Rubin -- Are You Just a Sandwich?

(c) 2010 F. Bruce Abel

If you were to ask me ten years ago to name my heroes in a quick moment Robert Rubin would be one of them -- out of a very few. Today before Congress Rubin is just a sandwich.

Of course this is troubling. Our world is so complicated that Robert Rubin can be paid by his company $100 million (as he was during the relevant time) and have no idea that his company is on the verge of bringing not just itself down, but the entire financial system down, with all that this implies.

We at this high level could not have been expected to get involved with the "granularity" of the bank's dealings, he says today to Congress.

This man saved the government from Newt Gingrich's plan to shut down government one weekend.

Was this done without "granularity?"

My Gawd.

This man saved Mexico through slogging through our debt package.

Was this done without "granularity?"

Maybe after all it was simply Young Goldman Sachs Men Looking Cool on the Beach. Robert Rubin is now not so young and he can't carry out on the granularity things?

Speaking of carry-out, Robert Rubin, here's a "granularity" assignment that would at least take care of lunch. Would you go down to Izzys and tell them to spread slices of bread with 1000 Island dressing; top each with 1 tablespoon sauerkraut and corned beef, lay cheese on top. Put in broiler and grill until hot ...

Meanwhile, mixing metaphors if not mega-phors, and, as Woody Allen would say,

"You are Citigroup; What are we, chopped liver?"

OK, put aside the above and read a stunningly good piece from the Washington Post by Ezra Klein:

Ezra Klein
The complexity problem
Earlier in the crisis, the line was that "too big to fail" was too big to exist. I'm coming around to an altogether more radical view: What if "too complex to understand" is too complex to exist?

Listen to Robert Rubin -- the former co-chairman of Goldman Sachs, celebrated secretary of the treasury and director of Citibank -- tell the Financial Crisis Inquiry Commission that

"All of us in the industry failed to see the potential for this serious crisis. We failed to see the multiple factors at work.”

Listen to Alan Greenspan -- former Federal Reserve chairman, holder of the nickname "The Oracle" -- say that we need regulations that kick in "without relying on the ability of a fallible human regulator to predict a coming crisis."

If you're an investment bank, the stock market has become a bit of a bummer. It's so transparent and user-friendly that there's really no place for a middleman to make major profits. That's normal: Efficient markets reduce margins. To put it another way: It's hard to make money doing simple things in a competitive market unless you have a monopoly. But Wall Street has leveraged incredible levels of complexity into something that's more like a monopoly than a market.

The really neat trick was that this worked even after the market crashed. Because no one could understand it, the people who crashed the place were also given a major role in the rescue effort. And that wasn't just true at the top level. Think back to the AIG employees threatening to quit and make it (theoretically) impossible to unwind the company's financial products division if they didn't get their retention bonuses. Their retention bonuses!

It would be one thing if this complexity had done great things for the country. But not so much, as we all know. Some innovations (pdf) have been good. But the opaque complexity that gave rise to credit default swaps and collateralized debt obligations and risk profiles that no one understood turned out to be almost unimaginably bad. Complexity helped bankers bully ratings agencies and regulators into signing off on products they didn't understand, it helped mortgage lenders entice consumers into contracts that they couldn't fulfill, and it's now helping Wall Street beat back necessary regulations because Congress is nervous about mucking with an industry they don't really grasp. And beyond all that, the complexity that allowed Wall Street to become a more profitable and significant segment of the economy also sucked talent away from other sectors.

How does this translate into regulation? I'm not really sure. It's not like there's a standard measure of unnecessary complexity or useless opacity. But watching these Wall Street titans tell the FCIC that they didn't understand what the banks were doing is making me a lot less sympathetic when their lobbyists tell Congress that Washington simply doesn't understand what the banks are doing.

By Ezra Klein April 8, 2010; 5:07 PM ET
Categories: Financial Crisis , Financial Regulation

Comments (not by me):

Restricting complexity ultimately translates into restricting interconnectedness.

Fundamental properties of structures in computer science and mathematics called graphs* show that at a certain level of interconnectedness, the corporate graph will show cyclical dependencies that are fairly intractable in terms of answering the questions we want to ask.

Compound this with the fact that you'll only be aware of a subset of the data structure at any time, and any densely interconnected financial system will be "too complex to understand".

