The Unwinding

by George Packer

  “There is this strange way in which the amount of inequality just kept growing,” he later said. “In the seventies, I didn’t know anyone who was a millionaire. That would have been really rich, that was unusual. In the late eighties at Stanford, there were a few people who were wealthier, but something like the twenty-to-thirty-million range was colossally wealthy. Their parents had that much money—that seemed really extraordinary.” Then, in 1997, a Silicon Valley novel called The First 20 Million Is Always the Hardest was published. “Twenty million seemed like a crazy amount of money. The theory I had was that it would seem counterproductive to have more. Maybe twenty million would be good, but way more would create all these problems.” But, year after year, “somehow it just kept going.”

  In a really unequal world, if you tried to keep up with the Joneses (defining the Joneses as the average of the people who were better off than you), then you would surely get lost, always feeling that you were falling farther behind—because, no matter how much you had, the Joneses would always be ahead by an ever-increasing amount, forever eluding you, a fata morgana on the desert horizon. In a really unequal world, you needed a place to anchor yourself.

  As a libertarian, Thiel welcomed an America in which people could no longer rely on old institutions or get by in communities with longstanding sources of security, where they knew where they stood and what they were bound for. All that was anathema to Thiel’s worldview. He believed in striking out into the void alone, inventing oneself out of ambition, talent, and abstractions—so the unwinding allowed him to thrive. But he also stood at the center of a tight-knit group of friends, almost all men, most of them young, like-minded Silicon Valley successes who had gotten rich around the same time, in the binary-step-function way of the Valley—one day they suddenly had more money than God, but they kept wearing jeans and T-shirts—though none as rich as Thiel. These friends kept him connected to his old reality and screened out the more ephemeral and toxic status markers. When an online gossip sheet outed Thiel in 2007, he called it “the Silicon Valley equivalent of al Qaeda” and continued to keep his personal life private, disdaining intimate conversation even with his closest friends. Over dinner they did not talk about sex, religion, or other people’s lives. Instead, they talked about ideas, world events, and the future of technology. Asked to name the investor he most admired, Thiel pointed to the billionaire recluse Howard Hughes.

  During the 2008 presidential campaign, Thiel was interviewed by Reason, the libertarian magazine. “My optimistic take is that even though politics is moving very antilibertarian, that itself is a symptom of the fact that the world’s becoming more libertarian,” he said. “Maybe it’s just a symptom of how good things are.” In September, having passed the milestone of seven billion dollars, Clarium moved most of its operations and 90 percent of its staff to midtown Manhattan. Thiel was approaching the level of the world-class hedge fund managers, and he wanted to be closer to the action on Wall Street.

  That same month, the financial markets collapsed. With everyone else in a panic, Thiel tried to catch a falling knife, but this time contrarianism became his enemy. Expecting coordinated intervention by governments to calm the global economy, he went long on the stock market for the rest of the year—but stocks continued to plummet, and his fund lost a lot of money. In 2009, when he shorted stocks, they rose, and Clarium’s losses grew. Investors began redeeming their money. Some of them grumbled that Thiel had brilliant ideas but couldn’t time trades or manage risk—he’d been predicting a crash in real estate for years, but when the moment came he was unable to take advantage. In mid-2010, with the bleeding unstanched, Clarium had to close its New York office and return to San Francisco. The moves were costly disruptions. By 2011, the fund’s assets were down to $350 million, two-thirds of it Thiel’s money, the entirety of his liquid net wealth. Clarium became a de facto family office.

  For the first time in his life, Thiel had failed at something he prized, publicly and spectacularly. He was humbled by it, and unlike at PayPal, where setbacks had triggered outbursts, he took losing well and kept an even keel with his staff. During the same period, his view of America began to darken. As he reconsidered the years since the seventies, years that had seemed so bright and hopeful, especially in Silicon Valley, even Facebook lost its glow. But Thiel’s pessimism also led him to form radical new ideas about the future.

