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Rubin's moral hazard.

In selling the bailout packages that it proposed after the peso meltdown, a recurring challenge for the Clinton administration was to counter the perception that the primary bail-out beneficiaries would be Wall Street financiers, billionaire Mexicans and their cronies in Mexico's ruling party. The fact that Treasury Secretary Robert Rubin, who had close ties to all of these elite interests, was the administration's leading bailout salesperson hindered the administration's unsuccessful attempts to counter this perception.

The perception that the bailout would benefit elites on both sides of the border unleashed criticism from liberals as well as from conservative economists, who said the bail-out posed a "moral hazard," protecting the Mexican government and Wall Street from the repercussions of risky investments and policies. Because of Rubin's background, the bailout posed certain moral hazards for him, as well.

The Clinton administration recruited Rubin from his former position as co-chair of Goldman, Sachs & Co., the investment bank that has aggressively carved out a niche for itself in recent years in emerging markets, especially Mexico's.

Mexico has been first and foremost among Goldman Sachs' emerging market clients since Rubin personally lobbied former Mexican President Carlos Salinas de Gortari to allow Goldman to handle the privatization of Telefonos de Mexico. Rubin got Goldman the contract to handle this $2.3 billion global public offering in 1990. Goldman then handled what was Mexico's largest initial public stock offering, that of the massive private television company Grupo Televisa.

In the financial disclosure form that Rubin filed after joining the Clinton team, he listed 42 Goldman Sachs clients with whom he had had "significant contact," including six powerful Mexican clients. The public sector clients were the Mexican government, Mexico's finance ministry and Mexico's central bank. The private sector clients were Telefonos de Mexico, Cemex S.A., the largest cement firm in the Americas, and Desc, Sociedad de Fomento Industrial, Mexico's seventh largest manufacturing conglomerate. Rubin reaped $25 million in compensation from Goldman, Sachs & Co. in 1992 alone.

Just before coming to Washington to head Clinton's National Economic Council, a leaked letter Rubin wrote to his former clients drew attention to his potential conflicting interests. "I also look forward to continuing to work with you in my new capacity," said the letter. "I hope I can continue to rely on your interest and support ... and would be grateful for whatever suggestions you would offer."

Goldman Sachs has steered billions of dollars of its clients' money into Mexico. The bank's clients, partners and reputation all stand to suffer large losses in Mexico unless a successful bail-out can be engineered. Heavy losses could encourage lawsuits from disgruntled clients.

The conditions of the bailout require Mexico to privatize more of its economy, including such sectors as oil, highways, ports and electrical power. Such privatizations could offer Goldman Sachs major new business opportunities. Despite this web of connections, Rubin has declined to recuse himself from heading up the bailout. In testifying before Congress, Rubin has said he had only had one conversation with his former Wall Street contacts since the crisis began. "We have no interest in bailing out investors," he told the Senate Foreign Relations Committee in January 1995.

Rubin's refusal to sidestep this appearance of a conflict of interest falls short of the White House's rhetoric of two years ago, when Clinton claimed he would impose the toughest ethics standards ever. Rubin's refusal to recuse himself also sets him apart from Secretary of State Warren Christopher. Christopher recently recused himself from involvement in the administration's position on a proposed oil deal between a Dutch subsidiary of Conoco and Iran, which the United States has been trying to isolate economically. Christopher recused himself in March after learning that O'Melveny & Myers, the Los Angeles-based law firm that he left to join the Clinton administration, was representing Conoco in the deal. "In conflict of interest matters I think you have to take a conservative position," Christopher said. Conoco has since cancelled the Iran deal.

Treasury spokesperson Howard Schloss says Rubin and the Treasury's Office of General Council have concluded that Rubin has no conflict of interest on the Mexico bailout. Schloss declines to say what differentiates Rubin's case from Christopher's.
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Title Annotation:Treasury Secretary Robert Rubin
Author:Wheat, Andrew
Publication:Multinational Monitor
Date:Apr 1, 1995
Previous Article:The fall of the peso and the Mexican "miracle." (includes related articles)(NAFTA Disaster)(Cover Story)
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