The Protégés

In earlier posts, we’ve highlighted Robert Rubin‘s network of protégés, who have assumed nearly every economic policy post of consequence in the Obama White House. In spite of his abysmal record of institutional leadership – Citigroup entered penny stock territory on Friday and Harvard, where Rubin’s influence as a member of the Corporation is unrivaled, has all but run out of cash – Rubin’s “wise man” brand won over Obama, who moved most of the policy staff of the Rubin-founded Hamilton Project and top Rubin advisers from the Clinton era into key administration posts at Treasury, the OMB and the inner sanctum of the White House.

While Rubin’s role in re-shaping the Democratic Party has been chronicled (and discussed here), less attention has been paid to his adeptness in building a power base of hedge fund capitalists that parallels his political network. Many of the techniques that allowed Rubin to pack the White House with friends – such as deep mentorship of bright-eyed Ivy League recruits fresh out of school and subsequent placement of the recruits in strategic institutions – have served also to place Rubin at the center of an unrivaled web of capital.

The financial heft of Rubin’s Goldman Sachs protégé network is staggering. According to our estimates, the hedge fund managers who came up in the famed Goldman Sachs arbitrage department and count Rubin as their chief mentor controlled over $110 billion in capital before the fall 2008 crash. Three of Rubin’s protégés were included in Forbes’ 2008 list of the 400 richest Americans; two of them control hedge funds that rank in the top ten in terms of assets under management as of this month. One of them made headlines in 2005 for paying himself more than $1 billion, at that time a record-setting level of compensation on Wall Street.

Clockwise, from top left: Eric Mindich, Richard Perry, Frank Brosens, Daniel Och, Tom Steyer, and Eddie Lampert
Clockwise, from top left: Eric Mindich, Richard Perry, Frank Brosens, Daniel Och, Tom Steyer, and Eddie Lampert

The story of Rubin’s hedge fund network begins at the Goldman Sachs arbitrage desk. Rubin was the third trader to head the desk, which was founded by Wall Street legend Gus Levy and then passed to L Jay Tenenbaum when Levy became senior partner. Rubin took the torch in the mid-’70s.

What is arbitrage? Although sometimes shrouded in an esoteric veil of quant theories on price differentials in volatile markets, much of arbitrage comes down to gleaning information using personal contacts. When asked about his job by the Times, Tenenbaum replied, “All I did was call directors and accountants or anyone in on the merger and be charming… I just wanted to know when the merger was going to happen.” According to a New York Magazine article on Rubin’s infamous Enron call, “the close-to-the-vest phone call has always been the hallmark of Rubin’s style.”

Rubin at work.
Rubin at work.

Acting on this kind of information runs perilously close to insider trading, but Rubin’s phone habits never resulted in legal action while he was at Goldman. At least one Rubin protégé, however, crossed the line of legality – and was caught doing so. Robert Freeman, head of the Goldman arbitrage desk following Rubin’s move to senior management, was indicted on insider trading charges in 1987. Freeman pled guilty in 1989 and received a one-year sentence (eight months suspended) and a $1.3 million fine. Rubin faced no charges.

In the 1980s, Rubin’s closest colleague in arbitrage at Goldman was Richard C. Perry. Fortune reports:

After joining Rubin’s arb desk, Perry quickly became a favored protégé. One reason Rubin says he took to Perry: “Richard is very thoughtful. His interests go far beyond the business world.” Perry babysat for Rubin’s kids. Rubin sometimes went to watch Perry play softball in Central Park. Perry also became Rubin’s teaching assistant at NYU’s Stern School of Business, where Rubin was an adjunct professor.

In the midst of the highly-publicized Freeman affair, when Goldman, and the arbitrage desk in particular, was facing a barrage of questions from regulators and the media, Richard Perry followed the lead of Thomas Steyer, another Goldman arbitrage trader, who had left the firm in 1986 to found Farallon Partners, a management fund based in San Francisco.