  2008

  BAM SLAMS HILLARY IN HISTORIC VICTORY He’s First Black to Win Iowa Caucus as Voters Embrace Message of Change … REAL ESTATE APPRAISED: FROM MALAISE TO CRITICAL … GM POSTS RECORD US AUTOMOTIVE LOSS OF $38.7B FOR 2007 Offers Buyouts to 74,000 US Workers … OIL SHOCK: ANALYST PREDICTS $7 GAS, “MASS EXODUS” OF US CARS … DEPRESSION QUESTIONS RETURN IN NEW CENTURY … IN WEEK OF IRAQ WAR ANNIVERSARY, OBAMA’S RACE SPEECH DOMINATED MEDIA COVERAGE … Obama’s entire campaign is built on class warfare and human envy. The “change” he peddles is not new. We’ve seen it before. It is change that diminishes individual liberty for the soft authoritarianism of socialism.… that there is something happening in America, that we are not as divided as our politics suggests, that we are one people, that we are one nation … LEHMAN FILES FOR BANKRUPTCY, MERRILL SOLD, AIG SEEKS CASH … BUSH ASKING FOR $700 BILLION BAILOUT … McCAIN PICKS FAILING OHIO FACTORY TO LAUD FREE TRADE He used his own recent political fortunes—a dramatic fade followed by an unexpected comeback to secure the Republican presidential nomination—to illustrate that depressed Rust Belt cities such as Youngstown can rebound.… PALIN REIGNITES CULTURE WARS … We believe that the best of America is in these small towns that we get to visit, and in these wonderful little pockets of what I call real America, being here with all of you hard working very patriotic … I bet bin Laden feels like a real asshole now, huh? “What? I bombed the wrong America?” … Heath Ledger passed away on Tuesday, sources reveal exclusively to PerezHilton.com.… SILICON VALLEY BARELY TOUCHED BY FINANCIAL CRISIS—SO FAR … How are you? You gotta love Face Book! YOU LOOK WONDERFUL. Hopefully I will get some pics of me and family downloaded soon … I can only imagine how anxiously you are awaiting election day? Are you still a strong Republican? Regardless, I always cherish our friendship … “CHANGE HAS COME” Barack Obama Elected First Black President; Economic Anxiety Propels Democrat to Electoral Landslide … and together we will begin the next great chapter in the American story with three words that will ring from coast to coast, from sea to shining sea: Yes. We.

  INSTITUTION MAN (2): ROBERT RUBIN

  Much to his surprise, Robbie Rubin, the new boy from Manhattan, was elected president of his fourth-grade class in Miami Beach in 1947, despite knowing nothing about how to be class president. He got good grades in high school, but he never would have gotten into Harvard if a lawyer friend of his lawyer father’s hadn’t introduced him to the dean of admissions. At Harvard he assumed that he would be part of the 2 percent of his freshman class that was going to flunk out, but his grades that year were excellent, and in 1960 he graduated Phi Beta Kappa, summa cum laude.

  Bob Rubin never expected a girl as beautiful and talented as Judith Oxenberg to date him, so he introduced her to his Yale Law School friends in the hope that they would reciprocate by setting him up with women closer to his own level—but within a few months Bob and Judy were married at Branford Chapel.

  Because his odds of making partner at Cleary, Gottlieb weren’t great, in 1966 Robert Rubin looked around for a job on Wall Street. Going from a law firm to an investment bank was very unusual in those days, but his father landed him introductions at Lazard Frères and Goldman Sachs, and to his surprise they both made offers. He joined Goldman’s arbitrage department, even though he didn’t know what risk arbitrage was, and he doubted that he had the audacity to get executives on the phone to question them about prospective deals. The head of Goldman, the legendary Gus Levy, regularly yelled at Rubin for asking stupid questions, but Levy also thought that he would one day run the firm—which seemed far-fetched to Rubin at the time. In spite of doi
ng well in arbitrage, he never in a million years thought he’d be offered a partnership, so he looked around for another job and was surprised, to say the least, when Goldman made him partner on the first day of fiscal year 1971. Within a few years he was on the management committee.

