Way-Back Machine: Robert Rubin, on Jon Corzine, in 2003

Recently, I looked again at Robert Rubin's 2003 book, In an Uncertain World. I remember recommending it to friends when it came out. My goal now, as I glanced at passages I had underlined years ago, was to see how the meaning had changed since the Great Unpleasantness of 2007-to-present. I was also wondering how Rubin, a guy who wrote so intelligently on how to think about risk, could have missed the big problems that developed while he was at Citigroup.

One passage amazes me. In it, Rubin raises a red flag about Jon Corzine's risk appetite, years before l'affaire MF Global. Quoting the book (and remember, this was 2003):

...The list of firms and individuals who have gone broke by failing to focus on remote risks is a long one. Even people who think probabilistically, and are highly analytical and systematic, often dismiss remote contingencies as irrelevant.

In this regard, I often think of an example from Goldman Sachs when Jon Corzine, then the firm's exceedingly successful head of fixed-income activities, wanted to take a large position in farm credit bonds. The expectation was of a high return, and because the bonds were backed by the "moral obligation" of the U.S. government through a new agency known as Farmer Mac, the probability of their defaulting seemed close to zero. But what Steve Friedman and I asked Jon was "What if a problem develops in farm credit and as extremely unlikely as it might be, the government declines to stand by its so-called moral obligation?" 

"That's silly," Corzine replied. It was inconceivable to him that the government would not honor its moral obligation, and in a sense he was right. 

But Steve and I didn't want Goldman Sachs to cease to exist after 130 years because something that we agreed was virtually inconceivable actually happened....Too often, risks that seem remote are treated as essentially nonexistent. In this case, the remote contingency never occurred, but the decision to limit the risk was right.

The passage I just quoted is on pages 342-343 of the paperback edition of In an Uncertain World. I added the bolding. Upshot for me? Rubin was bugged enough by this encounter with Corzine to put it in print. Note the bold text where Rubin says the he "often think[s]" of this episode. It really got to him.

It was politic of Rubin to admit that the risk (Farmer Mac default) never actually materialized. I guess that is how one becomes a Robert Rubin. Yet he does, in the end, make clear his view that the decision to overrule Jon Corzine was right. Which, of course, it was.

We have now seen, with the bankruptcy of MF Global, a certain vindication of Rubin's instinct that this episode at Goldman was disturbing and worth recording.