How Robert Rubin's Bright-Eyed Proteges Came to Dominate Wall Street

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 Office of Management and Budget and the inner sanctum of the White House.

While Rubin's role in reshaping 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 10 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, 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 quaint 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.

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 pleaded 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 baby-sat 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.

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