Risk, Rubin, Leadership and Goldman Sachs
Patrick Lefler
Early in my career, I had the opportunity to spend seven years at Goldman, Sachs & Co.
I arrived at Goldman in July 1988 having graduated with an M.B.A. from The Wharton School just two months earlier. Back then, Goldman was still a relatively small firm – just 7,000 employees worldwide as opposed to its current size of almost 32,000 – and it was still structured as a partnership. I spent my entire career on the fixed income trading side of the business as a government bond trader.
The Goldman experience was incredible for me personally in that I received exposure to a number of really outstanding leaders within the firm – many of whom later made their mark in the both the corporate world and the American political spectrum. One such experience I will always remember occurred early on in my career – a short, but intense conversation with Robert Rubin who at the time was co-chairman and co-senior partner of the firm along with Stephen Friedman.
Bob Rubin ascended to his leadership position at Goldman by heading the firm’s risk arbitrage department – investing Goldman’s capital in high-risk/high-reward arbitrage opportunities that added hundreds of millions of dollars to the firm’s bottom line and capital base. He understood the intricacies of financial risk perhaps better than anyone else at the firm.
My interaction with Rubin occurred just after I had been given responsibility for one of the larger bond trading positions within the fixed income division. Within a few weeks of this promotion, I took an extremely large position in highly volatile zero-coupon government bonds as a result of taking the opposite side of a trade with a large Japanese counter-party. I priced and executed the trade (with a number of partners standing directly behind me just in case…) and knew it would take months to unwind the position. I also knew that the risks during this unwind period were significant and the sooner I was able to understand and quantify the various risks associated with the position, the more likely that Goldman would make money off the trade.
Less than an hour after the trade was executed, I found myself face-to-face with Bob Rubin.
He had quietly slipped onto the trading floor and sat next to me without my even noticing. It was the first time we had met – he introduced himself to me and then proceeded to talk to me about risk and my decision-making process. The essence of the conversation can be boiled down into these three precepts:
- Focus today on the risks that you understand and can easily hedge.
- Focus tomorrow on the risks you don’t understand today. Make sure you tap the vast resources of the firm to fully comprehend these risks – they’re usually the ones that hurt you the most.
- Spend the vast majority of your time hedging the risks that you can control. If you can’t control the risk, don’t waste time spinning your wheels.
Our conversation lasted less than thirty minutes.
As Bob Rubin got up to leave, he shook my hand and wished me luck. It was my last conversation with him during his tenure at the firm. Less than two years later, he left to join the Clinton Administration, first as the head of the National Economic Council, and later to serve as the United States Secretary of the Treasury.
Bob Rubin taught me two basic concepts during that short conversation years ago.
First, he very clearly articulated the idea of parsing the decision making process into separately addressing known and unknown risks (or in my case, risks that were understood and risks that weren’t). He was miles ahead of anyone I had met in terms of understanding and articulating the process of addressing risk.
Second, his advice on focusing my efforts on things that I could control (as opposed to spending time on things that were beyond my control) was clear, straightforward, and profitable.
During the next six months, I spent my time hedging and re-hedging the various risks as I focused on things I could control (like the size of the position) and didn’t waste my time or energy worrying about the things I couldn’t control (What if the size of our position leaked out to our competitors?, What if there was a collateral squeeze? What if the sky was falling?). I still follow both pieces of advice today for myself and with my clients.
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This article seems particularly important given the events of the last few days. I just googled Robert Rubin and derivative trading and while he maintains that he’s been in favor of regulating derivatives, as a Clintonite, he quashed efforts at regulating (http://www.huffingtonpost.com/2010/04/20/rubin-i-actually-supporte_n_545113.html).
I can probably build a case that says he was standing true to this insights he shared with you that since he did not know the true risk of derivatives, he focused on what he thought he could control and did not anticipate the problems that they would cause down the road.
I think Rubin was typical of most of the early folks Clinton took into his inner economic circle; closet fiscal conservatives who were not big pro-regulation types. Derivatives were still in the ‘experimental’ stages when he left Goldman and then ‘full throttle’ when he was at Citibank. I know he’s taken a lot of heat from the left over the past couple of years; not sure he ever wants to get into politics again.
When he and Steve Friedman ran Goldman Sachs together, they were like bookends when it came to politics; Rubin the liberal democrat and Friedman the conservative republican. Despite these differences, they were an outstanding leadership team.