TSC TALKS WITH ROBERT RUBIN
A sensible plan would 'get Japan back on track and growing as it did in the past 50 years, [so] it can again become an engine of growth for the rest of the world.'
Editor's Letter: TSC Talks with Robert Rubin
By Dave Kansas and James J. Cramer 9/22/98 8:37 AM ET
(Editor's note: As you know, we do all we can to bring you top-flight news and information. That's why we are pleased to bring you an interview with Treasury Secretary Robert Rubin. A steady hand at Treasury, he is widely seen as a highly effective steward of the currently formidable U.S. economy. We had the chance to talk with Rubin on Friday night about a wide range of issues that are of interest to investors. Because of Monday's Jewish holiday, we are bringing you this story today. If you have any thoughts about Mr. Rubin's take on the world, we would love to receive your feedback at letters at thestreet.com.)
------------------------------------------------------------------------ To some, the world may seem like it is coming to an end, but the world Treasury Secretary Robert Rubin finds himself in is one in which things could go right, the center will hold and the cornerstone to the positive outlook is Japan, not the U.S.
In a wide-ranging conversation with TheStreet.com, Rubin seemed cautiously confident that, despite the world's tumult, positive changes in Japan's banking system could lead to a return to stability worldwide, without the risky investment that characterized the precrisis period. In addition, Rubin addressed the "moral hazards" of bailing out nations in economic distress, talked briefly about the currency markets and addressed the question that looms in the back of every investor's mind: How long will he remain in his current job?
In terms of the world economy, it's clear that the Treasury secretary is focused on what Japan can do to help solve some of the large problems, especially in Asia. The second-largest economy in the world has struggled mightily the past several years, beset by a slumping economy and a banking system laden with enormous debt problems. The banks, he said, are the key to getting Japan back on the path of economy growth. Rubin said the task at hand for the Japanese banking system is simple, that "weakened, but viable, banks" need "public money so they [can] become more robust with respect to credit extension." Japan needs to "get the bad loans off the books" and deal with the weakened banks in an orderly fashion, he said. A sensible plan would "get Japan back on track and growing as it did in the past 50 years, [so] it can again become an engine of growth for the rest of the world. Instead, it's been in the mode of very slow growth or recession, and that has had the opposite effect."
Rubin reiterated that there are a lot of things that Japan can do to help, but "the most important thing they can do by multiples is deal effectively with the problems in their own economy." Despite expressing dismay over the pace of Japanese reform and acknowledging that he had not had an in-depth look at the reform plans being discussed in Japan, Rubin presented a determinedly upbeat picture of the U.S. compared to the last time the financial system had been severely tested in 1990. "American banks are incomparably stronger than they were in 1990," he said, adding that the U.S. "is in much better shape than it was in 1990."
Rubin said he believes that one of the reasons the U.S. is doing so well is because of the 1993 deficit-reduction package. Moves to trim the deficit and improve government financing have helped the U.S. maintain steady economic growth, putting the country on strong fiscal footing as the world's crises have whirled. Moreover, America's strong economic standing has helped it assume a leadership role in trying to deal with financial problems in places like Asia and Russia.
The real risk, Rubin stressed, would have been had the U.S. not gotten itself in fiscal order through deficit reduction. "The morass we were in" could have made the worldwide crisis much more difficult to deal with. Rubin was reluctant to compare this moment in time to the Mexican crisis of '94 or the '90 U.S. banking crisis in terms of depth of trouble, but he did acknowledge that the losses taken this time around were far greater. And the heavier losses may not necessarily be a terrible thing.
Shortly after the conclusion of the Rubin-designed -- and successful -- Mexican bailout, Rubin let it be known that he was disheartened that the rescue plan had also bailed out reckless speculators who had gambled huge sums on risky Mexican projects. That "moral hazard" is much less in question today, with regards to any possible Latin American bailouts, primarily because many of those who invested in more speculative projects in places like Russia and Asia have already suffered steep losses. "I still feel the same way in that I wouldn't spend a nickel to help the bankers or portfolio investors." But, he acknowledged, "as you work to help other countries' investors, creditors and others may be helped, and that continues to be true." Any such help, though, "is a byproduct, not a purpose."
