Robert Rubin: Dr. Chairman, it’s your old friend Bob over at Citi.
Bernanke: Oh Bob, what a pleasure. It’s nice to hear from you again. What can I do for you?
Rubin: Well Ben, we’ve got some problems over here. Now I trust you will be discrete on this. We can’t let this get out in the market. I think we’re insolvent.
Bernanke: What?
Rubin: See we have about $65 billion in capital, but we have $55 billion in Super Senior CDOs, and no one will buy them from us.
Bernanke: No one?
Rubin: We can’t sell them for $1. I’m now being told that if no one wants to buy pieces of paper from you, it turns out they are worthless. Believe me. I’m as shocked as you are.
Bernanke: But don’t you have a lot of cash flow? That’s what I’ve been hearing on CNBC.
Rubin: Well, in addition, we have $80 billion in SIV exposure, an additional $80 billion in conduit exposure, and a lot, lot more in derivative exposure that might not be worth what we said it was when we paid out our bonuses over the last couple years. I talked to some ex-traders, but they aren’t inclined to give back the bonuses. You add it all up, and we don’t have enough money to meet our liabilities.
Bernanke: I see. I hadn’t realized that.
Rubin: We have a lot of cash flow, but our creditors are no longer buying that story. Counterparties are asking use to put up more capital for every trade we do, traders are leaving, and the whole thing is starting to wind down. If this information ever gets public, we could see our depositors start to leave as well. Oh, and with the economy possibly going into recession, we might have a lot more losses from credit cards.
Bernanke: I see. I understand how important what you are telling me is. I spent years studying the Great Depression.
Rubin: Right, and the worst part about it is that other banks have tremendous amount of counterparty exposure to us. There are $45 trillion in Credit Default Swaps in the system right now. Our accounting isn’t that good, so I can’t even tell you how many trillion we have with other banks. But I do believe it’s in the trillions. So if we start to go down, well, you know what happens.
Bernanke: A total meltdown of the U.S. financial system.
Rubin: Right! So you’ve got to help me out.
Bernanke: So how can I help you? You know I’m here to help. That’s my entire job. You should know that after your time in the government.
Rubin: Yes. We were good at bailing people out. We saved the world. So here’s what I need. I need you to give us $500 billion. No loan. No lowering interest rates. Those things are not going to help. They will just prolong the day. Look what lowering interest rates did to Japan. Their stock market is still below where it was 17 years ago. No, that route won’t do. What I need is cold, hard cash.
Bernanke: But I said I would never bail out investors and bondholders for the risks they took.
Rubin: Yes, but we’re talking about the entire U.S. banking system.
Bernanke: But why not just lower rates?
Rubin: Because banks would just take that money and buy commodities and move it off-shore. They know the banking system is weak, so they don’t want to lend into it anymore. They want to make a profit. It’s amazing how selfish people can be.
Bernanke: Hmmmm. So how does it work?
Rubin: Well, usually it works by the government claiming that there is no other option, that financial meltdown is the only outcome. You talk about the risk and how the government was forced to take this step in order to save the public, to protect the people. In return, I call my Democratic friends and tell them what a great job you are doing in the face of such troubling times, and I work behind the scenes to ensure that you will get re-nominated to be Fed Chairman. I also work my banking contacts to ensure that you get an extremely high-paying job once you’re out of office.
Bernanke: Is that how it worked for you?
Rubin: Definitely. I had a great job at Citi, earning a ton of money, without real responsibilities. But then this darn credit crunch came along. I wanted to bail, but Sanford Weill convinced me how bad that would look for my legacy. So I’m here to protect my legacy, and of course the entire U.S. banking system. Anyway, you guys were the ones who created this mess.
Bernanke: What? Us guys? What do you mean?
Rubin: Well, when markets were sky high and Long Term Capital threatened to bring them down a little, you lowered rates, and equities skyrocketed to new highs. That was back in 1998. The Internet Bubble should have been popped, not encouraged! Then in 2001, you dramatically lowered rates. It caused this Housing Bubble. And you and Greenspan did nothing to remove excess credit from the markets. In the 1990s, credit was growing $1 trillion a year. Over the last years, it’s been growing $4.5 trillion a year. You blamed the Chinese for this excess liquidity. Now that was smart. I couldn’t have thought of a better one than that, but it turns out it wasn’t true. It was you and Greenspan who were creating all the liquidity and encouraging risky trading practices by all the major banks. Well, we took the risk you encouraged us to take, and amazingly markets didn’t go up forever. Remember, you guys are the ones who set the rules. You told us to leverage up our balance sheets 20 to 1, and we were also able to work with other people in Washington to get that ratio up further by hiding things off our balance sheet, just like Enron did. But it was all legally done this time. It was allowed by Washington.
Bernanke: But you know the dollar is at an all-time low and people are running away from our currency?
Rubin: I know, but don’t worry. I’ve sold a lot of my shares in Citi, and I’m well diversified. I appreciate your concern.
Bernanke: No, I meant what will the American people think?
Rubin: As long as you talk about the greater good and how you’re doing it for their sake, you’ll get re-nominated. Plus, you can’t even imagine the New York City perks at these big banks.
Bernanke: What are my other options?
Rubin: Well, none really. The only other option is that we unwind Citi and sell it off in pieces. We might have a strong dollar, but we’ll have quite a recession. Banks will stop lending. You think the housing market is bad now? Just imagine that scenario. As for me, I lose my job and Jaime Dimon gets the last laugh. He’ll kick away Sanford Weill’s life work and legacy. You know I think Dimon is a Republican, and I don’t think they are going to win the next election. So you might want to think twice about going down that route. That might be the morally right thing to do. But it won’t help you.
Bernanke: But if we bail out Citi, people will lose confidence in the system. The dollar will plummet. Gold will skyrocket. Oil will shoot above $100 a barrel and then some. Inflation will be at hand, and long-term interest rates might go up! But I really do like this job. And it would be nice to make some money once I’m done here.
Rubin: I know. It’s great. Maybe you’ll even get on the cover of Time magazine if we pull this off.
Bernanke: Oh Time! I love Time.
Rubin: Yeah, it’s great, isn’t it? I loved the piece they did last week on…Well never mind.
Bernanke: Hmmmm. Let me think about it. We need to come up with some clever way to make it look as if I’m not helping you out directly. I’m sure I can come up with something. You know I have a PhD.
Rubin: I know. That’s why we all supported you for the job.
Bernanke: Ok. Don’t worry. I’ll come up with something. We can definitely get this done. We’ll save Citi.
Rubin: Yes. We’ll save Citi! Get back to me soon, though. We don’t have much time.
Bernanke: Ok. Let me ruminate a little. I’ll get back to you in a jiffy.
Rubin: Ruminate away. That’s what you academics are good for [aside to the audience: and for having no backbone!].
