Money and Power

by William D. Cohan

  Goldfield got off to a bit of an odd start. One day filling in for a trader, he lost $140,000 on a trade, some 7 percent of the annual revenues for this government bond option group. This was not auspicious. Then, a week or so later, filling in again—his supervisors were apparently not as horrified by the initial 7 percent loss as Goldfield was—he made $1.1 million on a trade, more than half the group’s annual revenues. “For what it was, it was shocking,” he said. Although he was not entirely sure how this happened, he would study the data on the hour-long subway rides to his parents’ apartment in the Bronx, where he was living at the time. The next year, the revenues in this little group shot up exponentially to around $35 million, from $2 million.

  His unprecedented success got him noticed during his first year at the firm. First, Corzine came by his desk and congratulated him. Then, one day, relatively early on in his tenure at the firm, Rubin called him in the Bronx. His mother answered the phone. They developed a close friendship. It turned out Rubin wanted to adopt Goldfield, metaphorically speaking. Rubin’s infatuation with Goldfield put him in awkward positions. “He went very far out of his way to include me in meetings where I didn’t belong,” he said. “There would be meetings to figure out what we should do about some big thing and all the senior people would be involved, and me—that kind of thing.” But Rubin took mentoring seriously, especially when he found someone unusually bright or creative. “This was bad because of course it created resentment,” Goldfield said, “but obviously interesting.”

  That’s when Goldfield thought about introducing Rubin to Summers. “At some point,” Goldfield recalled, “I said to Rubin, ‘Oh, I have this smart friend’ ”—Summers—“I guess I already appreciated that he valued intellect highly.” Summers and Goldfield had kept in touch during the five years since he had graduated from Harvard, especially on topics of mutual interest. “We had a lot of energy for very long calls,” Goldfield said. Sometime in 1986, the three men had lunch in Rubin’s office, off the equity floor. The lunch did not go all that well actually, and Summers figured—incorrectly—that he had heard the last of Rubin. (Summers was not the only smart economist Rubin brought to Goldman. For instance, Goldfield remembered Paul Krugman, from Princeton, also dropping by 85 Broad Street to meet with Goldman partners.)

  Over time, Rubin developed a special affinity for Summers. By this point, Summers had served a stint as an economist on Reagan’s first Council of Economic Advisers (even though he was a Democrat) and had returned to Harvard as a full professor of economics, one of the youngest ever. These significant accomplishments at an early age once again caught Rubin’s attention. “It’s easy to see why Bob and Larry developed a close working relationship,” Goldfield said. “Bob liked bright people who would challenge him. Larry greatly valued Bob’s judgment and appreciated his astonishing ability to form a consensus on difficult decisions.” At one point, Summers came to Goldman and gave a lecture about the efficient market hypothesis.

  The two men also shared an interest in Democratic Party politics. Although Rubin had been elected the president of his fourth-grade class and had dabbled in a few local New York political campaigns, his interest in national politics advanced after outgoing treasury secretary Henry Fowler joined Goldman in 1969. “ ‘Joe,’ as everyone called Fowler, was a courtly Virginia lawyer whose ancestors had come to America in the seventeenth century,” Rubin explained. “Many people at Goldman were not that interested in what Fowler had done in government. But to me, Joe was a fascinating figure—someone who had gone to Washington during the New Deal and served in every Democratic administration thereafter.” During one of their many discussions about politics, Rubin mentioned to Fowler that he would like to become more involved. Fowler called Robert Strauss, the irrepressible Akin Gump attorney and legendary behind-the-scenes fixer who had become treasurer of the Democratic National Committee in 1971.

  Strauss told Rubin that if he was interested in shaping policy, he had no use for him. But if he wanted to raise money, they should talk. Strauss wanted Rubin’s help raising money for Democratic congressional candidates in order for the Democrats to retain control of Congress in the face of what was certainly looking like a Nixon landslide reelection in 1972. Strauss then gave Rubin a valuable piece of advice about politics: Follow through. Lots of promises get made in politics, especially when it came to fund-raising, so if you say you are going to help, you’d better help or else don’t bother getting involved. “You know, you look good on paper,” Strauss told him. “But now that I’ve met you, I don’t think you’ll amount to much. So you better work hard.” Properly insulted, Rubin took a week off from work and started dialing for Democratic dollars. Not many of his fellow arbitrageurs were interested in supporting Democrats, but he did manage to raise $25,000. “In those days, that wasn’t a bad start,” Rubin explained.

