Pandit Speaks Out

Here's the transcript of an interview Citi CEO Vikram Pandit had this week with Charlie Rose on PBS.

Vikram Pandit:
Charlie, thank you for having me.

Charlie Rose:
It’s a pleasure to have you here and I appreciate the fact that this is your first television interview, and I want to view it as a sense of a conversation. Let me begin by what you think of what Secretary Paulson announced today. I mean a financial writer said to me, this is breathtaking.

Vikram Pandit:
This is a very interesting plan. It’s sizeable. The plan is about reducing the rates on mortgages, ultimately, to help people buy homes. And so as he announced these $800 billion worth of securities that can be bought, Fannie Mae bonds, Freddy Mac bonds, as a result of that, what’s already happened in the market, they’ve started trading better. And they’re about 50 basis points better. And if they’re 50 basis points better, that 50 basis points gets translated directly into a mortgage to a homeowner. That’s the beginning of what we need to do, because ultimately, we’re going to have to attack housing.

Charlie Rose:
Yeah. People say that constantly, that in the end, this crisis will be averted because the housing market will turn around, and we will have dealt with home mortgages and foreclosures. What else do you believe is necessary to happen and for the government to do ?

Vikram Pandit:
There are three or four things that are going on, Charlie. We talked about housing. That’s probably the most important thing. We got to deal with it because it started there, and we got to finish it before we can get out of it. The second part is that the banks and the financial institutions around the world have found themselves with more securities than they’d like to hold today. That’s called a deleveraging.

Charlie Rose:
Right.

Vikram Pandit:
All financial institutions.

Charlie Rose:
All financial institutions are deleveraging.

Vikram Pandit:
I think that’s right, around the world.

Charlie Rose:
Around the world.

Vikram Pandit:
They’re right, but around the world, they’re deleveraging. And the third part is whenever we go through a cycle of this sort, it does start affecting the economy. And so we’re heading into a market, an economy where unemployment is rising. And so as you’d think about what needs to happen, you got to attack housing directly. And what Secretary Paulson did today is one step. There can be a lot of different things one can do on that. The second part is to try and figure out what do we do with these assets the banks don’t want  ?

Charlie Rose:
Right. These so-called toxic assets.

Vikram Pandit:
Well, some of them are toxic, some of them are good. There is just too many of them. And there has to be a plan to clean out these assets and have institutions and or funds buy them, and the treasury has been working on them. The Fed is helping that and so we have some more work to do with that. But the last part is the most important one, which is if you attack housing, and at the same time unemployment is still rising, that doesn’t actually help us get out of where we need to be. And so we have to have a fiscal stimulus. And the president-elect has said that he’s considering that. It may be one of his first actions. You got to have a fiscal stimulus to jump start this economy.

Charlie Rose:
You and most of the bankers you know agree with that, that we need the kind of fiscal stimulus that the president-elect is talking about at the range of 500 billion, $600 billion that will not only be involved in infrastructure but also in terms of alternative energy and lots of other issues.

Vikram Pandit:
And I think that’s right. Now, one of the opportunities we have is to not only use the fiscal stimulus. To jump-start the economy, we need to do that. But at the back end of that, we want to make sure that we’re attacking some of those issues for America that are going to be important in the long term, like infrastructure.

Charlie Rose:
Right.

Vikram Pandit:
Healthcare, those kinds of things.

Charlie Rose:
How do you size up the president’s economic team ? Tim Geithner, who you work with, who you know. Larry Summers of course you know.

Vikram Pandit:
I like it. I think it’s one of the best teams one could put together. I’ve known Larry somewhat. He is a very smart man. He is experienced. He actually is very good at looking through a lot of details and coming up with a theory. Geithner understands theory, he understands practice. He’s a doer. And, unfortunately, he’s had a lot of experience in dealing with some of these things over the last six months. So it’s good to have him. It’s good to have Larry.

Charlie Rose:
My impression is that he was involved in negotiations having to do that took place over the weekend. But he pulled back after it became public that he might be the Secretary of the Treasury nominee.

Vikram Pandit:
Charlie, we dealt with a lot of regulators over the weekend.

Charlie Rose:
Right.

Vikram Pandit:
And that’s one of the wonderful things about what happened over the weekend. Everybody came together. And this was the FDIC. This was the OCC. This was the Fed. It was the Department of Treasury. And it required everybody to come together because what was going on was something that was beyond Citi. It was the confidence in the financial system as a whole. And so a lot of people are involved in trying to figure out, okay, we’re in this market where we have a battle between fear and confidence.

Charlie Rose:
Right.

Vikram Pandit:
And you have a battle where confidence has to win. And what do we do ?