  All his life he carried around a yellow legal pad, writing down notes and numbers, analyzing the likelihood of different outcomes, calculating risk and expected value. He found that he was interested in trading as an exercise in thinking about probabilities. Thinking probabilistically meant that he took even remote contingencies into account. The stress and flux of arbitrage left others nerve-racked and blinded by their own fear or greed, but he was always able to take the pressure of high-stakes trades in stride. He was a reasonably commercial person, but he didn’t find his purpose in making money—he had learned that people found fulfillment only within themselves—and his identity wasn’t job-dependent. This freed him to think more clearly about risk.

  He took the long view, keeping in mind that the result of a trade wouldn’t matter in a hundred years and that, while he enjoyed his membership in the establishment, he could always walk away into a different existence—sitting in a Left Bank café reading Tropic of Cancer and talking about the meaning of life, or fly-fishing at Spruce Creek or Tierra del Fuego. His core belief was that nothing could be proven to a certainty, so he functioned well in the uncertain world of markets. (He was also a reasonably good poker player.) This philosophical detachment made him a surprisingly successful arbitrageur.

  Goldman Sachs in those years was a very different place from what it would become—much smaller and tamer, a boutique private partnership dominated by investment banking, not trading, a place where the senior partners spent their time tending to the needs of clients. In the 1970s, calmly and rationally, Rubin pushed Goldman to get into over-the-counter derivatives—options trading—and commodities, which grew exponentially and proved extremely profitable. In 1981 he was part of a small group that persuaded the firm to make its first major acquisition—J. Aron, a commodities trading house. When the new division ran into trouble, he turned it around by taking on more risk, which he found very interesting. (Over half the people at Aron had to be fired, a delicate undertaking.) From there he rose to the top of Goldman’s huge fixed-income division, where he and his partner, Steve Friedman, had to stanch large losses on illiquid positions. To raise more capital they wanted to take Goldman public, following the other big Wall Street firms, but the younger partners with smaller stakes said no. With Friedman, Rubin became vice chairman of the firm in 1987, and in 1990 he reached the top. He got there, much to his own surprise, by maintaining the modesty of his ambition and the calm of his daring.

  Rubin stood in the political center, looking in both directions, but he was a Democrat, because he was concerned about the plight of the poor. He was also worried about the growing deficits of the Reagan years. He wanted to get involved in politics—few things were more attractive to him than the thought of seeing the world from inside the White House—so he began raising money for the Democratic Party. In 1982, his friend Bob Strauss asked him to chair a congressional fundraiser. Rubin wasn’t at all sure that he would be able to raise enough money—in those days there weren’t that many Democrats in finance—but the dinner took in more than a million dollars. Party leaders began to solicit his support in tapping Wall Street money, and he raised almost four million dollars for Walter Mondale in 1984, and the same amount for Michael Dukakis in 1988.

  As Rubin aged and grayed, his hair, parted on the left, still grew thick on top, while his hooded, pouched eyes got sadder and more skeptical. As Wall Street became an ever larger and more volatile juggernaut, he stayed steady and whippet-thin. As financial services were deregulated, he remained well regulated. He avoided the limelight, while his peers bought fifth homes and second wives and appeared regularly in Sunday Styles. After half a life at Goldman Sachs he was worth well over a hundred million dollars and lived in a Park Avenue penthouse, but he still wore plain rumpled suits to the office, walked around his neighborhood in an old pair of khakis, and always made time to read and fish. Colleagues heard him say “just one man’s opinion” a dozen times a day. He was careful to hedge his ambition with humility, his risk-taking with expressions of worry.

  When Bill Clinton was elected president in 1992, Rubin wasn’t at all sure that he would be offered a position in the new administration, but he became the first director of the newly created National Economic Council. He had no idea how to function in the White House—didn’t even know what a “decision memo” was—but he brought down his yellow legal pad, moved into rooms at the Jefferson Hotel, and sought advice from Washington veterans like Brent Scowcroft and Jody Powell. At meetings in the Oval Office or the Roosevelt Room, he didn’t try to get as close as possible to the president; he liked to stay away from the head of the table, read the people in the room, and speak from a slight remove. Self-effacement worked as well for him in Washington as it had on Wall Street. “You’re going to be the strongest person in the White House,” the president once said, which Rubin thought was ridiculous. He was just hoping to be relevant.

