Man Without Qualities

Wednesday, February 13, 2002

Indelicate Questions of an Aged Aunt

The Man Without Qualities values a polymath, including the rare one such as Robert Rubin who enjoys Congressional and media infatuation. But even infatuated ingenues deserve words from a hardened aunt willing to remind the family that the thrilling, romantic whirl does, in fact, share aspects with the process of selecting a prize animal for stud – all of which recommends that the squire in question be asked certain rather indelicate questions. To date, the romantic frenzy has perhaps reached a local peak in this pre-Valentine swoon by Joseph Kahn and Alessandra Stanley in the New York Times, an effort which almost immediately drew criticism from Mark Lewis in The Times prematurely declares that Mr. Rubin’s “call to Peter R. Fisher, under secretary of the Treasury for domestic financial markets, will probably be no more than a footnote in the Enron story.” But just as aged Auntie might impede the swelling emotions of the moment with her indelicate inquiries (Is there insanity in the family? Has the young man ever been - er – “detained” by the authorities? And so on.), I suggest that Mr. Rubin be required to answer some indelicate questions of his own, questions notably omitted in the Times interview.

What, exactly, did Mr. Rubin request of Mr. Fisher? Astonishingly, to judge from available reports, this most obvious question seems never to have been asked of Mr. Rubin directly. According to the Times article, Mr. Rubin called his former Treasury subordinate to request that "a Treasury official ask credit-rating agencies to give Enron — and its lenders — a break.” This is consistent with a New York Magazine article of intriguingly and irresponsibly unspecified sources. However, earlier reports of Mr. Rubin's activities suggested that he called Mr. Fisher to request a government guaranty – perhaps even loans – for Enron. The Times article somewhat inconsistently characterizes the call as an act that “inadvertently gave comfort to the White House and to some conservative commentators, who said it was evidence that it was a prominent Democrat, not Republicans, who backed a government rescue.” But a telephone call from Treasury to the credit rating agencies is hardly a “government rescue.” That seems more consistent with the earlier reports of a government loan or guaranty request. So what was it? Did Mr. Rubin request that the government lend its credit to support Enron (through loans or guarantees) or that the Treasury Department discourage the downgrade of Enron by the credit rating agencies? Or both? And was anything else discussed or requested?

Until the content of Mr. Rubin’s conversation is known, no determination of whether Mr. Rubin or his employer, Citigroup, committed an unethical or illegal act is possible. And it is important to know if the Chairman of the Citigroup Executive Committee committed an unethical or illegal act.

Did Mr. Rubin give any thought as to whether failure to make full disclosure to Mr. Fisher might be a violation of federal law? Citigroup is a bank holding company, and many activities of its corporate group are directly or indirectly regulated by the United States Department of the Treasury. The Federal government maintains a broad network of regulations and policies which prohibit officials of regulated entities from making false or misleading representations to their Federal regulatory agencies.

Did Mr. Rubin investigate what Citigroup and its subsidiaries knew about Enron, and whether his failure to reveal Enron’s failings to Mr. Fisher might violate any Federal regulations or policies? Under Federal law, Mr. Rubin’s call to the Treasury Department might or might not be held to the same standard of forthrightness which is applicable to a bank holding company officer providing information to the Federal Reserve Board (the main regulator of such companies). But the Federal Reserve also maintains a large set of “expectations” and “policies” which, while sometimes lacking the full force of law, can nevertheless cause great discomfort to a bank holding company which dares to transgress. Surely a man of Mr. Rubin’s legendary caution gave full consideration to all potentially applicable laws, regulations and policies.

Suppose Mr. Rubin had succeeded in his apparent venture of making Treasury cause the “credit-rating agencies to give Enron — and its lenders — a break” Is the fact that Enron’s debt would have received a downgrade but for pressure from the United States Treasury “material inside information,” in the dry but indelicate argot of the securities bar from which Mr. Rubin hails? One would think it is. In fact, one can scarcely think of a more valuable piece of information about a company’s debt than the fact that it would have been (and, in the near future, almost certainly will be) so downgraded, even as the other actors in the securities market proceed in complete ignorance of this fact. Indeed, given Citigroup's exposure to Enron, this information would probably have been “material inside information” with respect to both Enron and Citigroup. As former head of Goldman, Sachs’ arbitrage group, Mr. Rubin was intimately familiar with the value of such information.

In light of the material inside information a successful foray into what Mr. Rubin is apparently charmingly characterizing as “public policy” would have netted for Citigroup, was Mr. Rubin proposing a halt in all Citigroup trading and advising in Enron-related securities? Such activities are prohibited to holders of material inside information. Indeed, since the inside information would have arguably have been material to Citigroup’s securites also, was Mr. Rubin proposing a halt in all Citigroup trading and advising in Citigroup-related securities until the full story was revealed to the public?

