Cold Call

Photo: Associated Press

It’s been a few years since former Treasury secretary Robert E. Rubin has swept down from Mount Olympus and saved American capitalism. Since bowing out of government in 1999, Rubin has been ensconced in Citigroup CEO Sandy Weill’s office of the chairman doing – well, it’s hard to say exactly what.

He takes calls from billionaire Mexican financiers who want to sell their banks to Citigroup (Citigroup bought Banamex in 2001). He does the lecture circuit, lending his glow to dewy-eyed Citigroup clients all over the world. He even goes down to Washington every now and then to see his old pal Alan Greenspan and primly lecture the Bush administration about blowing the surplus.

For the most part, though, he stays above it all: sitting in his corner office right next next to Weill’s with his stocking feet up on the desk while a clutch of Citigroup executives – including vice-chairman Deryck Maughan, Salomon Smith Barney CEO Michael Carpenter, emerging-markets chairman Victor Menezes, and, most recently, the newly appointed president, Robert Willumstad – sweat mightily to position themselves as the 68-year-old Weill’s successor.

On November 8, though, Bob Rubin’s invisible hand got that old itch. Enron’s stock was in free fall, and though the energy-trading company was still far from a household name, he feared the company’s bankruptcy would be a dire event. Citigroup, one of its longstanding bankers, had more than a billion dollars in loans outstanding to Enron. But Rubin had larger concerns. He had been told by his bankers working on the deal, Salomon’s Carpenter and syndicated-loan head Chad Leat, that a rescue package was almost assembled. The night before, a group of the highest-level Citigroup and JP Morgan Chase bankers cobbled together a deal that would merge the fast-sinking Enron with its Houston competitor Dynegy.

But for the deal to go through, the credit-ratings agencies needed to be dissuaded from downgrading Enron’s mountain of debt to junk status. With a downgrade, the deal would be off and Enron would most likely go bust. In Rubin’s eyes, Enron’s implosion would rock not only the energy markets but global markets as a whole – just as the collapse first of the Mexican peso and then of Mexico’s stock market in 1994 had wobbled markets worldwide.

So Bob Rubin did what Bob Rubin does. On his own, without consulting Weill or anyone else, he picked up the phone and made what he thought would be the most discreet of calls to Treasury Undersecretary Peter Fisher. Rubin and Fisher weren’t strangers – Rubin knew him from his Treasury days, when Fisher worked at the New York Fed.

“Hey, Peter,” Rubin proposed, “this is probably not such a good idea, but what do you think about putting a call in to the ratings agencies? Maybe they could work with Enron’s bankers to see if there might be an alternative to an immediate downgrade.”

It was a cheeky proposal: Rubin was asking the federal government to meddle in the private business of the independent ratings agencies, Moody’s and Standard and Poor’s, on behalf of a company with manifold financial and spiritual links to the current administration. Not to mention the fact that he was a major shareholder and executive of one of the two banks that stood to lose the most if Enron went under. “Gee, Bob,” Fisher smartly demurred, “I’m not sure if that’s advisable at this point.”

Consensus within Treasury at the time was that an Enron flameout, contrary to what Rubin was thinking, would not threaten the financial and energy markets. Rubin’s intentions may well have been noble, and he had his own qualms about Treasury’s getting involved with the ratings agencies. When he sensed Fisher’s hesitation, though, he quickly backed off. He had tried to do his bit, and that would be that.

“He was putting on his éminence grise hat,” says Michael Holland of Holland and Co. “Rubin is an arbitrage trader; he makes decisions quickly. He viewed Enron as a financial-markets issue. In his mind, if a downgrade occurs, it’s ‘Katie, bar the door.’ “

Nevertheless, splashed all over the front page of the Times, the gesture made it seem – and perception is what always counts in the markets – as if he were flacking for Citigroup’s loan book.

The close-to-the-vest phone call has always been the hallmark of Rubin’s style – from his days as a Goldman Sachs arbitrageur to his celebrated stint as the White House’s financial-markets shaman. But the secret to Rubin’s phone calls, and Rubin himself, is that they remain secret. And they remain secret because the calls never cross that invisible line that keeps the interests of the second party best served by not revealing the call.

Rewind to the booming eighties: takeover fever was rampant, and the kings of Wall Street were not Internet analysts and technology bankers but risk arbitrageurs – brass-balled traders who bet millions on when and for what price companies would be taken over. Ivan Boesky was a semi-legend, but the best arb man of them all was Goldman Sachs’s Bob Rubin.

In the spring of 1984, Rubin bet a chunk of Goldman’s capital on a sleepy little company called Houston Natural Gas. It was the hot hostile-takeover stock of the moment: A rival energy concern called Coastal Corporation was buying up shares. Every arb worth his salt was long the stock. It seemed like a done deal, and Rubin bet big, taking on some leverage to spice up his return. But to the surprise of the street, Houston Natural Gas’s board sent Coastal packing. In return for a $42 million greenmail payment, Coastal gave up on its merger aspirations. Guy Wyser-Pratte, then of Prudential-Bache Securities and a prominent arbitrage player at the time, remembers the moment well. “It was a terrible shock when news of the greenmail came across my ticker,” he remembers. “You’ve just paid a huge premium for the stock, and all of a sudden the stock price collapses.” So Rubin and the arb community dumped their positions for a big loss. Shortly after, HNG’s board hired an ambitious, 40-year-old oilman named Kenneth Lay to run the company.

