Issue 6 - December 2011
View From The Bridge - continued
Restoring A Shaken Citi
When Richard Parsons was named chairman of Citigroup Inc. in January 2009, the bank had just announced an $8 billion quarterly loss. It was on the brink of being nationalized.
Parsons sat down with William M. Isaac, Senior Managing Director and Global Head of Financial Institutions at FTI Consulting, to recount the harrowing experience of preventing one of the world’s largest banks from collapsing. To Parsons, the government played a major role, and he is less critical of its actions than many of his peers. He argues, for example, that TARP [Troubled Asset Relief Program] and its follow-on measures helped restore confidence in the banking system.
Fast-forward to the present: Citi posted profits of $10.6 billion in 2010 and $6.2 billion in the first half of 2011. Having brought Citi back to life, Parsons articulates the bank’s leadership role going forward, including its commitment to housing finance.
The following are excerpts from the interview.
William M. isaac: What was it like being at the top of Citi during that period?
Richard Parsons: Citi was perceived to be the worst of the worst of the big guys. So trying to navigate that was a challenge. In my view, and I’m certain that it was the view of Tim Geithner [then president of the Federal Reserve Bank of New York] and every thoughtful person in Washington, we just couldn’t let Citi go down. The federal regulatory establishment was committed to the general proposition that we had to figure out how to get this big bank through this crisis — and in a way that was defensible given the toxicity of the environment. We had to figure it out and try to avoid making a mistake that could cause the bank to implode.
It was dicey because it’s all about confidence — whether it’s depositor confidence or counterparty confidence. One of Citi’s issues was that a huge part of its balance sheet and operations was funded in the wholesale markets. If those markets were closed to you, or if investors got spooked, your funding might disappear overnight. So we had to make sure we were doing the things needed to keep the markets calm. Then there was the heat of the battle in Washington. Every bank and all the bankers had become pariahs to many of my good friends and colleagues in the Washington establishment. Bank bashing and fat cat bashing were in vogue.
Isaac: How do you view the way the government handled the crisis? How would you grade its effort?
Parsons: B+. I’m talking about how the government handled the crisis once it was on us. I really do think the system could have melted down. I was told by the Treasury Department that there was about an hour on the Tuesday after Lehman collapsed when interbank trading around the world stopped. Nobody would clear anything. It just halted.
The financial world could have been thrown into total chaos. The government’s response, putting TARP in place and the follow-on measures thereafter, salvaged at least some confidence in the system. The bottom line is we worked through the crisis.
Isaac: But Lehman is part of that story in terms of the government’s actions, right?
Parsons: Certainly, it started off badly. But even if Lehman had been bailed out the way Bear Stearns had been, then the next one would pop up. There could have been more forethought to the handling of Lehman. But I’ve heard people argue that Lehman had to happen, so the sooner the better.
From the failure of Lehman forward, the government’s response was pretty good. But neither our government nor the industry did a good job of communicating why the financial system is different from other privately held industries, and the consequence of letting the financial system slip into chaos. So the angst and the anger caused by the crisis and the government’s response to it were higher than they needed to be. The situation was not helped by the handling of AIG — how we dealt with credit-default swaps and who was made whole without participating in any of the pain. In hindsight, I’m sure people would look at that and say we could have done a better job.
Isaac: What is Citi’s future?
Parsons: Here’s the way I think of it. Citi right now thinks of itself as being in three businesses: institutional or wholesale banking, retail banking, and global transaction services. GTS operates in about 96 countries but serves clients in 140 countries around the world. We have by far the biggest global footprint of any U.S. bank. HSBC is a distant second to Citi in terms of its global footprint.
I think of this GTS system as a circulatory system of the corporate body. It doesn’t have the highest amount of reported net income, although it’s highly profitable. But it connects all the other parts, both in country and across borders. We have a new tagline at Citi, which hasn’t actually been publicly promulgated yet: “America’s Global Bank.” Citi is going to continue to provide connectivity for its largest institutional clients and particularly for the top 5,000 corporations in the world.
Isaac: You said that the GTS is not the most profitable part of Citi. What is?
Parsons: It will bounce back and forth between the securities and banking business and the retail business and cards. Credit cards for a long, long time were a quarter of Citi’s earnings.
Isaac: Is there a future for housing finance at Citi?
Parsons: Yes, there has to be. The most stable and therefore valuable source of funding is deposits. If you’re going to be in that business, you’re going to be dealing with retail customers. You have to have a full suite of products and services to keep them there. You can’t just say, “Look, we want to take your deposits, but we don’t do anything else.”
There will continue to be a significant residential and commercial real estate component to Citi here in North America. But the old business of having a whole network of mortgage brokers out there so that you can get the mortgages and run them through the warehouse, package them up and sell them off as securities — that’s gone.