Despite what you may have suspected, not all bank CEOs rail against government meddling. Vikram Pandit, the CEO of Citigroup, is glad Citigroup was restructured after the financial crisis, that it boldly changed its destiny and saved itself from almost certain death.
In fact, in a speech just yesterday to the Lee Kuan Yew School of Public Policy in Singapore, Pandit congratulated himself and his executive team for making it all happen.
Wait. What?
It’s true that, like Nicholas Cage in the movie Moonstruck, Citigroup got a strong, unpleasant but very necessary slap during the financial crisis – one that allowed the bank to presumably begin to recognize its true destiny of being profitable and loved by the American people. The only problem is, it’s not exactly how things happened to Citigroup. The financial crisis was not a fuzzy, schmoopy romantic comedy, and Pandit forgot who did the slapping.
It was not him or his team who solely demanded and drafted Citigroup’s radical restructuring and ensured it subsequent survival. It was the federal government in the driver’s seat.
Pandit – an executive of irreproachable and sometimes impenetrable diplomacy – seems to have forgotten the indignities of a government near-takeover, and the mists of time have created a slightly fuzzier vision of history.
Let’s compare Pandit’s kinder recollections of the crisis, in his Singapore speech, to the actual historical record. I’ve italicized the parts you should pay particular attention to. Below the italicized sections, you’ll find some historical context. Weigh in, if you like, in the comments.
- IN WHICH CITIGROUP PRIDES ITSELF ON ITS SELF-AWARENESS
To me it is clear in hindsight that, crisis or no crisis, Citi had to be restructured. The crisis was the catalyst but the need was there. The company had, in my view, lost focus. It had lost sight of its core, historic mission.
- WAIT, DID IT REALLY HAPPEN THAT WAY?
No. It was actually not at all obvious to Citigroup management in 2009 that the firm had to be restructured. That’s why the government exercised closer and closer financial control over the firm- even as Citigroup kicked and screamed the whole way.
Note for, instance, this description of the Citigroup bailout in an official SIGTARP (Special Inspector General of TARP) report, which quoted a Citigroup official baffled that the troubled bank’s stock price was being hammered by the market in 2008: “Referring to the drop in Citigroup’s stock price, Citigroup Vice Chairman Ned Kelly told SIGTARP: ‘It
wasn’t entirely clear why we had a problem. It appeared to be market psychology without any regard to fundamentals.'”
Here’s how SIGTARP put it recently:
SIGTARP found that the Government constructed a plan that not only achieved the primary goal of restoring market confidence in Citigroup, but also carefully controlled the risk of Government loss on the asset guarantee. The Government
summarily rejected Citigroup’s initial proposal and made a take-it-or-leave-it offer that Citigroup only reluctantly accepted, against the advice of Citigroup insiders who considered the Government’s terms too expensive in light of the assistance provided.
In the end, Citigroup accepted the deal chiefly because of its expected impact on the market’s perception of Citigroup’s viability.
And how about a Wall Street Journal story in 2009 headlined, “Citigroup chafes under U.S. overseers“?
It included the observation that “Former federal officials have dubbed Citigroup the ‘Death Star,’ comparing the bank’s threat to the financial system with the planet-destroying super weapon in the ‘Star Wars’ movies. Privately, in the words of one official, they regard the banking giant as ‘unmanageable.'”
Back in 2009, Citigroup was so afraid of the government – even its rivals thought Citigroup would become a ward of the state – that the firm tried everything to please its cadre of regulators, from cancelling plane trips to Pandit voluntary $1 salary. That doesn’t sound like a firm that was aware of its shortcomings.
- PANDIT: CITIGROUP ALWAYS HAD A CLEAR VISION OF ITS FUTURE
Citi had become known as a company too much focused on buying and selling companies and businesses, putting this together and breaking that up, rather than on serving its clients for the long term, the way a bank should.
When I became CEO in December of 2007, figuring out what to do was the easy part. I knew we had to get back to the basics of banking, to Citi’s core strengths. We had to put our capital to work for our clients. We had to focus on serving the real economy.
- WAIT, DID IT REALLY HAPPEN THAT WAY?
No, and to be fair, during the crisis no one else had a clear vision of the future either. The Vikram Pandit of 2009 might take issue with the idea that “figuring out what to do was the easy part.” Citigroup was confused about its options and worried about the perception of every little move, down to the baked goods, according to the Journal:
“The government’s ongoing pressure to slim down the company has forced Citigroup executives to consider a range of unwanted options. They agreed in January to spin off the Smith Barney brokerage unit into a joint venture with Morgan Stanley after insisting for years that they wouldn’t part with the business. The bank has also split itself into two parts, with the goal of selling additional assets and businesses….The scrutiny has Citigroup executives second-guessing everything, right down to the fresh-baked cookies offered at a recent corporate retreat in Armonk, N.Y. Seated in plush chairs around a three-story stone fireplace, some attendees wondered aloud if the cookies themselves might be portrayed as a frivolous use of taxpayer money.”
