The Unwinding: An Inner History of the New America (34 page)

Much to his surprise, Robbie Rubin, the new boy from Manhattan, was elected president
of his fourth-grade class in Miami Beach in 1947, despite knowing nothing about how
to be class president. He got good grades in high school, but he never would have
gotten into Harvard if a lawyer friend of his lawyer father’s hadn’t introduced him
to the dean of admissions. At Harvard he assumed that he would be part of the 2 percent
of his freshman class that was going to flunk out, but his grades that year were excellent,
and in 1960 he graduated Phi Beta Kappa, summa cum laude.

Bob Rubin never expected a girl as beautiful and talented as Judith Oxenberg to date
him, so he introduced her to his Yale Law School friends in the hope that they would
reciprocate by setting him up with women closer to his own level—but within a few
months Bob and Judy were married at Branford Chapel.

Because his odds of making partner at Cleary, Gottlieb weren’t great, in 1966 Robert
Rubin looked around for a job on Wall Street. Going from a law firm to an investment
bank was very unusual in those days, but his father landed him introductions at Lazard
Frères and Goldman Sachs, and to his surprise they both made offers. He joined Goldman’s
arbitrage department, even though he didn’t know what risk arbitrage was, and he doubted
that he had the audacity to get executives on the phone to question them about prospective
deals. The head of Goldman, the legendary Gus Levy, regularly yelled at Rubin for
asking stupid questions, but Levy also thought that he would one day run the firm—which
seemed far-fetched to Rubin at the time. In spite of doing well in arbitrage, he never
in a million years thought he’d be offered a partnership, so he looked around for
another job and was surprised, to say the least, when Goldman made him partner on
the first day of fiscal year 1971. Within a few years he was on the management committee.

All his life he carried around a yellow legal pad, writing down notes and numbers,
analyzing the likelihood of different outcomes, calculating risk and expected value.
He found that he was interested in trading as an exercise in thinking about probabilities.
Thinking probabilistically meant that he took even remote contingencies into account.
The stress and flux of arbitrage left others nerve-racked and blinded by their own
fear or greed, but he was always able to take the pressure of high-stakes trades in
stride. He was a reasonably commercial person, but he didn’t find his purpose in making
money—he had learned that people found fulfillment only within themselves—and his
identity wasn’t job-dependent. This freed him to think more clearly about risk.

He took the long view, keeping in mind that the result of a trade wouldn’t matter
in a hundred years and that, while he enjoyed his membership in the establishment,
he could always walk away into a different existence—sitting in a Left Bank café reading
Tropic of Cancer
and talking about the meaning of life, or fly-fishing at Spruce Creek or Tierra del
Fuego. His core belief was that nothing could be proven to a certainty, so he functioned
well in the uncertain world of markets. (He was also a reasonably good poker player.)
This philosophical detachment made him a surprisingly successful arbitrageur.

Goldman Sachs in those years was a very different place from what it would become—much
smaller and tamer, a boutique private partnership dominated by investment banking,
not trading, a place where the senior partners spent their time tending to the needs
of clients. In the 1970s, calmly and rationally, Rubin pushed Goldman to get into
over-the-counter derivatives—options trading—and commodities, which grew exponentially
and proved extremely profitable. In 1981 he was part of a small group that persuaded
the firm to make its first major acquisition—J. Aron, a commodities trading house.
When the new division ran into trouble, he turned it around by taking on more risk,
which he found very interesting. (Over half the people at Aron had to be fired, a
delicate undertaking.) From there he rose to the top of Goldman’s huge fixed-income
division, where he and his partner, Steve Friedman, had to stanch large losses on
illiquid positions. To raise more capital they wanted to take Goldman public, following
the other big Wall Street firms, but the younger partners with smaller stakes said
no. With Friedman, Rubin became vice chairman of the firm in 1987, and in 1990 he
reached the top. He got there, much to his own surprise, by maintaining the modesty
of his ambition and the calm of his daring.