  Rubin was quite taken with Strauss (and vice versa). “Bob has a magnetism that reminds me of Gus and Bunny [Lasker],” Rubin wrote in his memoir. “When he walks into a room, the effect is electric.” Strauss gave Rubin some “early political advice” that he remembered: “Let me tell you about Washington, Bob, I could call President Carter once a week and just say anything—even talk about the weather. After that, I could walk around town telling people that I had just been talking to the President today and, while it would mean nothing substantively, it would have meaning in Washington. That’s just the way this city works.”

  As the Carter administration was nearing its end, Rubin got a payoff of sorts in the form of a job offer at the White House to head up the Council on Wage and Price Stability, which was part of the effort to bring inflation under control. Rubin explored the opportunity. “Few notions were more appealing to me than seeing the world from inside the White House,” he wrote. He went down to Washington, met with the relevant people, but decided against taking the job. “I was left with the impression that that job wasn’t positioned to work, in terms of either staffing and authority within the administration or its conceptual approach,” he continued.

  In 1982, Strauss asked Rubin to be the chairman of the congressional campaign dinner in Washington. This was code for raising money for the elections. After checking around, Rubin determined that he needed to be able to raise at least $100,000 or he shouldn’t agree to take the job. He called a family friend in Florida “who had made a lot of money from my arbitrage advice” and he and his partner agreed to put up $20,000 each. Rubin also agreed to put in $20,000. With $60,000 raised immediately, he told Strauss he’d take on the responsibility. He ended up raising more than $100,000 on his own, and the dinner itself took in more than $1 million, “large numbers by the standards of that era,” he explained. Rubin’s success finding the “mother’s milk” put him on a higher trajectory within the party. Soon, both Walter Mondale and John Glenn, two Democratic senators seeking their party’s nomination for president in 1984, came looking for his help.

  Rubin decided to support Mondale, whom he met through Jim Johnson, Mondale’s campaign manager. He ended up serving as the New York State finance chairman for Mondale. Over time, he participated in policy discussions with Mondale, Johnson, and other top campaign leaders. “Some people like opera,” Rubin explained. “Some like basketball. I like policy and politics.” His cluttered Goldman office on the trading floor—filled with unopened boxes—also had pictures of him with presidents Carter and Reagan. He knew that someday he wanted to work in the White House, although with Mondale’s defeat at the hands of Ronald Reagan he knew that wasn’t going to be anytime soon. Afterward, Mondale had nothing but praise for Rubin. “I definitely would have offered him a position in my administration, one that would have been significant and matched his skills and interests,” Mondale told Institutional Investor in 1990. “Bob is the ablest person I have ever met.”

  In 1988, Rubin worked on the Dukakis campaign, both as a fund-raiser and as a policy adviser. In his memoir, Rubin downplayed his involvement with Dukakis. He wrote that he “met” D
ukakis a “few times,” raised money for him, and “contributed a bit of advice to his campaign.” Rubin was part of a small group of outside advisers to the Dukakis campaign—including Roger Altman and Laura D’Andrea Tyson—whom Dukakis and Gene Sperling, a midlevel economic staffer on the campaign, would speak with fairly regularly. The two economic advisers who were “first among equals,” according to Sperling, on the Dukakis campaign were Summers and Robert Reich, Summers’s Harvard colleague, although Summers was an economics professor and Reich was a professor at the Kennedy School of Government. Summers, Reich, and the economics staff—including Sperling—would have a conference call every night in 1988 during the presidential campaign. Summers and Reich gave their time freely. “They were hungry to be involved,” Sperling said. Sperling described the Dukakis campaign as Summers’s “political awakening” and remembered that he started off being incredibly wonkish—pushing to reform copyright laws or the GATT (General Agreement on Tariffs and Trade) treaty—until Dukakis berated him once, “Larry, GATT, schmatt!” and he started to get with the program.