Further, suppose Mr. Rubin had succeeded. In that event, his own former subordinate and the Bush administration in general would have been predictably (predictable that is to Mr. Rubin, but not to the unknowing Mr. Fisher) drawn into the scandal much more deeply and exposed to public criticism so violent as to make what has actually occurred seem like a summer breeze. Did Mr. Rubin consider the possibility that in such circumstances the Administration would perhaps have had an incentive to do what it could to extract revenge on Citigroup and its subsidiaries in whatever way possible – preferably through non-public regulatory action? Would that have been a development in the best interests of Citigroup, its shareholders and its other board members? And in light of the predictable and potentially serious consequences of his actions, did Mr. Rubin think it might, possibly, be required of him to consult the Citigroup board – or at least Citigroup Chief Executive Officer Sandy Weil - before acting so rashly?

The curious New York Magazine article noted above asserts that Mr. Rubin made his call “On his own, without consulting Weill or anyone else.” But can that possibly be true? It is here that we perhaps most closely approximate Auntie’s annoying but necessary question: “Is there insanity in the family?" But perhaps it is here where Mr. Rubin’s legenday judgment and steel trap mind intervened. Was Mr. Rubin counting on Mr. Fisher’s disincentive to reveal or act on the call once the trap (if there was one) had been sprung? The New York Magazine article suggests that Mr. Rubin’s entire career has been marked by just such calculations. How could Mr. Rubin have known that that Mr. Fisher would unexpectedly act as he did?

Did Mr. Rubin consult with counsel before making his call? Now, of course, such consultation may well be protected by the attorney-client privilege. But that privilege belongs to Citigroup – not Mr. Rubin – to waive. And given the circumstances, Citigroup’s board should have no hesitation to do so. Perhaps Mr. Rubin consulted the able attorneys at Citigroup’s long-time primary outside counsel, Shearman & Sterling, some of whose current partners - in their prior lives as employees of the Securities and Exchange Commission – were the very people responsible for granting Enron the waivers from the provisions of the Investment Company Act which reportedly allowed to Enron allegedly to run amok.

Mr. Rubin is not apologetic about his call. The New York Times article quotes him as saying that he would do it again. The New York Magazine article speculates that his request, if granted, would have yielded a splendid crop of benefits to the public. Really? Has the energy market been wracked in ways it would not have been had the government intervened? Would the markets have benefitted from further delay in the credit agencies doing their duty and exposing Enron for what it was, as Mr. Rubin desired? Most of the disruption in the securities markets arising from the Enron matter has been caused by market discontent with accounting practices. Was Mr. Rubin proposing to withhold information concerning Enron's alleged accounting chicanery from the public? In short, what were the "benefits" supposed to be - other than to Citigroup and the Democrats.

And about those credit rating agencies. Ordinary participants in the bond market believe that the credit agencies are actually hired to give their frank and honest evaluation of the credit risk inherent in rated bonds. Silly them! Sophisticated insiders like Mr. Rubin seem to understand that the Treasury Department can and does manipulate those very ratings. How many bond holders are aware that the Treasury Department manipulates the credit agencies evaluations of public company debt in the service of "public policy." In considering this question, one should also keep in mind that Enron was not even a marginal case. Mr. Rubin was requesting Treasury to cause a deliberate misevaluation of the public debt of a company now widely described as a "house of cards". Mr. Rubin should be asked if he did such things when he was Secretary of the Treasury? If so, did he do them at the behest of his old buddies from the Goldman, Sachs arbitrage department or elsewhere on Wall Street? And, while we're at it, the credit rating agencies and others at Mr. Rubin's Treasury (starting with Larry Summers) should be asked the same questions. Inquiring bondholders will certainly be interested in the answers. In fact, it is hard to imagine a development which might generally disrupt Mr. Rubin's cherished bond market more than a public perception that the credit rating agencies are manipulated by the government at the behest of well-placed insiders - which is just what he attempted. In fact, he seems to think it's no big deal.

There are many other questions that Auntie, in her indiscretion, wants to ask Mr. Rubin. But this will do for now.

Everyone involved in covering the Enron matter seems to dote on some cherished potential conflict-of-interest, so here’s a new one. As noted above, Mr. Rubin works for Citigroup, which is a bank holding company directly regulated by the Federal Reserve Board. So it would seem that the Federal Reserve Board has primary responsibility in investigating Mr. Rubin’s (and Citigroup’s) actions in some cases. But many media articles concerning the personable Mr. Rubin note his long term ”friendship” with Mr. Greenspan. Does that “friendship” create any conflict of interest for Mr. Greenspan?

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