Rubin stood in the political center, looking in both directions, but he was a Democrat,
because he was concerned about the plight of the poor. He was also worried about the
growing deficits of the Reagan years. He wanted to get involved in politics—few things
were more attractive to him than the thought of seeing the world from inside the White
House—so he began raising money for the Democratic Party. In 1982, his friend Bob
Strauss asked him to chair a congressional fundraiser. Rubin wasn’t at all sure that
he would be able to raise enough money—in those days there weren’t that many Democrats
in finance—but the dinner took in more than a million dollars. Party leaders began
to solicit his support in tapping Wall Street money, and he raised almost four million
dollars for Walter Mondale in 1984, and the same amount for Michael Dukakis in 1988.

As Rubin aged and grayed, his hair, parted on the left, still grew thick on top, while
his hooded, pouched eyes got sadder and more skeptical. As Wall Street became an ever
larger and more volatile juggernaut, he stayed steady and whippet-thin. As financial
services were deregulated, he remained well regulated. He avoided the limelight, while
his peers bought fifth homes and second wives and appeared regularly in Sunday Styles.
After half a life at Goldman Sachs he was worth well over a hundred million dollars
and lived in a Park Avenue penthouse, but he still wore plain rumpled suits to the
office, walked around his neighborhood in an old pair of khakis, and always made time
to read and fish. Colleagues heard him say “just one man’s opinion” a dozen times
a day. He was careful to hedge his ambition with humility, his risk-taking with expressions
of worry.

When Bill Clinton was elected president in 1992, Rubin wasn’t at all sure that he
would be offered a position in the new administration, but he became the first director
of the newly created National Economic Council. He had no idea how to function in
the White House—didn’t even know what a “decision memo” was—but he brought down his
yellow legal pad, moved into rooms at the Jefferson Hotel, and sought advice from
Washington veterans like Brent Scowcroft and Jody Powell. At meetings in the Oval
Office or the Roosevelt Room, he didn’t try to get as close as possible to the president;
he liked to stay away from the head of the table, read the people in the room, and
speak from a slight remove. Self-effacement worked as well for him in Washington as
it had on Wall Street. “You’re going to be the strongest person in the White House,”
the president once said, which Rubin thought was ridiculous. He was just hoping to
be relevant.

From the foot of the table, Rubin told Clinton that he would have to sacrifice his
campaign promises on education, job training, and middle-class tax cuts and instead
establish credibility on deficit reduction (cutting spending and raising taxes on
the top 1.2 percent) in order to reassure the bond market. If deficits remained at
Reagan-Bush levels, interest rates would go up, and if interest rates went up, economic
growth would be stifled. (This wasn’t just Wall Street’s view—it was basic Rubinomics.)
Clinton, all the while fuming that he was being turned into an Eisenhower Republican,
assented. Nor did the president refuse when, from the foot of the table, Rubin further
advised (not out of class solidarity, but in fear of undermining business confidence
in the president) against using polarizing, class-laden terms like “the rich” and
“corporate welfare.” Even “corporate responsibility” was over the line. When the secretary
of labor, Robert Reich, argued for more populist policies and language, Rubin would
say—calmly, without raising his voice—“Look, I spent most of my life on Wall Street.
I can tell you, you’re just asking for trouble.” In the Clinton White House, most
of a life on Wall Street trumped any other experience, because the bond market was
reality and everything else was an interest group.

Rubin was giving his best economic advice, always disinterested and on the merits.
(If it happened to be Wall Street’s view too, well, the economy had become dominated
by the financial sector, and any Democratic president would be destroyed if he lost
its confidence, especially after the party began to raise most of its money on the
Street.) So Clinton, elected as a middle-class populist, governed as a pro-business
centrist, and Rubin, after moving over to the Treasury Department in 1995, became
one of its most admired secretaries, defusing financial crises in Mexico, Asia, and
Russia, reducing the deficit to zero, and guiding the country through the longest
period of economic growth in its history.

