Robert Rubin's Agony

What keeps the former Clinton economic star up at night? Friends blame him for the Citigroup fiasco. And Rubin can't figure out how he didn't see it coming.

Paul J. Richards, AFP / Getty Images

People who know Robert Rubin say he never thought that it would end this way. In a span of about 10 years, the former Treasury secretary under President Bill Clinton pulled off an amazing feat—going from the man who saved the economy to one of those responsible for its demise as a senior executive and board member of the hopelessly troubled banking giant Citigroup.

It is an amazing about-face for someone who has wielded so much influence and achieved so much success in the power centers of New York and Washington over the past four decades. Before becoming Treasury secretary during the economic boom of the Clinton presidency, Rubin served as CEO of Goldman Sachs. Since leaving Washington, he spent the last 10 years as a board member and senior executive at Citigroup, which for a time was the prototype of the modern Wall Street firm, with its financial “supermarket” business model that offered every banking and brokerage service imaginable. In time, however, Citi became the poster child for the financial crisis that has plunged the country into one of history’s steepest recessions after its massive and costly bet on toxic real-estate debt.

“Bob feels pretty strongly that what happened at Citi wasn’t his fault,” says one associate. “He also knows that he faces an uphill battle changing people’s opinion about the matter.”

It is his role at Citigroup during this time that has damaged Rubin’s legacy, possibly beyond repair. He has been ridiculed in the press. He found his picture prominently displayed with other board members on the front page of the New York Post under the headline “Bounce These Bozo Bankers,” which pointed out that Rubin made close to $110 million during his time at Citigroup, while shares fell from above $50 to below $5, wiping out billions of dollars of shareholder wealth in the process, as he became richer.

Even among his peers on Wall Street, who revered him for so long, there is a general belief that Rubin is fairly culpable for the Citigroup implosion that led to a massive government bailout. This general belief, even among people who consider themselves friends, is what keeps Rubin up at night, according to people who know him. “Bob feels pretty strongly that what happened at Citi wasn’t his fault,” says one associate. “He also knows that he faces an uphill battle changing people’s opinion about the matter.”

One reason Rubin is so concerned about his reputation is that even now, eight months “retired” from Citigroup, he commands respect and influence. He keeps an office on Park Avenue at the Council on Foreign Relations and has a regular business schedule. He often travels to Washington to speak with his good friend and protégé, former Treasury Secretary Larry Summers, now the president’s chief economic adviser, to discuss what he likes to talk about most: economic policy. Recently, Rubin even had a sit-down with President Obama on the subject.

People who know Rubin say what keeps him going at age 70 is that he is still very much part of the public-policy debate, albeit in a behind-the-scenes way, and he would like to keep it that way. (It is one reason he won’t talk publicly with me about these issues.) Unfortunately, Rubin is also still very much part of the debate surrounding the disaster known as Citigroup, including the questions over whether the troubled company should be broken up, whether its CEO, Vikram Pandit (a man Rubin helped hire), has the chops to remain in that position, and most importantly, who’s to blame for the bank’s tragic downfall—one of the key events in the great financial crisis of 2008.

It’s that blame that Rubin can’t seem to shake; in fact it’s becoming more intense as the one year anniversary of the financial crisis’s most turbulent period approaches. And as the debate about Rubin’s culpability grows among the chattering classes, people who know Rubin say this debate is also growing inside his head. Rubin has been privately wrestling with his role as senior adviser to former Citi CEOs Sandy Weill and Chuck Prince when the risk taking began (and reached immense proportions), and falling back on the fact that he didn’t have “operating responsibilities,” meaning he had authority but no direct responsibility to manage those risk takers.

He concedes that he advocated more risk taking, but he says he wanted Citi to do it smartly, “like we did it at Goldman,” he has said. (What makes him feel bad is that he knows that even his old friends on Wall Street say he needs to own up to the damage caused by that wild risk taking.)

Recently, he has been speaking to former government officials, regulators and friends on Wall Street to determine if they saw the financial crisis coming because he sure didn’t until it was too late. Most admit they didn’t either, and that makes Rubin feel better.

One thing that Rubin can’t seem to rationalize, however, is that while Citigroup burned, he was one of the people who had no idea the house was on fire until it was too late.

“I’ve thought about this a lot,” he told one person about Citigroup, “But I don’t know what I could have done without operating responsibilities.” When pressed if he could have done more, however, Rubin confessed, “In hindsight, there is no question. Everyone should have.”

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“I’ve thought about this a lot,” he told one person, “But I don’t know what I could have done without operating responsibilities.” When pressed if he could have done more, however, Rubin confessed, “In hindsight, there is no question. Everyone should have.”

To understand Rubin’s dilemma, you have to understand his role at Citigroup. During his 10 years at the big bank, Rubin had possibly the most unusual job on Wall Street. He was a senior executive with the title “chairman of the executive committee” that bestowed no real duties other than to travel and schmooze with clients and provide advice. Rubin designed his job that way and Sandy Weill agreed.

“I had no desire to return to running a firm,” he has said. “And I had other offers.”

Even so, aside from the chief executive, no other executive at the firm over the past decade wielded more clout. One reason for that was that Rubin wasn’t just a top executive. He was also a board member, the most influential member of the Citigroup board, according to people at the firm. And no major decision was made without his input.

Bob Rubin is at bottom a proud man and I believe a very decent person who has served this country well while in government. He still believes that within the narrow parameters of his job at Citi—to provide advice and serve on the firm’s board—he did a good job. He worked well with clients. He will tell anyone who will listen that he tried to get the bank’s CEO, particularly the hyper-short-term-oriented Sandy Weill, to focus on long-term results, rather than the daily fluctuations in the bank’s stock price and results over the next quarter.

But if there’s one certainty of the past decade of Wall Street greed and government mismanagement of the economy, it’s that Citigroup was a grossly mismanaged institution. Eventually, the federal government was forced to prevent what would have been the largest bank failure in U.S. history by pumping some $50 billion in capital into the bank, and guaranteeing hundreds of millions in toxic assets.

The U.S. government is now Citigroup’s largest single shareholder. The firm is currently on its third CEO (and some regulators are pressing for yet another change at the top); it has gone through almost a half dozen CFOs, numerous management changes during its sordid history, and endless regulatory turmoil.

Throughout the good times and bad, there’s been one constant—Bob Rubin. And consider the following: Citigroup was technically illegal when it was founded by Sandy Weill and John Reed back in 1998 because it combined both commercial and investment banking, but with the help of Rubin as Treasury secretary, the law that would have prevented the supermarket model from working—The Glass-Steagall Act— was dismantled. Citigroup survived, and Rubin was rewarded with his dream job: Lots of money and little if any management responsibility.

Now you know why Bob Rubin’s reputation won’t be repaired anytime soon.

Charles Gasparino is CNBC's On-Air Editor and appears as a daily member of CNBC's ensemble. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His book about the financial crisis, The Sellout, is scheduled to be published later in 2009.