Is Fortress Ashamed Of Director Howie Rubin's "Tickets Forgotten In A Drawer" Experience?

Fortress investment group has been on a tear recently: the stock which had probed the sub-dollar space some months ago, recently got a much needed upgrade from the fine analysts over at Barclays, which optimism was undoubtedly bolstered by the firm's retention of one Daniel ("His Name Is Not") Mudd as CEO, who did miracles during his prior tenure at Fannie Mae for shareholder returns. After all, as the whole "once bitten..." saying goes, one can be positive he has learned from losing billions in shareholder value in the past, and will never repeat it again. (Outliers such as Bob Nardelli are just that - outliers.)

Yet a casual glance at the Fortress Board of Directors reveals one Howard "Howie" Rubin. Taking a look at Howie's directorial bio reveals little of significance:

Howard Rubin

Director

Mr. Rubin has been a member of Fortress Investment Group’s board of directors since February 2007. Mr. Rubin currently serves as a Portfolio Manager at Soros Fund Management, LLC. Mr. Rubin is a director of Deerfield Triarc Capital Corp. (member of Audit Committee). In addition, he previously served as a director of Global Signal, GateHouse Media, Inc. (member of Audit Committee) and Capstead Mortgage Corporation (head of the Audit Committee). He has over twenty years of experience trading mortgage-backed securities. From 1987 until 1999, Mr. Rubin was a Senior Managing Director at Bear Stearns, where he ran the Collateralized Mortgage Obligations desk. Mr. Rubin received a Masters of Business Administration from Harvard Business School and a B.S.E. in Chemical Engineering from Lafayette College.

In fact, one would believe that Mr. Rubin's career, as presented, started at Bear Stearns and there was nothing relevant prior. One would be remiss, as Mr. Howard really hit the prime time long before he even joined Bear Stearns, in what Michael Lewis in "Liar's Poker" described as the man who (in the days before Kerviel and other next gen "superstar" traders) had "lost more money on a single trade than anyone on the history of Wall Street." The relevant headline and article in the Wall Street Journal on April 29, 1987 read:

"MERRILL HAS $250 MILLION LOSS ON UNAUTHORIZED TRADING

 

Executives at Merrill Lynch privately identified the trader as Howard A. Rubin, 36 years old, who had been the firm's head mortgage trader. They said he had far exceeded his limits in acquiring mortgages that were packaged into a particularly risky form of securities. The package involves splitting off the interest payments on the mortgages from the principal and selling each separately. They are known as 'interest-only/principal-only' securities, or lOPOs."

We urge readers to read the entire snippet in Liar's Poker, not least of all because the story of Jerome Kerviel it turns out is nothing new, but because back than $250 million was actually considered a big loss for a trader. How the times have changed.

Another article by the New York Times on April 30, 1987 put Rubin's departure in a slightly more negative light:

Merrill Lynch attributed the loss largely to unauthorized trading by one of its senior officials, who was dismissed. But some executives at Merrill Lynch and other Wall Street firms said more than half of the loss came from trades that had been approved, and they suggested that it was clear there had been serious supervisory lapses and errors in judgment at Merrill...The firm said it had notified regulators of the unauthorized trading. It also said it was tightening its supervisory procedures to limit the ability of any one trader to commit such substantial sums of the firm's capital...Several senior Merrill executives, who spoke on the condition that they not be identified, said Mr. Rubin was unlikely to be the only one disciplined.

What was the impact on Merrill in those days, when Black Monday was seemingly just around the corner:

Merrill Lynch's stock fell $2.50, to $35.50, after its announcement. Despite the size of the loss, equal to more than half of Merrill's total profits last year - which were $454 million - Merrill was not expected to suffer serious financial damage. The firm has total capital of more than $3 billion.

So was anyone disciplined as a result of this then massive loss? Apparently not: the NY Times from November 1987 reports that Mr. Rubin (and his money losing largesse - by this point the loss was apparently $377 million: 83% of Merrill's expected profits) was promptly retained by Bear Stearns. As always - the regulators are out there, watching out for us all.

John Sites, the managing director of Bear, Stearns's mortgage securities division, confirmed yesterday that Mr. Rubin would be working as one of 14 mortgage securities traders at his firm, several rungs down from his previous job.


Mr. Sites would say only that Mr. Rubin had met all Bear, Stearns's requirements before being offered a job, but his formal hiring indicated that he would probably not be sued by Merrill Lynch for the earlier losses, as Merrill had said it was considering.


Mr. Sites said he did not know when Mr. Rubin would begin work.

At least Bear Stearns did their background checks properly.

Another take home message: just like in 2008, Merrill apparently had a tradition of betting the farm on trades that could make or break the firm. And in the 20 years between 1987 and 2008 nothing changed. Except that the loss in 2008 was so big that Ken Lewis is now facing potential jail time for having "decided" to bail out the firm that one last time.

But going back to Mr. Rubin. Investors in Fortress, who read Barclays' note and decide to lap up the shares have a right to know, and it is the SEC's obligation to make available, that one of the firm's directors was responsible for almost bringing mother Merrill to her knees a good 20 years prior just because of "some trade tickets forgotten in a desk drawer." The information may now be irrelevant, and for all we know Mr. Rubin plays cards all day long during board meeting, but as Michael Lewis quips in Monkey Business:

A Salomon mortgage trader telephoned to suggest that Rubin volunteer for an American Express commercial. "Hi, you don't know me, but I lost more money trading than anyone in the history of Wall Street. So I know the meaning of credit. And when I get in trouble... I pull out this little card.

Ironically this commercial would be ten times as effective with some other bank executives trolling the alleyways of downtown New York in current days, if only American Express wasn't in the same boat itself.

As for Mr. Rubin, his primary activity now involves being a Portfolio Manager at Soros Fund Management. One wonders whether Mr. Rubin has, in fact, learned from the past. Then again, seeing as assets at Soros Fund Management are allegedly up 41% in a year, someone must be "selling" something very persuasive to the new Soros LPs. It would be very ironic, however, if Mr. Reflexivity himself were to end up blowing up his fund, as a result of his traders putting on comparable outsized bets, only for the proverbial six sigma event to strike. Ultimately, the question is, and always has been, do people on Wall Street really learn from their mistakes. And if one listens to President Obama, the answer is a resounding yes. So there is no reason to worry about anything ever again. And absolutely no reason for Fortress to disclose that one of its Directors is the progenitor of a fine tradition of Wall Street traders, hell bent on proving the good old Apres moi le deluge saying.