Lay had grand ambitions for the company, and within months it was in play again. This time, the bidder was a rival, an Omaha-based gas firm called InterNorth, and by the summer of 1985, InterNorth had paid $2.3 billion, in a friendly merger, for HNG. The next year, Lay, now CEO of the merged company, christened it Enron. This time, the arbs made out big. HNG’s stock shot up from the low 50s to the $70 level, where the deal was priced.

Rubin by then had moved on to management, and leadership fell to Rubin protégé and fellow partner Robert Freeman. Freeman and his team stuck to the sidelines as the stock soared; Goldman Sachs was advising InterNorth on the deal.

But one of the risk arbitrageurs who did make a mint off HNG was Ivan Boesky. Since the mid-seventies, Boesky and Rubin had widely been recognized as the top arb men on the street. A Fortune article in 1977 had dubbed them, together with Wyser-Pratte and a fourth banker from Salomon Brothers, the four horsemen of Wall Street. Practically the same age, they had made millions for themselves and their firms by mastering the black arts of risk arbitrage, relentlessly working the phones, hoovering up information wherever they could find it and then trading on it. Loud, ostentatious, and a shameless epicure, Boesky was the antithesis of Rubin, who preferred his suits off the rack and a strictly light lunch at his desk. For Boesky, though, his information on InterNorth’s designs for HNG proved to be too good. As would later be documented in James Stewart’s Den of Thieves, Boesky had been buying his information from Martin Siegel, a takeover wizard at Kidder, Peabody, who, the government and more specifically U.S. District Attorney Rudolph Giuliani claimed, was sourcing much of his information from Goldman Sachs’s arbitrage desk – and Bob Freeman.

In February 1987, Giuliani ordered the arrest of Freeman on insider-trading charges. Rubin had been a mentor to Freeman; he had hired Freeman and taught him all that he knew. And Freeman was good, too – he had made millions for the partnership, and his reputation on the street before his arrest had been impeccable. But as he finally admitted in 1989, when he pleaded guilty to having put a call in to Marty Siegel and selling stock on an inside tip, one thing Freeman had not learned from the master was when not to make that last, skating-too-close-to-the-edge phone call. Giuliani got his Goldman partner, though some said at the time that he was after bigger game – Rubin himself.

To this day, Rubin resolutely defends Freeman (“Marty Siegel was lying through his teeth,” he has been known to say), who was never formally charged with providing information to Siegel on HNG. And his acute dislike for the former mayor still retains its fresh edge. As for Giuliani, he could never make his larger case.

Rubin knew well enough from his days as a deal lawyer at Cleary, Gottleib in the sixties, when all the arbs would call him digging around for deal scoop, that the key to successful arbitrage was not just good information but knowing which information to use: knowing when a company will be taken over, placing your bets, riding the stock up, and, most important, knowing when to unload a position. He witnessed as well how his mentor, Gustave Levy – a legendary Goldman arbitrageur and senior partner who helped invent and popularize the risk-arbitrage business in the forties and fifties, always seemed to know just enough to make big money on a deal but never enough to make it obvious.

Every morning at 8 a.m., Rubin would show up at his small desk on Goldman’s trading floor. Spread out before him would be a slide rule, some yellow legal pads, and a telephone. And he would make his calls – never shouting, never emoting, never breaking a sweat. With Goldman’s monster balance sheet behind him, he could bet up to $50 million on a single position, and Goldman became the 800-pound gorilla in the arbitrage racket in the seventies and eighties.

“Rubin was leagues ahead of Boesky,” says a rival arbitrage man from the period. “He had that steel-trap mind, and he always knew how far he could go, who he could talk to, and who he knew would shut up. He was always operating just underneath the radar. And he also had Gus Levy. Gus could call any CEO in the country and ask him: ‘Is your deal safe?’ That’s what made Rubin so good. Goldman always seemed to have the information.”

Most arbitrageurs tend to be like Boesky and Levy. To be on the phone that much, to get access to the right kind of information, to keep your shirt dry when your bet goes south – it all assumes a brashness of character, a largeness of ego.

But Rubin was different. His selflessness, the soft mutter of his voice, the self-deprecatory smirk, that worn, Waspy look – he just stood out from the crowd. The players, the lawyers, the deal guys, came to him in droves, like moths to light. Some risk was fine – risk is the very pith of arbitrage – but knowing when to pull back was the true secret that the other guys could never understand.

In a way, Rubin’s call to Fisher was akin to an arbitrage bet. A trade-off, if you will. He might well have scratched out a scenario or two on his yellow legal pad. The downside risk was essentially what happened: Fisher backed off, Enron collapsed, and Rubin’s reputation lost a bit of its gloss. But weighed against the possible upside – Fisher makes the call and a national tragedy is quite possibly averted (Bob saves the day again!) – in Rubin’s mind, that was a risk-reward relationship he could work with. If he had to do it today, friends say, he’d certainly do it again. He had saved Mexico in 1994, an entire country, by weighing similar pros and cons – why not do the same for Enron?

But for once, Bob Rubin was pushing against a string. By inserting himself into the Enron mess so late in the game, he made his presence physical, not spectral. Which is not how Bob Rubin’s power works. For such a famously self-denying man, the call was a rare act of hubris.


Cold Call