Barack Obama’s political future may hinge on a man who lost his life in the most notorious duel in American history. As the sky was just beginning to lighten, a barge ferried two men across the Hudson River to a rocky outcrop near Weehawkin, New Jersey. In the boat were Alexander Hamilton, Nathaniel Pendleton and Dr. David Hosack. Hamilton was on his way to a duel with death. Aaron Burr had challenged Hamilton after the 1804 New York Governor’s election in which Hamilton had vilified Burr in a campaign whose nastiness was notable even for those days of no-holds-barred elections.
Dueling was illegal in New York which is why the two journeyed to the Weehawkin Heights, which was a well-known local dueling ground where Hamilton’s son had died three years earlierl. The two seconds published an account of what happened when Burr and Alexander Hamilton met:
Colonel Burr arrived first on the ground, as had been previously agreed. When General Hamilton arrived, the parties exchanged salutations, and the seconds proceeded to make their arrangements. They measured the distance, ten full paces, and cast lots for the choice of position, as also to determine by whom the word should be given, both of which fell to the second of General Hamilton. They then proceeded to load the pistols in each other’s presence, after which the parties took their stations. The gentleman who was to give the word then explained to the parties the roles which were to govern them in firing.
He then asked if they were prepared; being answered in the affirmative, he gave the word present, as had been agreed on, and both parties presented and fired in succession. The intervening time is not expressed, as the seconds do not precisely agree on that point. The fire of Colonel Burr took effect, and General Hamilton almost instantly fell. Colonel Burr advanced toward General Hamilton with a manner and gesture that appeared to General Hamilton’s friend to be expressive of regret; but, without speaking, turned about and withdrew, being urged from the field by his friend, as has been subsequently stated, with a view to prevent his being recognized by the surgeon and bargemen who were then approaching.
The duel at dawn had mortally wounded both men. Hamilton would die of his wound; Burr’s political career was ruined. Two centuries after that duel another former Treasury Secretary would found the Hamilton Project, an adjunct of the Brookings Institution. Yet many believe the founder of the Hamilton Project may suffer a fate as tragic as Hamilton or Burr’s.
A previous essay discussed Rubin’s early years, particularly his penchant for taking risks, something both he and Hamilton share. Like Hamilton, Rubin also has a powerful political patron–Hamilton’s was George Washington; Rubin’s is Bill Clinton. Where the course that lead Hamilton to Weehawkin began during Washington’s term, Rubin’s tragedy began during Clinton’s Presidency. It involved the repeal of the one of the cornerstones of the New Deal, the Glass-Steagall banking act.
Rubin and Glass-Steagall
Unfortunately many have blamed the repeal of Glass-Steagall solely on the Democrats, when in fact it was not a Democratic Party idea. In the mid-1980s a Federal Reserve Board stocked with Republican Reagan-Bush appointees began reinterpreting Glass-Steagall in a series of actions that slowly expanded the ability of banks to engage in other financial operations.
The actual bill that repealed Glass-Steagall has the name of John McCain’s principal financial advisor Phil Gramm: the 1999 Gramm-Leach-Bliley Act. Here is what Gramm said at the signing ceremony for Glass-Steagall:
We are here today to repeal Glass-Steagall because we have learned that government is not the answer. We have learned that freedom and competition are the answers. We have learned that we promote economic growth and we promote stability by having competition and freedom.
I am proud to be here because this is an important bill; it is a deregulatory bill. I believe that that is the wave of the future, and I am awfully proud to have been a part of making it a reality.
So how did Bill Clinton and Robert Rubin get involved in what had been largely a Republican attempt to gut Glass-Steagall? Curiously, Rubin’s Treasury biography says nothing about the Glass-Steagall repeal.
Actually, Rubin’s support for repealing Glass-Steagall is entirely consistent with his actions at Goldman Sachs, especially his advocacy of expanding ways banks could operate. In a sense, as related in the previous essay in this series. Rubin’s tenure at Goldman set the stage for the repeal of Glass-Steagall.
