Robert Rubin interview, June 28, 2002
|
Wall $treet Week with FORTUNE interviewed Robert Rubin, a director of Citigroup and former Secretary of the Treasury. Here's a full transcript of the discussion with TV hosts Karen Gibbs and Geoff Colvin:
COLVIN: The largest financial services firm on the planet is Citigroup, and very few people have gained the respect of Wall Street, Main Street, and Pennsylvania Avenue the way Citigroup director Robert Rubin has. As Treasury Secretary, Bob Rubin helped engineer the longest economic boom in U.S. history, fighting hard for fiscal discipline and open trade. I'm not sure he'd take credit for it, but the Dow rose at a 25 percent annual rate during his tenure, which must make him Wall Street's all-time favorite Treasury Secretary. Before Washington he spent 26 years at Goldman Sachs, where he was Co-Chairman, and where he built an extraordinary reputation as one of the Wall Street's most trustworthy leaders. Now he's one of the most influential players in all of global finance. Bob, thank you for being with us.
RUBIN: Geoff, delighted to be with you.
GEOFF: After a week like this, an awful lot of ordinary investors are scared to buy anything. How should they be thinking about this market now?
RUBIN: Well, I think, Geoff, at least in my view, the way to think about the market is to start with your long-run view of the American economy, and at least in my view, the prospects, the potential for the American economy over the long term is very favorable. Now having said that, there are a lot of challenges that need to be met if we're going to realize that potential.
We've got to reestablish fiscal discipline, we have to invest in our people, we have to deal with a whole host of international economic issues. We have to deal with terrorism and political instability abroad. But I do think we have a very favorable long-term potential, and I believe over time the stock market will tend to follow fundamentals.
COLVIN: And long term means how long?
RUBIN: Oh, long term means something out beyond a couple years.
COLVIN: Yeah. We just had some apparently great economic news this week, the announcement that in the first quarter the economy grew at a 6.1 percent rate, which is blistering growth. And yet the markets shrugged it off and went nowhere.
RUBIN: Well, I think that's a different matter, Geoff. If you start talking about the shorter-term outlook, the first quarter, as you know, was very much influenced by adjustments with respect to inventories. I think the shorter term outlook is more complicated. Most forecasters are very, and have felt for quite some time, very positive, and I think there's a powerful, positive argument. On the other hand, I think that there are uncertainties and concerns that have been badly under-weighted in most forecasts. And I think in fact you have probably a roughly equal likelihood of the favorable outcome most forecasters expect and a perhaps more difficult shorter-term or intermediate-term outcome.
GIBBS: Bob, that uncertainty has been seen not just domestically but also internationally, the dollar hitting two-year lows against the euro. What's the downside of that, and is there any positive in a weaker dollar here?
RUBIN: Well, I think that the strong dollar served our economy enormously well in the 1990s in terms of attracting capital from abroad, which we are, as you know, a savings deficient country in terms of it keeping inflation down and interest rates down. The dollar exchange rate after all is our exchange rate, in terms of exchange with the rest of the world has enabled us to get the benefit of a more favorable term of exchange in selling our goods and then importing. I think that the imports that we had in this country put pressure, competitive pressure on American business, which was one factor in driving productivity. So I think a strong dollar contributed enormously to our economic well being in the '90s, and I think
that should be our policy objective going forward.
COLVIN: I want to get your views on this crisis of confidence that we have right now. Your former colleague, Henry Paulson, gave a speech a few weeks ago that was very widely covered, in which he said, if I get it properly, that "the crisis of confidence in the way in which companies do business has seriously impaired the confidence of investors, CEOs, and boards of directors alike. It has been a drag on the economy." How bad a drag is it?
RUBIN: I think it's hard to know, Geoff. I think a number of factors have affected confidence. I think the most important one has been the concern about terrorism and geopolitical events, political instability abroad, conflict abroad. I think it's extremely important that we deal with those issues effectively and thoughtfully, and also discuss them in the public domain in a thoughtful fashion. On the issue that you're raising, the corporate governance issues and the accounting issues, clearly a set of problems have developed. I think it is extremely important that we deal with them effectively and energetically, and I think there have been some very interesting and very thoughtful proposals put forth. On the other hand, we have a system that has served our country extremely well for a long time, and while it's very important that we act and act thoughtfully and sensibly, I also believe it's very important that we act with balance and don't overreact. Because I think if we do that, we can unbalance and damage our long-term economic prospects.
COLVIN: What should Washington do, if anything?
RUBIN: I think that the bill that came out of the Senate Banking Committee, Senator Sarbanes' bill, which as you know had bipartisan support, it passed with a vote I think of 17 to 4 or something like that, was a thoughtful bill. I think on the whole it has provisions that make a lot of sense. It focuses on what I think is the central and most important issue in all of this, which is accounting. You know our system really is dependent on the credibility and trustworthiness of the numbers that people get, that investors get, but also that banks like ourselves get. And those are the audited statements that come out of accounting firms, and that's what Senator Sarbanes focused on, and I think rightly.
