the term risk arbitrage (or as some would say, riskless arbitrage, thanks to the helpful nudge here and there of whoever may have been in a position of "puppet" power at any given moment) by being among the first to discover (and definitely the first to repeatedly bet the farm, making boatloads when successful, and somehow not losing when not) the amazing synergies provided by Goldman Sachs' numerous relationships as they may pertain to the firm acting in proprietary trading capacity.

If one were to claim that Goldman Sachs is a cephalopod of some nature, than Robert Rubin is the beating heart (and soul) of such an animal. A mere listing of the people the were Rubin's proteges while at Goldman should be enough to send shivers up the spine of any University of Chicago efficient market hypothesis fan. The names of Rubin's most well-known underlings include (and this is not a comprehensive list):

• Larry Summers: needs no introduction
• Thomas Steyer: founder of multi-billion hedge fund Farrallon Capital
• Sylvia Matthews Burwell: President of the Global Development Program at the Bill & Melinda Gates Foundation
• Eric Mindich: Youngest Goldman partner in history (27) and founder of multi-billion hedge fund Eton Park
• Richard Perry: Founder of multi-billion hedge fund Perry Capital
• Frank Brosens: Co-founder of multi-billion hedge fund Taconic Capital
• Edward Lampert: Founder of multi-billion hedge fund ESL Investment

Another way to visualize Rubin's relationships is courtesy of Muckety:

Yet taking a more detailed look at Rubin's accomplishments reveals a less than flattering picture. Some relevant episodes taken from Rubin's career:

1979 Arb desk losses on oil:  Head Rubin "Remaining detached was often no mean feat. For one thing, Rubin, as part of his job, was sometimes gambling with a third of his partners' retirement money. In 1979, for example, he took a number of arbitrage positions that depended on the expectation that inflation and oil prices would continue high. When oil prices and inflation dropped, many of his investments plunged. "We had one month in which we lost more money than the firm made in any prior year," he remembers. "But most people had internalized this sort of thing and the senior management, particularly, was very good about saying, Look we understand once in a while things like this will happen. It doesn't mean people weren't nervous because they were -- hell, I was nervous."  From the NY Times,  see also Big Deal:  Mergers and Acquisitions in the Digital Age, by Bruce Wasserstein, page 574.
 
1986 fixed income division losses on interest rates: Co-head Rubin "had learned his lessons in risk from the financial markets. In 1986, as losses at the fixed income division of Goldman Sachs mounted to $100 million, Rubin discovered that there are implicit interest rate options embedded in many fixed income products. If the rates drop then homeowners would refinance their mortgage at lower rates and corporations would exercise their call provisions to refinance their bond debt."  Risklatte see also Fischer Black and the revolutionary idea of finance, by Perry Mehrling
 
1992 losses on Mexican bonds before Rubin joined the Clinton Administration in 1993: "From 1992 to 1994, [Goldman] had purchased $5.2 billion of Mexican bonds on behalf of its clients or its own portfolio, one-fifth of the total.  These were the very bonds that Rubin's bailout was to salvage." From Blood Bankers, by James Henry, page 296.
 
2002 Citi bad loans to Brazil and Enron:  "American banks have about $25.6 billion in outstanding loans to Brazilian borrowers. Citigroup, the biggest lender to Brazil, has $9.7 billion in Brazilian loans." That's right. Forty percent of the U.S. bank exposure in Brazil is the fault of America's biggest and dumbest bank. And who is the resident financial wizard at Citigroup? "Robert H. Rubin, who was treasury secretary under President Clinton and engineered international rescue packages for Mexico, Russia and many Asian countries, is now a Citigroup director." From The American Cause

A common unifying thread is the repetitive, spaced out by 5-10 years on average, spectacular blow up, the result of the bursting of yet another bubble of his own creation, for which not only would Bob not get punished, but would either frame, or be the beneficiary of, policies that would provide a generous backstop, and would subsequently progress to ever loftier positions of responsibility, both private and public.

Is this the same theme now seen with now only the five core TBTF firms, but mostly with Goldman Sachs? Is it surprising that moral hazard has now enveloped the very fabric of finance, after one of its core progenitors has been pacing the halls of both Goldman (and now nationalized Citi) and numerous administrations over the past 40 years?

More on Robert Rubin and his multi-billionaire hencheman as we delve deeper next time.

h/t Richard