Charlie Rose:
Let me come to that, because that has to do with the weekend and where we are today. Tell me what had happened to Citibank, not going all the way back. And I want to talk about risk management in a second.

Vikram Pandit:
Right.

Charlie Rose:
But why was the stock collapsing? And was there a run on Citibank ? And why did you feel it was necessary to say we need to do something about short selling ?

Vikram Pandit:
There is no doubt that a lot of banks have come into this market with assets and securities that they wish they hadn’t had. These are loans, loans that they make. And in a tough market, they are challenged loans. And we knew that. We had those on our balance sheets. And we did everything we could to make sure we raised the right amount of capital. We raised a lot of it. We cut our cost structure correctly and had a plan. We do have a plan to make sure that as we get out of these assets, the company starts making money. What happens, though, occasionally, is that in a market where there is a lot of fear, there are issues that come up occasionally about what about this bank? What about that bank ? What about that bank ? We’re not the first ones. As you know, this has happened to other banks along the way. And our fear and was that some of the issues about Citi’s assets and asset quality were being translated into people taking action on the stock, not only some people who had stock they were selling, but particularly short sellers. And we thought that this was an issue about confidence in Citi, not about capital, not about our earnings. And somehow, we needed to make sure that we got control of the situation.

Charlie Rose:
Or if you didn’t, what would happen ?

Vikram Pandit:
That’s anybody’s guess, and we’ll never find out because when you look at what happened over the weekend, everybody got ahead of it. 

Charlie Rose:
How did that happen ? Did you make a call to the secretary of the treasury or to Tim Geithner of the New York Fed or Ben Bernanke and say, We’ve got a real problem here ?

Vikram Pandit:
We’re always talking to our regulators.

Charlie Rose:
Right.

Vikram Pandit:
And we’re always in touch with the people in Treasury. We’re in touch with the OCC. And we were all watching what was going on. And when you looked at how well capitalized we were, when you looked at all the operating earnings we were, we had, it became clear that we had the capability to manage our bank in a very solid way over the next few months. But it also became clear this is a market where stock price can become an indicator of what confidence people might have in you.

Charlie Rose:
And you lost, in a week, 50 percent of your value ?

Vikram Pandit:
We did indeed. The stock price went down about 50 percent in a week. And so I think it was important as we all talked that we got ahead of this. And that’s certainly what happened over the weekend.

Charlie Rose:
Why do these things always take place on the weekend ?

Vikram Pandit:
Charlie, that’s a good question. I guess one answer is the markets are closed, and gives you an opportunity to really think through what needs to get done. You can get it done, put it in place, and by the time the markets open, you can announce it.

Charlie Rose:
So you go to them and you decide that we need to do something, because there is a loss of confidence, maybe people are taking the deposits out. Was there a significant run in terms of deposits or not ?

Vikram Pandit:
As of Friday, which is really when we started talking to the regulators, there was only noise.

Charlie Rose:
Noise means what ?

Vikram Pandit:
Noise in the sense of deposits coming in, deposits going out, meaning sort of the usual kind of activity.

Charlie Rose:
But not a significant number of people of significant wealth coming saying I’m worried about Citibank, I have seen the stock collapse, and we better get our deposit out of there.

Vikram Pandit:
That’s right. That’s right, and so, you know, from that perspective, again, with 300,000 people around the world knowing exactly the strength of the bank, we did a pretty good job of making sure we had informed our clients about the strength of Citi. So really the view was going into the weekend, what could happen this coming week that we’re in. And it became pretty clear that this was something that was bigger than Citi.

Charlie Rose:
What was it ?

Vikram Pandit:
In the sense that if it is about Citi and it was really about the entire financial system. It was about confidence in the financial system. It was about stability of the financial system. It really was about the U.S. banking system and for Citi, we have a rather unique place. We’re in 109 countries around the world, and Citi’s strength is viewed to be America’s strength in many ways.

Charlie Rose:
So you knew you had a crisis, and the credit crisis of confidence that made go beyond Citibank, and you had to do something. Bob Rubin makes a call to Hank Paulson. How have those things happen? And you bring the people into the room, and there is negotiating all over the weekend. And it’s not decided until 12:00 on Sunday night, I think. That’s the report we have. How is it negotiated ? Whose plan was it? Was this your plan, this plan for $306 billion in terms of after the initial loss, if there was an initial loss in some of these securities, you’d cover the first 29 billion, and then after that, the government would cover 90 percent of the loss, and therefore, you had a guaranty that the assets would be, in a sense, protected. And that instills confidence. You had $20 billion in terms of preferred took place as well. Was that your plan ? Was that Geithner’s plan ? Was that Paulson’s plan ? How do those things happen ?