*Note, this is very different from a plot or your common bar graph,

Posted by: zosima April 8, 2010 5:35 PM Report abuse

Ezra: I hope you do follow the TED conference and their videos. Two key speakers talks about the need to reduce complexity whether it's legal or societal.

http://www.ted.com/talks/alan_siegel_let_s_simplify_legal_jargon.html

http://www.ted.com/talks/barry_schwartz_on_our_loss_of_wisdom.html

Posted by: AD1971 April 8, 2010 5:48 PM Report abuse

From reading Michael Lewis it is clear that the subprime/CDO/CDS stuff was really complex--so much so that one had to have Asperger's and spend 6 months at it to understand it. It was way, way too complex, and deliberately so. Moreover, the Rubins and Princes didn't ask someone to explain the products to them. There were people in their firms who understood the level of risk, or at least how the products worked. In addition, there were people gaming the ratings agencies who knew that the towers of mortgages and derivatives were largely sh*tpiles. But no one wanted to upset the applecart, and the people with responsibility never wanted to inquire very far.

So what did Rubin do to warrant his $20 million? Provide access? Cachet? He ought to give most of it back.

Greenspan also won ;t acknowledge the role that low interest rates played in (1) fueling the housing boom and (2) encouraging savers/investors to look for higher yields in products like CDOs.

If we want to encourage genuine savings, higher yields were needed, and it would have provided a margin for easing when things went bad. Now, of course, we need low rates. But still. It is a hell of an environment for savers.


Posted by: Mimikatz April 8, 2010 6:05 PM Report abuse

This combined size and complexity is not manageable or controllable in a democracy.

We face very hard choices that we are not socially/politically prepared to make.

There are many aspects that need radical redos:
- numbers and types of biz's that financial firms are allowed to participate in
- max. size of a organization allowed before a anti-trust/anti-complexity trigger is hit that results in breakup into smaller pieces.
- regulators that are tailored to various segments of biz that are created after monoliths are outlawed.
- no financial innovation that isn't fully studied and pre-prescribed remedies are enacted to automatically kick in when inevitably things go awry in one of the newly arranged segments/sectors.

It is almost a fool's errand to think about this, since the beast controls the keeper in multiple ways. We haven't and won't learn from our mistakes. Denial is the order of the day. A return to democratic control of our society is probably now impossible.

Learn to love your financial masters, because they are now your destiny.

Posted by: JimPortlandOR April 8, 2010 7:01 PM Report abuse

The key to regulation is to make CONSUMER PROTECTION paramount. If rules are made with consumer protection in mind AT ALL LEVELS then it will eliminate most of the cheats frauds and loan sharks.

Especially if we take a broad definition of consumer protection to include pension funds and 401Ks. Protecting consumers by cracking down on loan sharks would have prevented the housing bubble.

Trying to regulate the banksters directly is unlikely to work. What can work is to protect small investors and the types of products that can be marketed. The cost of regulation will be small compared to the huge inefficiencies created by the cheats frauds and loan sharks.

Posted by: bakho April 8, 2010 8:01 PM Report abuse

I always though we should just make it a criminal offense to lose $X billion when you can't cover it with assets. Financial meltdowns causes much more societal damage than any particular single criminal act from drug use to trespassing to murder.

You designate a CEO and/or CFO or whoever to be responsible. If the losses include contracts made under a previous CEO, you include him or her.

This is effectively a leverage ratio of 1, but only coming into place when you leverage near the limit. Say, X = $50 billion dollars. I can leverage $4 billion in assets at 13:1 and still make it under the "cap" if it goes bad (4 x 13 - 4 = 48).

But I can only leverage $10 billion at just under 5:1, or else risk 20 years in prison.

But the best part is that no one has to calculate it until after the fact if it goes bad and it motivates people to get it right in the first place. The creditors will act as the police and bring it to everyone's attention because they are making the claims.

Not that I've worked out every aspect of this. You can mitigate sentences for bad luck or duped CEOs.

We used to throw people in jail for debts but got rid of it because it was inhumane for the poor. They can't leverage assets however, so they would just go bankrupt before they reached the limit.

I don't think debtors prison is inhumane for rich CEOs, though.

Posted by: JasonFromSeattle April 8, 2010 8:20 PM Report abuse

RobRub?


Posted by: pj_camp April 8, 2010 8:56 PM Report abuse

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