In 1988, Perry formed his firm – Perry Capital – with Paul Leff, an executive at the Harvard Management Company, which was a Goldman client with close ties to Harvard-alum Rubin, who has served as a director of both Harvard Management and its parent, the Harvard Corporation.

Perry maintained close relationships with Goldman and Rubin following his departure, which suggests that he may have had their blessing for his experimental endeavor, perhaps to provide some distance from the heat Goldman faced from the Freeman investigation. Goldman continues to invest with Perry Capital and Richard Perry himself has been a linchpin of Rubin’s strategy to dominate the Democratic Party. Perry has donated more than $200,000 to the Party and its candidates over the last ten years. Perry is also a director of the Hamilton Project, Rubin’s public policy shop.

Meanwhile, Perry Capital blossomed, setting the stage for the explosion of hedge funds and hedge fund returns over the last twenty years. According to an estimate from 2008, Perry Capital currently has about $12 billion under management, ranking it in the top fifteen largest hedge funds. Thomas Steyer’s firm Farallon Partners, the first fund founded by a Rubin protégé, prospered as well. Farallon now has more than $30 billion under management and ranks as the third largest hedge fund in the world.

The partnership of Richard Perry from Goldman and Paul Leff from Harvard Management foreshadowed a series of hedge fund spin-offs from Rubin’s two institutional domains. All told, at least six of Rubin’s Goldman protégés have spun off of the firm to form major hedge funds, typically getting seed money from Goldman.

In addition to Perry Capital and Farallon Partners, the firms founded by Rubin protégés at Goldman include Edward Lampert‘s ESL Investments in 1988; Daniel Och‘s Och-Ziff Capital in 1994; Frank Brosens‘s Taconic Capital; and Eric Mindich‘s Eton Park Capital in 2004.

This is only the very inner ring of Rubin’s elite hedge fund network – each of these individuals has been described as “protégés” of Robert Rubin in press reports. Many other hedge fund managers came up at Rubin-led institutions, but may not have had quite so strong – or well-reported – a connection to him as these six.

Rubin’s proximity to vast amounts of youthful hedge fund capital has played an extremely important role in shaping the new administration, and in guiding its choices. This hidden means of influence has gone largely unreported over the past two years, even though it explains Rubin’s strong standing with Obama (more than Rubin’s record of, ahem, accomplishment).

An April 2007 BusinessWeek article on Wall Street and the presidential candidates had a perfect opportunity to highlight Rubin’s influence over Obama in the early stages of the campaign. It offered the following account of a meeting with Obama in February of 2007, just one month into his campaign:

Like most voters, Wall Streeters are also trying to size up candidates’ personal qualities. At a meeting on Feb. 3 in Manhattan, bankers grilled Obama about how he makes decisions. Present were Eric Mindich of Eton Park Capital, Frank Brosens of Taconic Capital Advisors, Michael Froman of Citigroup Alternative Investments (C ), and James S. Rubin of JPMorgan Chase’s (JPM ) private equity fund, among others.

Sure, this was a meeting of “Wall Streeters,” but “Rubin’s inner circle” might have been a more accurate description of those in attendance: two of his hedge fund protégés, his son, and his right-hand man (the subject of this post and a forthcoming one). All four became bundlers for Obama. Despite his extreme centrality, Rubin is never identified in the piece.

The policy consequences of Rubin’s networked influence over the new administration are wide-ranging and will continue to play out in coming weeks and months. Eyes on the Ties will be watching. For one, as financial sector elites clamor for additional bailouts in the coming weeks and months, we will pay special attention to whether the White House – where Rubin’s close allies are a dominant force – advances plans that favor the Rubin hedge fund network. The financial sector and sympathetic pundits are pushing the notion that, as part of the master plan for cleaning up balance sheets to be announced soon by Geithner, certain hedge funds should be enticed to enter the market-to-be for toxic assets through a Federal guarantee against loss. Time will tell whether firms with Rubin connections are recipients of such largess.