Bob Rubin, please just go

Harvard has changed a lot since Larry Summers became president barely a decade ago. But some things never change. Unfortunately, one of those things is that Bob Rubin is still a Fellow--that is, a member of the small governing board that is the legal Harvard Corporation, the President and Fellows of Harvard College.

In early 2010, I wrote about Rubin and Summers in the Huffington Post. The article was called Robert Rubin, Larry Summers: Will the Harvard Shadow Elite Bankrupt the University and the Country? I noted there,

Rubin is now gone from his leadership role and his board membership at Citigroup, hauling away $126M from a firm that was $65B poorer than when he joined it, with 75,000 fewer jobs. But he remains on the Harvard board, in spite of the financial meltdowns at both Citigroup and Harvard and his poor oversight of the problematic president he persuaded Harvard to hire.

That article was published a few weeks after Fred Abernathy and I wrote an op-ed in the Globe, Shrouded in Secrecy, decision makers gambled and Harvard lost. Our piece ends:

The Harvard Corporation is a dangerous anachronism. It failed its most basic fiduciary and moral responsibilities. Some of its members should resign. But the Corporation's problems are also structural. It is too small, too closed, and too secretive to be intensely self-critical, as any responsible board must be. Until the board can be restructured, the fellows should voluntarily share their power with the overseers. And Harvard should reveal the risks of its business plans, as would be required if it were a publicly held corporation. That exercise in transparency would surely serve Harvard well.

Jamie Houghton happened to resign a few days later, but it was Rubin I was thinking of. The former U.S. Treasury Secretary has been a Fellow since April of 2002--and throughout the financial meltdown from which the university still has not recovered. (See my previous post on Harvard's financial condition.)

The Board has in fact expanded, and the four fellows most recently appointed (one to replace Houghton, and three to expand the board) are terrific. But Rubin hangs around. A low profile guy these days, he cannot be happy about being in the news today. 60 minutes did a piece called Prosecuting Wall Street which is, of course, about how Wall Street has escaped prosecution for what were, in some cases, clear violations of Sarbanes-Oxley and other criminal statutes. Here is a piece of the transcript, in which the CBS correspondent interviews Richard Bowen, a former vice president of Citigroup about what was going on back in 2006-2007.

Until 2008, Richard Bowen was a senior vice president and chief underwriter in the consumer lending division of Citigroup. He was responsible for evaluating the quality of thousands of mortgages that Citigroup was buying from Countrywide and other mortgage lenders, many of which were bundled into mortgage-backed securities and sold to investors around the world. Bowen's job was to make sure that these mortgages met Citigroup's own standards - no missing paperwork, no signs of fraud, no unqualified borrowers. But in 2006, he discovered that 60 percent of the mortgages he evaluated were defective.

Kroft: Were you surprised at the 60 percent figure? 

Bowen: Yes. I was absolutely blown away. This-- this cannot be happening. But it was. 

Kroft: And you thought that it was important that the people above you in management knew this? 

Bowen: Yes. I did. 

Kroft: You told people. 

Bowen: I did everything I could, from the way-- in the way of e-mail, weekly reports, meetings, presentations, individual conversations, yes. 

In early November of 2007, with Citi's mortgage losses mounting, Bowen decided to notify top corporate officers directly. He emailed an urgent letter to the bank's chief financial officer, chief risk officer, and chief auditor as well as Robert Rubin, the chairman of Citigroup's executive committee and a former U.S. treasury secretary. The letter informed them of "breakdowns of internal controls" in his division and possibly "unrecognized financial losses existing within our organization." 

Kroft: Why did you send that letter? 

Bowen: I knew that there existed in my area extreme risks. And one, I had to warn executive management. And two, I felt like I had to warn the Board of Directors. 

Kroft: You're saying there's a serious problem here, you've got a big breakdown in internal controls. You need to pay attention. This could cost you a lot of money. 

Bowen: Yes. Somebody needed to pay attention. Somebody needed to take some action. 

The next day Citigroup's CEO Charles Prince, in his last official act before stepping down, signed the Sarbanes Oxley certification endorsing a financial statement that later proved to be unrealistic and swore that the bank's internal controls over its financial reporting were effective. 

Bowen: I know that there were internal controls that were broken. I served notice in that e-mail that they were broken. And the certification indicates that they are not broken. 

Kroft: It would seem the chief financial officer and the people that signed the Sarbanes Oxley certification disregarded those warnings. 

Bowen: It would appear.  

We received a letter from Citigroup saying the bank had acted promptly to address Richard Bowen's concerns and that the issues he raised were limited to his division and had little bearing on the bank's overall financial health. Citigroup also told us that it did not retaliate against Bowen for sending the email. But not long after he sent it, Bowen's duties were radically changed. 

Bowen: I was relieved of most of my responsibility and I no longer was physically with the organization.

…

Three months after Bowen's email Citigroup's new CEO Vikrim Pandit received a blistering letter from the office of the comptroller of the currency, its chief regulator. It questioned the valuations that Citi had placed on its mortgage securities and found internal controls deeply flawed. The letter stated, among other things, that risk management had insufficient authority and risk was insufficiently evaluated and that the Citibank board had no effective oversight. 

Yet eight days later, CEO Vikrim Pandit and Chief Financial Officer Gary Crittenden personally signed the Sarbanes Oxley certification. They attested to the bank's financial viability and the effectiveness of its internal controls. The deficiencies cited by the comptroller of the currency were never mentioned. Citi said it didn't consider the problems serious enough that they had to be disclosed to investors and says the certifications were entirely appropriate. But nine months later, Citigroup would need a $45 billion bailout and $300 billion more in federal guarantees just to stay in business.

I recommend this piece; the video shows the actual email Bowen sent to Rubin et al. (at 4:28). (This is the second segment of the show.) The piece suggests that somebody should have been criminally prosecuted for misrepresenting the financial controls that should have been in place.

It took very little to remove Pug Winokur from the Harvard Corporation when Enron got in trouble. To what, except having friends in all the right places, can we attribute the fact that Bob Rubin continues to be one of Harvard's legal fiduciaries? Can this please be the final straw? Fellows of Harvard College, don't you realize that your own reputations, as well as Harvard's, are on the line if you continue to keep this little club together?