(Sen. Paul Sarbanes, D-Maryland, is chairman of the Senate's Banking, Housing & Urban Affairs Committee, which recently passed a Sarbanes-sponsored bill designed to reform the accounting industry. The measure will be considered by the full Senate)
GIBBS: What about the President? Do you think he has a role in reassuring the investing public in terms
of this crisis of confidence? Or should he stand aside?
RUBIN: I think it's always important, Karen, for political leaders to discuss issues that are affecting our economy, investors or businesses or the consumer, in a thoughtful and serious fashion. I used to say to President Clinton at times when we had difficulties, that at least in my view, and he very much felt this way, it's extremely important to discuss these issues in a thoughtful and serious way in the public domain. Because I think that does, first it increases public understanding, but I think it also increases confidence and it increases the sense that people have that their political leaders understand the problems that they're dealing with.
COLVIN: Part of this crisis of confidence is trust that isn't there as much as it used to be in Wall Street institutions, in investment banks and brokerage firms, because of the conflicts that are there. Obviously a big part of Citigroup is one of those firms, Salomon Smith Barney, and people are going to wonder why they should be trusting the advice and recommendations they hear from that firm.
RUBIN: Well, let's leave Citigroup and Salomon out of it.
I think that you've got a systemic question, which is the relationship between the research departments and investment banking. And that I think, Geoff, is a manageable conflict and there are a number of proposals around with respect to how to do that. I don't think that that is a problem that will be a long-term, systemic problem.
I think that a far more central problem with respect to how our system is functioning is the role of accountants, because I think they're in an extremely difficult position. On the one hand, they have a sort of quasi-regulatory responsibility for the integrity of numbers, and on the other hand they are profit-making institutions. And I think we have to find some way of enabling that to work effectively. As I said, I think Senator Sarbanes came up with a number of very constructive ideas.
GIBBS: Do you think we're encouraging this kind of a systemic flaw by focusing on these tiny points, these narrow issues, such as earnings per share or...
RUBIN: Oh, Karen. I left Treasury in July of '99, and even though while I was in Treasury I kept in touch with people and I think I had a good sense of what was happening in markets, I was astonished at how greatly the intensity of focus on quarterly earnings had increased in the time that I was in government. And as I said, I kept very much in touch with
business and with markets. I think not only is that non-sensible, in terms of maximizing over the long term, it's irrational in terms of maximizing over the long term, both for investors and businesses. But I think it does put a great deal of pressure on managers and businesses to make aggressive accounting decisions. So I just think it's unhealthy and unwise. The trouble is I don't think there's anything that you can do to reduce, at least that I've been able to think of, to reduce this intensity of quarterly pressure.
GIBBS: So not another layer of oversight or even more regulation could take away that pressure.
RUBIN: Karen, I don't think there's anything that you can do in a regulatory legislative sense to reduce what has happened, which is this intense focus on quarterly earnings. I think if people were sensible about maximizing their long-term investment results, they wouldn't focus on the quarter. They'd focus on the underlying fundamentals of business and invest for the long term.
COLVIN: Well, this is a real basic question then, which is can corporate America heal itself?
RUBIN: I think corporate America is very much in the process of healing itself, Geoff, and I think the markets themselves are a powerful corrective. It's very interesting. If you look today, not today, but if you look over the last few weeks in the corporate bond market, one thing you'll find is that companies with good liquidity positions are now selling more favorably, at more favorable prices than companies without good liquidity positions. The market's going to do a great deal to correct what's happened. But I do think there are some systemic issues, particularly with respect to accounting, and I think that those do need to be dealt with.
GIBBS: How could they be dealt with?
RUBIN: Well, Senator Sarbanes has suggested, in this bill that passed the Senate Banking Committee, there be an oversight committee set up, an oversight operation, which I think is a useful thing to monitor in effect the functioning of the audit processes. Arthur Levitt has said, and I think he's right, that there probably needs to be a better way of dealing with accounting standards. Most people think that auditing and consulting should be separated. I've never been sure myself that that quite goes to the core of this problem, but I think it probably is a useful thing. I'm less clear about that. So those are three suggestions. I thought Warren Buffett had a very interesting suggestion that I saw in the press not long ago. You can't make audit committees into super accounting committees because they're not, that's not their function. They couldn't do it. But what you could do is have audit committees ask a series of questions of the auditors with respect to what problems and what judgements they made in applying, in doing their audits, and I think that was a useful suggestion.
GIBBS: All right. Bob Rubin, thank you very much for joining us today.
RUBIN: I'm delighted to be here. Thank you very much.
|