With Rubin’s ascendancy to Treasury Secretary during the go-go economy of the 1990s, the feeling grew among some economists and the financial community that Glass-Steagall hampered America’s financial competitiveness. Among the many voices favoring this was Alan Greenspan along with his former Goldman Sachs colleague Robert Rubin, then Bill Clinton’s Treasury Secretary. In a 1995 speech and testimony to Congress Rubin signaled the Clinton Administration was ready to repeal Glass-Steagall:
The banking industry is fundamentally different from what it was two decades ago, let alone in 1933.” He said the industry has been transformed into a global business of facilitating capital formation through diverse new products, services and markets. U.S. banks generally engage in a broader range of securities activities abroad than is permitted domestically. Even domestically, the separation of investment banking and commercial banking envisioned by Glass-Steagall has eroded significantly.
A year later Sanford Weill set in motion the forces that would finally end Glass-Steagall. Weill proposed the most audacious financial merger of in American history: he would merge one of the largest insurance companies (Travelers), one of the largest investment banks (Salomon Smith Barney), and the largest commercial banks (Citibank) in America. Weill convinced Federal Reserve head Greenspan, Rubin and Clinton to sign off on a merger that was illegal at the time, with the expectation that Congress would repeal Glass-Steagall.
The story of that repeal has been told several times in this blog, most recently this past spring, so I will not detail it yet again except to note that although it was Robert Rubin who urged the repeal of Glass-Steagall, the official signing did not happen on his watch, but instead during the tenure of his successor and protege Lawrence Summers.
The year 1999 was an interesting one for Robert Rubin if you do nothing but look at the chronology. On May 6, 1999, the Senate passed Gramm-Leach-Bliley. Rubin’s last day at Treasury was July 1, 1999. On July 30, the House passed a different version of the bill. At this point the House and Senate conference committee began trying to work out their differences. This is the impasse that sparked the famous middle-of-the-night telephone call on October 21 between Citigroup head Sanford Weill and President Bill Clinton, in which Weill urged Clinton to throw his weight behind the resolution advocated by Gramm. A September 17 New York Times article announced that Rubin was planning on returning to Wall Street, but he had not yet decided where or in what capacity. A little over a month later–and five days after that phone call–on October 26, 1999 Rubin joined Citigroup. On November 4, the final version of GLB passed both Senate (90-8) and the House (362-57).
This chronology leads you to the famous question asked during the Watergate hearings, “What did he know and when did he know it?” It would have been interesting to be a fly riding around on Robert Rubin’s shoulders between September 17 and October 26. What role, if any, did he play in breaking the deadlock? What conversations did he, Weill, Summers and Clinton have, if any? In that crucial month there is plenty for a good Washington investigative reporter, especially one with access to inside sources, to track down.
Citigroup
Rubin very cleverly negotiated a deal with Citigroup that gave him the title of director and chairman of the executive committee. Rubin explained his reasons for the title:
By the time I finished at Treasury, I decided I never wanted operating responsibility again.
A banking official put it more bluntly:
When you have responsibility with no accountability, that is a very dangerous thing on Wall Street.
Exactly how much impact Robert Rubin had on Citigroup has now become one of the chief topics of gossip on Wall Street, in the press, and inside the Beltway, His friends have been actively running cover for him, claiming he played no role in the present debacle, but as reporters pry more into how Citi fell into this mess, they have begun to draw the noose tighter around Robert Rubin.
They also brought up some of his other missteps at Citi such as In November 2001 when in the midst of the Enron debacle Rubin phoned Peter Fisher, undersecretary of the treasury for domestic finance, tried to convince him to delay a downgrading of Enron’s debt.
The Noose Tightens
Last spring’s Times profile contained a few hints.
“He is like the Wizard of Oz behind Citigroup, he is the guy pulling on all the strings,” said one Citigroup banker who was not authorized to speak publicly about the situation. “He certainly was the guy deferred to on key strategic decisions and certain key business decisions vis-à-vis risk.”
Yet for each of these negative words about Rubin, the Times would quote one of his allies to balance it. They also quoted Rubin’s defense:
“People know I was concerned about the markets,” he says. “Clearly, there were things wrong. But I don’t know of anyone who foresaw a perfect storm, and that’s what we’ve had here.”
“I don’t feel responsible, in light of the facts as I knew them in my role,” he adds.
But did he make mistakes?
“I’ve thought a lot about that,” he responds. “I honestly don’t know. In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.”
But last week the tone changed and the quotes became more pointed in a Times’ piece on Citi’s downfall.
“Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process,” a former Citigroup executive said of the bank’s big C.D.O. push. “Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more.’ ”
According to current and former colleagues, he believed that Citigroup was falling behind rivals like Morgan Stanley and Goldman, and he pushed to bulk up the bank’s high-growth fixed-income trading, including the C.D.O. business.
Meanwhile the rest of the press has also been busy, especially Rupert Murdoch’s New York papers. The Wall Street Journal and the Post called for the resignation of the entire Citi board, including Rubin. A Journal editorial asked:
When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi’s dubious investments, how can these men possibly deserve to remain on the board?
It did not help that word was quickly spreading through the media and the blogosphere that Rubin had called on his former Goldman colleague, Treasury Secretary Henry Paulson to give Citi the bailout money or that Barack Obama’s new Treasury Secretary Timothy F. Geithner remained silent about the affair.
Teflon Robert
Part of the reason Rubin has not faced his day of reckoning stems from his extraordinary ties to Democratic Party politicians along with his network of colleagues and proteges. This circle of influence ranges from former President Bill Clinton to present Treasury Secretary Henry Paulson. When Nancy Pelosi arranged a seminar for new representatives after the 1996n election, she scheduled three speakers on foreign policy and one for economic policy. You can guess the identity of that speaker.
Robert Kuttner has dubbed his imposing network “Rubinistas,” writing about an influence on American economic policy that is approaching two decades. In an article he asks:
What kind of magic does this man Rubin have? He was one of the key Democratic architects of the extreme financial deregulation that brought the economy to this pass. At Citi, he was one of the grand strategists of the speculation in securitized loans and off-balance-sheet gimmicks that has brought Citi to the edge of bankruptcy. Yet he continues to fall upwards. Surely Barack Obama must have noticed that Rubin is a false prophet. So why is his entire senior economic group a Team of Rubinistas?
It’s a fair question. One answer lies in the Hamilton Project.
The Hamilton Project
It is significant that the Project was unveiled at a policy briefing featuring Rubin and Obama and moderated by Peter Orszag, now Obama’s choice for director of the Office of Management and Budget. Others involved in the Hamilton Project include Obama advisor Austan Goolsbee and Lawrence Summers, incoming director of the National Economic Council. Because of this connection between Obama, his appointees and the Project, it is important Americans understand what the project stands for.
Directly tying itself to Hamilton, the Project states:
Consistent with the guiding principles of the Project, Hamilton stood for sound fiscal policy, believed that broad-based opportunity for advancement would drive American economic growth, and recognized that “prudent aids and encouragements on the part of government” are necessary to enhance and guide market forces.
Here is what the vision document states:
The Project’s strategy–strikingly different from the theories driving current economic policy–calls for fiscal discipline and increased public investment in key growth-enhancing areas.
This sounds suspiciously like a have-your-cake-and-eat-it statement in its call for “fiscal discipline” and “increased public investment.” During the Clinton years Rubin earned a reputation as a deficit hawk who was not afraid to cut back on social programs to balance the budget. He also is known as an advocate of the open-markets approach favored by the Democratic Leadership Council and the GOP. A Reagan-like statement in the vision document notes:
Government has a limited but essential role in creating conditions for growth in which all Americans can share.
In explaining this paragraph the statement goes on to describe how this might be achieved:
Reform regulation so that it effectively guides private firms without unnecessarily hampering them; and take measures to make all proposals budget-neutral.
The entire vision document reads to me like a cut and paste job that tries to meld current Republican and Democratic Party ideas, with a Clinton-like triangulation.: For example, we will enhance education but make it budget neutral. Clearly to rescue American education will require an increase in education spending, but if we are to do that without deficit spending where do we cut? For a think tank of economic experts, the Hamilton Project is curiously silent about spelling out these cuts.
Is This The Final Act?
The Obama Administration will not have that luxury. The showdown in the administration and the Party is likely to loom between those who favor a level playing field and those who favor the measures advanced by the Hamilton Project. It is reminiscent of the battle between Hamilton and Jefferson in Washington’s Presidency. Navigating between these two factions will be as difficult for Obama as it was for Washington, yet so far Barack Obama has shown an uncanny ability to do so.
Yet, The fear on every American’s mind is whether the tragedy of Robert Rubin and the Democratic Party will become America’s tragedy just as Hamilton’s was.
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