Did Rubin Kill Citi?

The vipers’ nest of recriminations and finger-pointing that is Citigroup has now turned on the one man who was until now untouchable, Bob Rubin:

Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits.

Of course, none of these insiders and analysts are named, and anonymously-sourced stories like this are often exercises in axe-grinding which should be taken with a large pinch of salt. Still, this is not something we’ve heard before, and it might well be true:

For some time after Sanford I. Weill, an architect of the merger that created Citigroup a decade ago, took control of Citigroup, he toned down the bank’s bond trading. But in late 2002, Mr. Prince, who had been Mr. Weill’s longtime legal counsel, was put in charge of Citigroup’s corporate and investment bank.

According to a former Citigroup executive, Mr. Prince started putting pressure on Mr. Maheras and others to increase earnings in the bank’s trading operations, particularly in the creation of collateralized debt obligations…

“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.’ “

The first part of this sounds as though it comes from Sandy Weill, turning on his former protégé. But I don’t think it’s Weill firing poison darts at Rubin. And those poison darts are hitting home. Up until now, I had a vague concept that Rubin’s biggest mistake at Citi was to have spent too much time as a rainmaker, schmoozing clients, and not enough time sorting out internal problems.

According to this story, however, Rubin was front and center in encouraging Citi’s investment bank to take on more risk — a strategy which had been hugely profitable at his former bank, Goldman Sachs. Did Rubin really think that he could turn Salomon Smith Barney into Goldman Sachs just by encouraging more risk-taking? I doubt it. But if Rubin wasn’t spending much time on the trading floor, it’s possible he was unaware of just how screwy Citi’s risk management was:

It was common in the bank to see Mr. Bushnell waiting patiently — sometimes as long as 45 minutes — outside Mr. Barker’s office so he could drive him home to Short Hills, N.J., where both of their families lived. The two men took occasional fly-fishing trips together; one expedition left them stuck on a lake after their boat ran out of gas…

As the bank’s C.D.O. machine accelerated, its risk controls fell further behind, according to former Citigroup traders, and risk managers lacked clear lines of reporting. At one point, for instance, risk managers in the fixed-income division reported to both Mr. Maheras and Mr. Bushnell.

Bushnell, here, is the chief risk officer within the fixed-income group: the person who’s meant to be keeping a close eye on the people running it: Maheras and Barker. Instead, he’s palling around with them, and his employees are even reporting to Maheras.

How much of this can reasonably be blamed on Rubin is still unclear. But the fact that Rubin is now coming under public attack from Citi types is certainly indicative of how little discipline remains within the bank, and of the size of the task facing Paulson and Geithner this weekend.

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