Robert Rubin’s obstinate performance yesterday on Capitol Hill is sure to fuel popular disgust with the bank bailouts. Rubin appeared to be what he is, someone who has walked away with so much money that he doesn’t have to answer to anyone. When he was responsive, Rubin tried to claim that he had nothing to do with Citigroup’s meltdown. He also tried to make it complicated, which it is not.
All you have to do is read pages 145 and 146 of Charlie Gasparino’s book, titled The Sellout, for a concise account of Rubin’s role in leveraging up Citigroup. Rubin not only pushed for more risk-taking at Citigroup’s executive and board levels, but he also “was making the rounds of the various departments and talking to people about taking more risk.”
I’ve never been a big fan of trial by Congressional hearing. This one was handed over to the Financial Crisis Inquiry Commission, chaired by former California Treasurer Phil Angelides. California is the public sector version of Citigroup. Angelides was on the wrong side of the witness table, but we nonetheless got more than a glimpse of Rubin’s arrogance.
The Wall Street Journal reports today that the big banks like Citigroup, Goldman Sachs, JPMorgan Chase, and Bank of America been masking their debt and leverage levels in end-of-quarter reports to the Fed. They have been temporarily lowering their debt used to trade securities right before the reporting deadline. For the last five quarters, it’s meant an average reduction of 42%.
There is nothing unusual about financial institutions making things look better at the end of the quarter. Mutual funds do it all the time. But this is different. It was excessive leverage that nearly brought down the whole financial system.
Banks are on such thin ice with the public anyway, they are ill advised to play games with these disclosures. Jamie Dimon can’t whine about the bankers being demonized while JPMorgan is engaged in these practices.
Yes, this may be legal, but there is such a thing as good faith. These disclosures have a purpose. They are to allow regulators and the investing public to know how much these banks are leveraged up. In the current atmosphere, citing the fine print — that debt levels may fluctuate — is not going to cut it.
Hiding leverage now may be even worse than prior to the meltdown. Banks are now playing with taxpayer money. It’s not just TARP. Its also TALF, near-zero interest rates, extension of FDIC insurance, and worst of all, Timothy Geithner’s Public-Private Investment Program.
Goldman Sachs is now a commercial bank, but it makes most of it money by trading. Yet it enjoys all the protections and guarantees of a bank. I think most people want banks to operate more like banks, to take in deposits and lend out money.
That’s unlikely as long as someone like Robert Rubin can walk away scot-free from the Citigroup disaster. According to the New York Times, Rubin received $126 million in cash and stock for his Citigroup “service.”