Vikram Pandit:
When you look at the announcement that came out, and it was a joint announcement by the FDIC, the Federal Reserve, and the Treasury. It talks about Citi, but it also talks about a lot of different things. It talks about how all the regulators and the treasury, everybody, is going to stand behind the U.S. financial system. And was about making sure people understood that all measures, all resources available to us would be used to make sure there was not an issue of confidence in the U.S. financial markets and the banking institutions of the U.S. financial markets. That was, to me, the major part of the announcement. Obviously, given where we were at Citi, with where the stock price was, just an announcement, we’re okay. I mean it could have worked, but it was really important to say, you know, we should go a little bit above and beyond kind of what it might take.

Charlie Rose:
Put your money where your announcement was.

Vikram Pandit:
Exactly. You got to show something that goes way beyond that.

Charlie Rose:
Some have said, and I think Bernanke has even mentioned this, not necessarily with respect to Citi. I don’t remember. Some institutions are too big to fail. Clearly, as the world’s largest financial institution at one time, you were too big to fail. Is Citi too big to manage ?

Vikram Pandit:
You know, Charlie, the answer is no. It’s not too big to manage. Let’s talk a little bit about Citi. You’re bringing up a question about Citi. What’s unique about Citi ? What’s unique about Citi is that we’re in 109 institutions around the world, which means we bring the world to our clients and we bring our clients to the world. We’re helping the world globalize. It’s a very unique place to be and probably exactly the place to be, given what’s happening around the world, globalization, trade flows, capital flows, everything increasing per se. With those 109 countries come the requirement to operate the company in exactly the right way. And what we of course doing and I have been doing over the last 11 months is saying, okay. That’s what we’re good at. We’re good at bringing the world to our clients and our clients to the world. How do we do that as well we can and clean up the rest ? And so we sold about 16 -18 businesses so far. I’ve got a long list of things we’re cleaning up. And then you get back to saying that when I help my clients, I help them save.

Charlie Rose:
But you are saying it’s not too big, certain assets we had we shouldn’t necessarily have said, whether it’s insurance or whatever it might have been, but we’re going to clean it up. But the idea of being too big to manage is not an idea that you accept ?

Vikram Pandit:
It is definitely not a company that’s too big to manage. It’s a company that is being refocused on its uniqueness, a company where we’re slimming down, we’re simplifying, we’re getting it more efficient, and going back to our core purpose. And our core purpose is to be a bank. What does a bank do ?

Charlie Rose:
It loans money.

Vikram Pandit:
It helps people save. It loans money to people that need it.

Charlie Rose:
And gives them a place for their deposits.

Vikram Pandit:
Gives them a place to take deposits and put them to work. That’s what a bank does.

Charlie Rose:
Tell me what happened. How did you get to this place where you had so many obligations? There was a very tough piece by Eric Dash in the New York Times over the weekend, an exhaustive look at Citibank. And it basically painted the picture of a bank where risk management was not handled very well at all. And it troubled a lot of people. And people have, as I knew you were coming here, said to me today, how did this happen to these people ? How could they be doing this? How did they show so little understanding of the risk that they were taking ?

Vikram Pandit:
Charlie, go back, again, to what a bank does. A bank takes deposits and puts deposits to work by lending money, et cetera. Start there. Stay with me for a minute. Okay? We learned historically that if you take deposits under Houston and put them in Houston real estate, it didn’t work 20 years ago. So a good bank takes deposits from a diversified set of places and puts that money to work in a diversified set of risks. What went wrong ? What went wrong is we had tremendous concentration in the sense we put a lot of our money to work against U.S. real estate. So how we got here is we got here by lending money and putting money to work in the U.S. real estate market in a size that was probably larger than what we ought to have done on a diversification basis. 

Charlie Rose:
There is no question about that, is there ?

Vikram Pandit:
Results would show that’s kind of where we are. And so as I got into this job about 11 months ago, I came in with a set of assets were which unduly concentrated against the U.S. residential market, and we have been working down steadily.

Charlie Rose:
Okay, but when these decisions were made, and this is the essence of the New York Times piece. Risk management was not being handled very well, number one. People didn’t even understand the level of exposure, and that the role of risk management, which Warren Buffet said to me, is the role of the CEO. That’s the man who has to be in charge of risk management.

Vikram Pandit:
He’s right.

Charlie Rose:
And risk management at Citi seemed to have gotten out of control. Will you accept that ? Before you got there.

Vikram Pandit:
I do consider the role of the CEO as that of a risk manager. I’ll take that. That is my role, very clear about that. But let’s think about risk management.

Charlie Rose:
So that’s a change at Citigroup.

Vikram Pandit:
But let’s think about risk management for a minute. How many times have you seen triple A bonds go to zero ?

