The Rubin-Bernanke Phone Call

Teh internets aren't happy about the fact that Bob Rubin, Lew Ranieri, and others got to speak one-on-one with Ben Bernanke in the wake of the August FOMC meeting. (See John Carney (twice), Kevin Duffy, and Greg Newton, for starters.) But the chap who actually got all the details of the conversations with a FOIA request, Penn's Kenneth Thomas, thinks the conversations were a jolly good idea on Bernanke's part, and evidence that he's trying to "get up to date with what is going on". And Larry Kudlow, who supports Bernanke's actions, doesn't deny that Rubin et al were instrumental in driving monetary policy:

It seems clear that Rubin started a chain reaction on August 8 — only one day after the Fed’s disappointing, hold-the line policy decision that so disappointed financial markets and intensified the credit turmoil. Essentially, the academic Bernanke became a hands-on market participant through his contacts with Rubin, Paulson, the hedgies, and others. He reached out to savvy financial-market players who put him in touch with the real world. He then embarked on a 5-week journey that shook world credit markets out of their financial panic and started the healing process that continues to this day.

Now a large part of Bernanke's mandate is to regulate banks and to keep an eye on the markets. There would be a lot more complaining if Bernanke hadn't talked to private-sector grandees like Rubin and Ranieri. But I'm fascinated by this part of a Chuck Prince profile in the NYT:

On Aug. 8, a day after the Federal Reserve decided against lowering interest rates, Mr. Rubin made a phone call to Ben S. Bernanke, the Fed chairman, to compliment the decision, according to a person familiar with the call. Although Mr. Rubin’s interactions with federal regulators have drawn scrutiny in the past, this person said that Mr. Rubin acted “on his own behalf and not on behalf of Citigroup.” This person also said Mr. Rubin made the call out of concern that a rate cut might encourage reckless behavior on Wall Street.

If the "person familiar with the call" wasn't Rubin himself (I suspect that it probably was), then it's someone expressly authorized, if not outright instructed, by Rubin to place these talking points in the New York Times. It seems that Rubin is at pains to point out that (a) it was Rubin personally making the call, not the chairman of the executive board of Citigroup; and that (b) Rubin supported the August decision to keep rates on hold, and was not trying to talk Bernanke into a rate cut.

Methinks that Rubin doth protest a little too much, here. As Deutsche's Michael Mayo points out later on in the NYT piece, Rubin has been paid more than $100 million by Citigroup this decade, in return for which he has never talked to investors and has never taken any managerial responsibility for any Citigroup businesses. In other words, he got paid $100 million precisely because he has clout with the likes of Ben Bernanke, and is a master of the well-timed, strategically-placed phone call. In return for that $100 million, we can assume that Rubin's phone calls tend to coincide with Citigroup's interests.

As for Rubin's hawkishness, is it a mere coincidence that Bernanke slashed the discount rate just two days later? I'm with Kudlow on this one: Rubin did indeed help steer Bernanke into rate-cutting mode. (And there's no indication that Rubin disapproves of Bernanke's decision to cut rates in September.)

So the main thing we can learn from the NYT plant is that Bob Rubin is a little bit embarrassed about that phone call, now that it has been made public. Which in turn suggests that Carney et al might have something of a point, even if it's probably stretching things to say that Bernanke is responsible for imparting "inside information" to hand-picked market participants.