  For much of the summer of 1988, Dukakis was way ahead of George H. W. Bush, and the inevitable speculation began about which Dukakis adviser would have what position at the White House or in the cabinet. Many people assumed Summers would be Dukakis’s head of the Council of Economic Advisers, the natural post for a leading and influential economist. But by the time September rolled around, Dukakis found himself trailing Bush and then he lost big in November. Dukakis’s defeat hit Rubin, and others, hard. “[M]any in the party felt bitterly toward him for the way he handled his candidacy,” Rubin wrote, without elaboration. For his part, while disappointed by the Dukakis defeat, Sperling looked back on it and instead recalled that it was that campaign that brought together for the first time the people—Rubin, Summers, Reich, Tyson, Roger Altman, George Stephanopoulos—who would soon become household names. “It’s amazing how much goes back to that Dukakis campaign,” he said. “It’s amazing. I walked out of there after ten months—we had lost—but little did I know that people I’d worked with would all end up being highly consequential.”

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  OF COURSE, RUBIN’S entry point into this circle of politics could be boiled down to the fact that he brought in the money. Politicians need cash, and bankers crave power, if only to prove to themselves they have a higher purpose than becoming obscenely wealthy. In 1991, while he was still an economics professor at Harvard, Summers wrote an influential chapter, “Planning for the Next Financial Crisis,” that appeared in a book published by the National Bureau of Economic Research. Other chapters in the book were written by economists Hyman Minsky, Paul Volcker, William Poole, and Paul Samuelson, Summers’s uncle. “It used to be said that a repeat of the depression of the 1930s was inconceivable now that governments better understood how to manage their economies,” Summers wrote. “Yet, both Latin America and Europe have suffered economic downturns during the 1980s on a scale comparable to the 1930s. And, in 1987, the world’s stock markets suffered the greatest one-day drop in their history. It is little wonder that the possibility of financial crisis with major economic consequences has again emerged as a major cause for concern.”

  In this remarkably prescient essay, Summers wrote about the need for a “lender-of-last resort”—the Federal Reserve—to step in during a financial crisis but warned that such non-market-based financial support could lead to “moral hazard” and a too-big-to-fail mentality. “In the presence of a Federal safety net, depositors will not scrutinize the loan portfolios of financial institutions,” he wrote. “This will encourage excess risk taking. The problem is magnified because a few aggressive institutions can put pressure on the rest by offering premium interest rates. Safe institutions that do not desire to take unfair advantage of lender-of-last-resort protection then must choose between raising the rates they offer and accepting fewer deposits. Just as bad money drives out good, there is a tendency for bad financial institutions to drive out good ones.” In researching the article, Summers spoke with Rubin, at Goldman. “Bob set up for me to talk to some other people at Goldman as I was working on that article …,” Summers said, during a 2009 interview in his White House office. “That’s the only consulting I did for Goldman.” (A year later, Summers’s spokesman, Matthew Vogel, wrote that Summers was confused about his intersections with Goldman and Rubin during this period. “I think there’s some conflating going on here,” he wrote. “The only thing Larry did for Goldman for which he was paid was a seminar he conducted for some of their people on behavioral finance in the late 1980s. The [NBER] paper had nothing to do with it.” Goldman would eventually pay Summers $135,000 to speak at the firm in April 2008.)