Ah. Fretting over cookies. That doesn’t sound like a firm confident in its direction.
- PANDIT: CITIGROUP STRATEGIZED AND EXECUTED A BRILLIANT RETURN FROM TARP
Today in Singapore, Pandit said:
This year is our 200th anniversary. We were founded by a group of merchants who needed financing. Essentially, we were founded by our clients. We know what’s worked for us in the past—and what hasn’t. When we have focused on our core mission—serving our clients banking needs—we have thrived. When we have strayed, that’s when we’ve run into trouble.
So I knew what we had to do. Doing it was a little harder.
I assembled a core team, split roughly evenly between Citi veterans and people I’d long worked with who had come with me to Citi. We immediately began raising capital. Since year-end 2007, we’ve added more than $140 billion to our capital base.
And we changed the structure by identifying what businesses were core and which were not core to our strategy and historic strengths. In January 2009, we formally reorganized the company into Citicorp—our core banking businesses such as retail banking, credit cards, transaction services, and institutional banking—and Citi Holdings, businesses and assets that we identified for sale.
- WAIT, DID IT REALLY HAPPEN THAT WAY?
Not exactly. Citigroup did break up into two parts, and it did raise all that money – but because the government forced it to. The division of Citicorp and Citi Holdings grew out of a government idea to create a “bad bank” for Citigroup’s troubled assets to quarantine them from the bank’s healthy loans.
- PANDIT: CITIGROUP TRIMMED THE BAD STUFF AND GREW ITS WAY TO PROFITABILITY
Citi today is smaller, simpler, safer and stronger. We employed 375,000 people in 2007 compared to 261,000 today. Our balance sheet has shed some $600 billion, mostly of assets not core to our ongoing mission.
We’ve sold more than 60 businesses and Holdings is now one quarter of the size it was in 2008 and only 10% of Citi’s total assets as of the end of the second quarter—and still shrinking. Our capital strength is more than five times higher than it was during the crisis.
And our risk management function has been completely overhauled and our risk is down substantially. For instance, we carefully strive to match our assets and liabilities, country by country. A bank that is funded mostly by short-term funds that also owns a great many long-term loans will be far more complex to steer through a crisis than one whose assets and liabilities are more evenly matched.
The results—ten straight quarters of solid profitability—speak for themselves.
- WAIT, DID IT REALLY HAPPEN THAT WAY?
Sort of. Citigroup did shed assets from its balance sheet, and Citi Holdings really did shrink, impressively, to $191 billion at the end of June 2012 compared to $650 billion in 2009, according to Reuters. But Citi Holdings is hardly a success story; it’s still losing money, racking up $921 million of losses in the second quarter of this year. The firm’s profitability has also come despite a struggle for profits, and because of deep cuts to its staff. In fact, between 2007 and late 2011, Citigroup cut or lost about 100,000 employees. Citigroup’s also boosted profitability by setting aside less money to cover its bad loans. That “extra” money goes right to boosting profits. Shareholders refuse to pay Pandit more than the same $1 salary he took so nobly back in 2009. And regulators have refused to let Citigroup return any money to its shareholders, which has been a consistent source of frustration to the bank.
Now, it’s not as if Pandit is completely wrong. He worked cooperatively with the federal government – a role that many other, more controlling bank CEOs would have found chafing. He stayed in the most challenging job in financial services for nearly five years with very little incident, which is something of a miracle. And the bar for running a bank like Citigroup is very high: Citigroup, the bloated product of a mishmash of acquisitions, is a bank that no one has been able to manage very well since the departure of its architect, Sandy Weill. (Who now, by the way, wants to break up big banks like Citigroup.) And Pandit, in his cooperation with Treasury and other agencies, could probably give a master class in the newest skill required by bank CEOs: how to work with your regulators with patience and aplomb.
There are also logical reasons why Pandit would want to strut a little: he wants to be paid more than $1, to start, and he wants the bank to finally pay out money to its shareholders.
Even so, if Citigroup wants the federal government to give the bank permission to pay out dividends again, maybe it’s a good idea to give credit where credit is due. And a lot of that credit, when it comes to saving Citigroup, is due to Washington.
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