In 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley
Born, floated the idea of regulating the enormous and shadowy market in over-the-counter
derivatives—the market that Rubin had led Goldman Sachs into twenty years earlier.
During a one-hour meeting at Treasury, Rubin was angrier than his colleagues had ever
seen him (Brooksley Born was too strident, he felt, she didn’t defer enough), and
he lectured her to stay out of derivatives—she should listen to the banks’ lawyers,
not the government lawyers at her agency. He teamed up with Larry Summers, his deputy,
and Alan Greenspan, the Fed chairman—called “the Committee to Save the World” on the
cover of
Time
—and persuaded the Republican Congress to block Brooksley Born. (Not that Rubin wasn’t
worried about derivatives. In fact, he had always been worried about the size of Goldman’s
derivatives book, though he reluctantly agreed whenever traders wanted to make it
bigger. And he continued to worry about the risks of derivatives as Treasury secretary,
the way they could entangle financial institutions and magnify excesses in the market.
He had no objection in principle to derivatives being regulated—just not by Brooksley
Born—though he never got around to doing anything about it because of the opposition
he would have faced from Wall Street and the rest of the Committee to Save the World.)
In 2000, Congress passed and Clinton signed into law a bill—the last one the president
signed before leaving office—that prevented derivatives from being regulated by any
agency. (By the time the Commodity Futures Modernization Act became law, Rubin was
no longer in government, so he couldn’t be held responsible for any negative effects
it might have had, as he would point out in later years.)

The same was true of Gramm-Leach-Bliley, passed by Congress and signed by Clinton
in 1999, which repealed the 1933 Glass-Steagall Act and allowed commercial and investment
banking under one roof. (Yes, Rubin vocally supported Glass-Steagall’s repeal, mainly
because the wall between commercial and investment banks had already eroded—a fait
accompli that the most admired Treasury secretary since Alexander Hamilton was powerless
to fix.)

In 1999, Rubin returned home to New York. He took out his yellow legal pad and began
jotting down questions about his next move, taking notes in conversations with people
like Henry Kissinger and Warren Buffett. He wanted to stay involved in public policy,
but he saw no reason to become a monk financially, though he didn’t care to take on
the responsibilities of a CEO. In other words, he wanted to be a wise man, like Douglas
Dillon or Averell Harriman in another era, the kind of figure who moved seamlessly
between Wall Street and Washington, serving the interests of shareholders as well
as the American people. (In fact, working on Wall Street would keep him current on
financial issues so that he could remain useful to policymakers and give his customary
disinterested advice based on the merits.)

Every firm in New York wanted Rubin’s golden name, but Sandy Weill of Citigroup pursued
him relentlessly with just the right offer: Rubin would sit at the top of the bank’s
empire as chairman of the executive committee, the in-house consigliere, shaping strategic
decisions but bearing no responsibility for day-to-day operations. For this he would
be paid fifteen million a year in salary and guaranteed bonus plus stock options (he
was a reasonably commercial person), and he would get to use Citigroup’s corporate
jets for fishing trips and other expeditions. (Citigroup, the world’s largest financial
services company, had been created the year before from the merger of Citicorp and
Travelers, a deal that would not have survived under Glass-Steagall, but Glass-Steagall
no longer existed, though Rubin had nothing directly to do with its repeal and no
one could justifiably accuse him of being paid back handsomely by Citigroup, though
critics inevitably did.)

Rubin fished and read and advised senators and talked with foreign leaders and wrote
his autobiography while he ran meetings of Citigroup’s executive committee. He was
a wise man, and his hair remained thick and his body thin. He had fingers in all parts
of the establishment, joined the boards of Ford, Harvard, and the Council on Foreign
Relations, became an important figure at Brookings, advanced the careers of his many
disciples in business and government. He warned against fiscal recklessness and short-term
investing. He basked in the glow of the longest economic expansion in American history,
even as it faded out.

For it turned out that Rubinomics had not made much difference after all. The years
1993–99 barely slowed trend lines that had been in place for a generation. Between
the late 1970s and 2007, years when Rubin held positions in senior management at Goldman
Sachs, the White House, the Treasury Department, and Citigroup, the financial sector
grew spectacularly, and the rules and norms that had kept it in check collapsed. Financial
companies doubled their share of corporate profits in America, and salaries in finance
doubled as a share of national earnings. The top 1 percent more than tripled its share
of national income, while the income of those in the middle rose by only 20 percent,
and the income of those at the bottom stayed flat. By 2007, the top 1 percent owned
40 percent of the nation’s wealth, the bottom four-fifths just 7 percent. The period
when Rubin stood at the top of Wall Street and Washington was the age of inequality—hereditary
inequality beyond anything the country had seen since the nineteenth century.