  After Rubin became co-chairman of Goldman, in 1990, Strauss threw a dinner party for Rubin in Washington to celebrate. “Not because of me, but because of him, it was quite an assemblage,” Rubin recalled. At the time, Rubin had become increasingly concerned about the growing federal budget deficit and the lack of a bipartisan focus in Washington on figuring out how to close it. He was also concerned about the country’s “deep denial” about its social problems—drug use, poverty in the inner cities, continued deterioration of the efficacy of public education—and wondered whether political and financial leaders would have the courage to tackle any of them. These concerns were very much on his mind when he rose to speak at the Strauss dinner. “The gist of it was,” he recalled, “that on the one hand, we were the world’s largest economy, but on the other we had a set of problems—public education, crime, drugs, the inner cities—and social costs that flow from those problems: the deficit, the savings rate, the comparison between our somewhat failing infrastructure and the more modern infrastructures of Europe. You look at all these together, and it was not a prescription for a healthy future—quite the contrary. It seemed to me, unless we dealt with those problems, we would have a mediocre economy as far in the future as you can see. And I said I was not optimistic personally that we would deal with these problems, because it did not seem to me our political process wanted to do the things that were necessary.” The failure to face up to these systemic problems, Rubin concluded, was the “risk of inexorable national decline.”

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  BY 1992—AND twelve years of Republican rule that resulted in many of the problems he had railed against—Rubin was sifting through the various potential Democratic presidential aspirants in order to decide which one to support. He and David Sawyer, a well-regarded political consultant and documentary filmmaker, held a series of small dinners for the candidates along with about a dozen business and media types. Bill Clinton, the governor of Arkansas, was the guest one night in mid-1991. Rubin was blown away. “I’ve been to many events where a candidate spends much of the time talking,” Rubin recalled. “For more than three hours, Clinton engaged in a real dialogue—a serious give-and-take—on the issues important to us.” At the end of the dinner, Rubin turned to Lew Kaden, a New York attorney (and later Rubin’s colleague at Citigroup), and said, “This guy Clinton is amazing. It’s remarkable how well he understands this stuff.” By March 1992, the New York Times had reported that Rubin was solidly in Clinton’s camp. It is the nature of modern politics in America that people who want to be president of the United States must first audition for people like the chairman of Goldman Sachs.

  A few months later, in May, Clinton, edging closer and closer to the Democratic nomination for president, invited a group of informal advisers to Little Rock to discuss economic issues. The media had not been alerted to the meeting, and the meeting was not reported at the time. Rubin was invited, along with both Altman and Reich, from the Dukakis campaign, and Rubin’s fellow Goldman partners Ken Brody and Barry Wigmore. Although Rubin regarded the meeting as a form of window dressing, Clinton ended up taking off a day from his campaign to evaluate what the group of advisers was thinking. “Doing that showed a remarkable seriousness of purpose for a candidate in the midst of a campaign,” Rubin recalled. He rem
embered the group had “a range of opinions” but agreed on the importance of deficit reduction, greater investment in education and health care, and the wisdom of reducing trade barriers.

  Clinton asked the group to draft an economic statement. That task fell to Gene Sperling, who had just joined the Clinton campaign and “instantly became its economic engine.” Rubin took a prominent role as a media spokesman for the Clinton campaign on economic issues. Under Sperling’s careful tutelage, he learned how “to engage with the media” in a Washington context. Sperling, he explained, told Rubin it was “crucial to get my points across” in answering questions on Clinton’s behalf.

  On September 19, Barron’s reported that if Clinton was elected president, he would name Rubin treasury secretary. Goldman said that Barron’s had not interviewed Rubin for its article and that it was just idle speculation. At the end of October, the Times reported that Rubin was in line for a top economic post if Clinton won. Rubin spent election night in Little Rock “celebrating Clinton’s victory.” A couple of weeks later, Clinton summoned Rubin to Little Rock to meet with him. They spoke together “for a couple of hours,” Rubin remembered, but very little of the discussion was about economic policy, which Rubin later told his wife seemed peculiar.

  At the meeting, Clinton asked Rubin who should be treasury secretary. Rubin recommended Texas senator Lloyd Bentsen, who was the chairman of the Senate Finance Committee, Mondale’s running mate, and “well equipped for the job,” Rubin allowed. Of his own qualifications, or lack thereof, Rubin explained that he didn’t feel he had “the experience in dealing with Congress, the media, policy or politics to handle the job at that point.” He and Clinton also spoke about Clinton’s idea to create an economic equivalent of the National Security Council at the White House to coordinate the many agencies and offices that participate in economic policy making in order to distill down the many different viewpoints about which economic paths to take and make useful recommendations to the president.