  From the foot of the table, Rubin told Clinton that he would have to sacrifice his campaign promises on education, job training, and middle-class tax cuts and instead establish credibility on deficit reduction (cutting spending and raising taxes on the top 1.2 percent) in order to reassure the bond market. If deficits remained at Reagan-Bush levels, interest rates would go up, and if interest rates went up, economic growth would be stifled. (This wasn’t just Wall Street’s view—it was basic Rubinomics.) Clinton, all the while fuming that he was being turned into an Eisenhower Republican, assented. Nor did the president refuse when, from the foot of the table, Rubin further advised (not out of class solidarity, but in fear of undermining business confidence in the president) against using polarizing, class-laden terms like “the rich” and “corporate welfare.” Even “corporate responsibility” was over the line. When the secretary of labor, Robert Reich, argued for more populist policies and language, Rubin would say—calmly, without raising his voice—“Look, I spent most of my life on Wall Street. I can tell you, you’re just asking for trouble.” In the Clinton White House, most of a life on Wall Street trumped any other experience, because the bond market was reality and everything else was an interest group.

  Rubin was giving his best economic advice, always disinterested and on the merits. (If it happened to be Wall Street’s view too, well, the economy had become dominated by the financial sector, and any Democratic president would be destroyed if he lost its confidence, especially after the party began to raise most of its money on the Street.) So Clinton, elected as a middle-class populist, governed as a pro-business centrist, and Rubin, after moving over to the Treasury Department in 1995, became one of its most admired secretaries, defusing financial crises in Mexico, Asia, and Russia, reducing the deficit to zero, and guiding the country through the longest period of economic growth in its history.

  In 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, floated the idea of regulating the enormous and shadowy market in over-the-counter derivatives—the market that Rubin had led Goldman Sachs into twenty years earlier. During a one-hour meeting at Treasury, Rubin was angrier than his colleagues had ever seen him (Brooksley Born was too strident, he felt, she didn’t defer enough), and he lectured her to stay out of derivatives—she should listen to the banks’ lawyers, not the government lawyers at her agency. He teamed up with Larry Summers, his deputy, and Alan Greenspan, the Fed chairman—called “the Committee to Save the World” on the cover of Time—and persuaded the Republican Congress to block Brooksley Born. (Not that Rubin wasn’t worried about derivatives. In fact, he had always been worried about the size of Goldman’s derivatives book, though he reluctantly agreed whenever traders wanted to make it bigger. And he continued to worry about the risks of derivatives as Treasury secretary, the way they cou
ld entangle financial institutions and magnify excesses in the market. He had no objection in principle to derivatives being regulated—just not by Brooksley Born—though he never got around to doing anything about it because of the opposition he would have faced from Wall Street and the rest of the Committee to Save the World.) In 2000, Congress passed and Clinton signed into law a bill—the last one the president signed before leaving office—that prevented derivatives from being regulated by any agency. (By the time the Commodity Futures Modernization Act became law, Rubin was no longer in government, so he couldn’t be held responsible for any negative effects it might have had, as he would point out in later years.)

  The same was true of Gramm-Leach-Bliley, passed by Congress and signed by Clinton in 1999, which repealed the 1933 Glass-Steagall Act and allowed commercial and investment banking under one roof. (Yes, Rubin vocally supported Glass-Steagall’s repeal, mainly because the wall between commercial and investment banks had already eroded—a fait accompli that the most admired Treasury secretary since Alexander Hamilton was powerless to fix.)

  In 1999, Rubin returned home to New York. He took out his yellow legal pad and began jotting down questions about his next move, taking notes in conversations with people like Henry Kissinger and Warren Buffett. He wanted to stay involved in public policy, but he saw no reason to become a monk financially, though he didn’t care to take on the responsibilities of a CEO. In other words, he wanted to be a wise man, like Douglas Dillon or Averell Harriman in another era, the kind of figure who moved seamlessly between Wall Street and Washington, serving the interests of shareholders as well as the American people. (In fact, working on Wall Street would keep him current on financial issues so that he could remain useful to policymakers and give his customary disinterested advice based on the merits.)