He added that "it's interesting if you look at what happened to investors and creditors and others over the past year: Enormous losses have been sustained, so the 'moral hazard' issue that people have been concerned about is not nearly as potent as it used to be because people have taken the kinds of losses that hopefully will induce more careful investment and credit extension." The "moral hazard" issues cannot stand in the way of going "to provide national assistance where it is needed."
Rubin, the former co-chairman of Goldman Sachs, also addressed the skepticism he has received in the rare moments he has spoken out about the nation's currency, acknowledging that when he publicly said the dollar was too low in 1993, it did help cause a bottom in the currency. When he recently said the dollar was too strong, it did mark a top in the dollar's rise against the yen. But he pointed out, "those weren't calls [on tops and bottoms]; I wasn't trying to trade or a make a call like you would at Goldman," an allusion to a time when TSC co-founder and former Goldman Sachs associate James J. Cramer worked with Rubin when he was the partner in charge of arbitrage at Goldman Sachs. "All I viewed ourselves as doing was intervening when, for various reasons, we felt it was appropriate to intervene. But I never viewed it as a statement of where I thought the market was going."
No conversation with Rubin would be complete without some conjecture over the plans of the most important financial executive in the world -- save Fed Chief Alan Greenspan -- and we couldn't resist. In return, we got the same assurances that Rubin periodically issues. Our impression: Regardless of what happens, he's not going anywhere. He even joked about the "100-year" plan, subtly acknowledging the significance of his plans in a time of peril. "My mind is on what I am doing and what is in front of me right here," he said at the conclusion of the interview.
In his talk, Rubin made it clear that the problems facing the world right now can be solved by political resolve.
Wrong! Rear Echelon Revelations: The Coolest Man in the Room By James J. Cramer 9/22/98 8:37 AM ET
Bob Rubin made me less of a bear last week. In our interview with the Treasury secretary, I found his cold-eyed view of the world less threatening and more practicable than I thought I would. Don't get me wrong -- Rubin's unhappy with the pace of the Japanese bank bailout. But it's not his job to be a cynic or a pessimist. The Treasury secretary of the world's most powerful nation doesn't get us anywhere by expressing panic and worry.
But the Rubin I talked to reminded me of the Bob Rubin who stood in the middle of the cyclone that was the trading floor of Goldman Sachs and exuded a level of confidence that made you know that, somehow, this too would pass -- and pass favorably -- if you just kept your head. I remember going up to see Rubin, and, I swear, sometimes he would be lying down on his back in his office (he was always bothered by his back when I was at Goldman), and I would think, "Oh boy, he is incapacitated." But when I got in his office, he would always amaze me with his wit and perspicacity despite being floored by pain.
In his talk, Rubin made it clear that the problems facing the world right now can be solved by political resolve. He emphasized repeatedly that if the Japanese want to clear the mess up, a la the U.S. in 1990, it can be done -- and fast. He did not make me want to go out and buy Japan, but he did seem to throw cold water on the seeming intractability of the Japanese mess. He knows they have a blueprint; he just wants it executed. The idea of Japan as a scapegoat must seem laughable to this pro. Sometimes there is a goat -- scape or not -- and, this time, it really and truly is Japan.
Rubin did not want to make analogies to 1990 no matter how hard we pressed him, stopping short of saying comparisons are idiotic, but he did emphasize that the colossal problems of 1990 were, in retrospect, truly frightening compared to what faces us now -- in part, because the U.S. government's deficit made the possibility of the U.S. bailout seem all but impossible.
I got the feeling that making a bet against the world right now was a tougher call than making a bet against the United States in the fall of 1990, when many short-sellers ended up taking a licking anyway. Rubin is too much of a team player to say it, but his insistence on conquering the deficit is precisely why we are better off now than in 1990. Do you go long because of interviews like this? No, but you must ask yourself whether Rubin's confidence is justified by events as he knows them. Had I not worked with Rubin, I think I might have been saying to myself, "Hey, pretty glib guy, really trying to put a positive spin on a negative situation."
Instead, I said, "Hmmm, same old Rubin." No sense betting against him. He's still the coolest man in the room, except this time the room includes Japan, Russia and all of the other ne'er-do-wells, and he knows what needs to be done to bring everybody into line. And he's not going anywhere until they are.
James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to TheStreet.com at letters at thestreet.com.