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Robert Rubin: The Man at the Nexus of Big Business and Big Government

There are plenty of media types who blame last year's implosion and the bailout on greedy bankers, but that's only part of the story. Wall Street needed a co-conspirator; namely, the government.
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For anyone who thinks that big Wall Street and Big Government aren't joined at the hip, promoting policies and laws that keep each other fat and happy often at the expense of the American taxpayer, consider the career of Robert Rubin.

Rubin, of course, is largely gone from the public scene after spending 10 disastrous years as a board member and senior executive at Citigroup, the banking giant that epitomizes all that is wrong with American finance, and before that, a largely successful run as Treasury Secretary in the Clinton Administration, which he joined after running another controversial bank, Goldman Sachs. But his legacy looms large, mainly because I believe he was one of the reasons why the financial crisis occurred in the first place.

Citigroup, with nearly $1 trillion in customer deposits, is and always was Too Big To Fail, meaning that because of its size and scope, and the fact that it safe keeps FDIC insured customer deposits, the Federal government wouldn't just let the bank implode as it did Lehman Brothers.

Too many people would be hurt, and not just the Wall Street types. That's why during the height of the financial crisis, policy makers in both parties threw hundreds of billions of dollars at Citigroup to save it from going bust.

Despite all of this, as I show in my new book about the financial crisis, The Sellout, Rubin advocated policies at Citigroup that put the massive bank in jeopardy, and with that put the entire financial system in peril. He was one of the strongest supporters for the bank to begin taking more risk through bond trading, which ultimately led to the firm's downfall, and its government bailout. He had a seat on the Citigroup board, but from that vantage point, he never saw how the firm's risk profile was growing out of control. He was a senior executive at the firm with the lofty title of "Chairman of the Executive Committee," and yet he has time and again explained to me that he had "no operating responsibilities" to monitor the bad behavior that got the firm in trouble in the first place.

More than that, Bob Rubin helped kill the very law that would have prevented Citigroup from being a company in the first place, and would have saved taxpayers a lot of money. The law is known as Glass-Steagall, named after Depression era lawmakers who believed it was a pretty good idea not to mix the risk taking of investment banking and trading, with traditional banking practices such as safeguarding deposits and making loans to small businesses.

Wall Street had made a concerted effort to eliminate Glass-Steagall since at least the early 1980s when the business model of the financial business began to change from one that provided advice to customers--individual investors and corporations-to one that was focused on taking risk, namely trading complex bonds and derivatives where the returns are much larger.

Rubin at the time was at Goldman Sachs. He wasn't one of Glass-Steagall's fiercest opponents, at least at first. When he went to the Clinton Administration as a top economic adviser and later as Treasury Secretary he was still on the fence; published reports show him speaking both in favor and against the law's continued existence.

By the time he had announced that he would resign from Treasury in 1999, the now infamous Citigroup deal had been announced with John Reed the CEO of Citicorp and Sandy Weill who ran the brokerage giant Travelers Group shocking the world with the mega merger, which was technically illegal since Glass-Steagall was still in effect.

But not for long. Rubin had now fully joined the Wall Street gang in pushing for the law to be dumped. And it was, and as it was, Rubin took his private sector job with Citigroup, the biggest beneficiary of the end of Glass Steagall.

Robert Rubin isn't the only reason why Glass Steagall was killed; Wall Street had had been showering their favorite Congressmen and Senators from both parties with campaign contribution and buying their votes. The theory of Citigroup was widely accepted in business circles as the future of the financial business; combining commercial and investment banking services under one roof and allowing firms to sell all sorts of products was a step forward toward "financial modernization."

Nor is Rubin the only beneficiary of the revolving door of Big Government and Wall Street. But his career is useful in showing the problems that this unholy alliance between major financial firms and our ever-expanding government are one of the major contributing factors to last year's financial meltdown.

Citigroup, with its mandate now in hand, and with Rubin approving the effort, became one of the biggest creators of mortgage bonds, the main vehicle used by government bureaucrats of both parties to transform home ownership from something that must be earned to something close to a civil right. With Wall Street buying these loans en mass from the banks to pack into their ever-riskier bonds, lending to so-called "subprime" borrowers became an accepted practice fully sanctioned by the federal government. When Citigroup couldn't sell the bonds to investors, it horded them on their balance sheet, earning the high interest rates the bonds threw off.

That is until reality set in, as it did last year when the entire financial system, burdened by investments in these mortgage bonds on their way to default, Wall Street, began to collapse and the economy fell into the Great Recession, now with 10.2% unemployment that shows no signs of letting up. Citigroup was the biggest casualties of the collapse; its risk takers had lost so much money that it needed tens of billions in guarantees and handouts, as well as the government becoming the bank's largest shareholder.

When the dust finally cleared, it became obvious that the demise of Glass-Steagall allowed the risk-taking traders at Citigroup to jeopardize nearly $1 trillion worth of customers deposits, which is the main reason the feds had to spend so much bailing it out. With that, Bob Rubin's Wall Street career was over. He was forced to resign from the Citi board and the firm itself with his reputation in tatters, but not without earning more than $100 million.

There are plenty of media types who blame last year's implosion and the bailout on greedy bankers, but that's only part of the story. Wall Street needed a co-conspirator, and for me, that co-conspirator is Big Government. They are an odd couple; the ultimate free marketers teaming up with the bureaucrats. But as I show in The Sellout, the relationship worked, at least for them.

As for the rest of us, we're still paying the price.

Cross-posted from Big Government