Charlie Rose:
Almost never in my exposure. I’m not wise about that.

Vikram Pandit:
Keep that on one side for a second, Charlie. And then say, okay, the U.S. real estate has almost always gone up and frankly since the Depression, it really hasn’t gone down much. So if you’re risk managing, and think about real estate saying, oh, it could really go down. How much do you think would be a prudent amount for a risk manager to think about how much it could go down, 5 percent maybe ? Ten percent ? Fifteen percent ? So forgetting about Citi for a minute, regardless of where you go and look at risk managers, if they see these are triple A bonds, and by the way, let me stress test them, which is the language of risk managers. How should I stress them? Well, let’s assume housing prices are down 15%. Let’s suppose if they had done that, you’d still have had a problem, because housing prices are down a lot more than that. So it’s something that goes beyond risk management here which is that whether we like it or not, you know, over the last 2,500 years in financial markets, there have always been bubbles.

Charlie Rose:
Indeed, we had a bubble in a number of sectors in our economy, then we had a bubble in the housing sector here. But there is also this that a number of people have come to this chair that you’re in and said one of the serious problems here was the rating agencies, that people were accepting what they said. And what they said was not reliable.

Vikram Pandit:
Some of that is true in the sense that there are funds around the world that invest in securities based on ratings. And there are people who thought triple As are triple As, and you should buy them. And there is an aspect of that that is true. But that doesn’t mean that people solely relied on the ratings. I think people did do work. But the fact is that I’m not so sure anybody, anybody ran a stress test of the kind of environment that we are living through today. And I’m not the first one to say it, but I don’t think there is a living generation that has seen an environment of the sort we’ve got in this case.

Charlie Rose:
So you seem to be saying that no one should have expected a better performance because no one could have imagined the housing collapse that we saw in this country, correct ? Is that what you’re saying ? Because it says that no one was to blame and that therefore we end up with all this collapse with no responsibility, other than point the finger at the housing crisis and say, we couldn’t have predicted that so therefore our hands are clean. Is that what you are saying ?

Vikram Pandit:
What I’m saying is that when you look at the housing market, when you look at what’s happened to housing prices over time, they’ve steadily gone up. And customers, consumers, the average person in the U.S. has looked at their house as their bank. It’s where you collect equity, where you have your savings. And they started using that. And so yes, I think Wall Street, financial institutions went a little bit further, went to a point where they started encouraging people to use those savings. They went a little bit further in the sense of the saying, okay, housing price have really not dropped that much over the years, encouraged them to buy more houses. Some of the practices did go a little far, and quite a lot far in terms of what and how they encouraged people to buy homes. And when the other side of things happened, they all sort of roll into a place where sometimes you create a bubble. And that’s where we got into. Now, we’re not the first country that has gotten into this bubble. There are a lot of different places that have gone into that. In almost every one of those examples, there are people who anticipated some of this. There are people who thought, well, we may want to pull back. But the fact of the matter is, when the housing prices drop the way they have dropped, and when you go to a housing cycle the way we’re going through it, nobody’s spared.

Charlie Rose:
Let me just come back to this question, though. I mean, Citibank had become much larger than the functions that you have talked about.

Vikram Pandit:
Mm-hmm.

Charlie Rose:
Trading was a central part of this. And you look around, and all these functions were under this one institution. And a lot of people were making a lot of money trading in securities. And the New York Times piece over the weekend, so many people seemed to focus on, you know, suggested that there was, in Citibank, an emphasis to take more risk, to trade more, to engage in these complex securities that too many people didn’t understand, and that in some way, that was an abandonment of fiduciary responsibility not use that in a legal way.

Vikram Pandit:
There was an emphasis on trading. There continues to be an emphasis on trading at all the firms that are in the trading business. There is an emphasis on making sure that you are there to work in the markets, help clients and create the kind of instruments clients need. That continues. That’s all there. It’s here, and it’s at every other firm. On the street, different firms did it in a different amount.

Charlie Rose:
What was the role of Bob Rubin ?

Vikram Pandit:
Bob Rubin is on our board as a director. That’s his primary role today.

Charlie Rose:
Formerly chairman of the executive committee.

Vikram Pandit:
He is former chairman of the executive committee. Bob spends a lot of time with our clients, and we have a lot of great clients around the world. Being in 109 countries, we have a lot of finance ministers.

Charlie Rose:
And as [unintelligible] secretary of trade, you had an international reputation.

Vikram Pandit:
And it’s important because people know the central banks want to get his point of view. So Bob’s role at Citi is to work with our clients, work with regulators, work with other central bankers around the world in order to help the company.

Charlie Rose:
But he had influence on Chuck Prince, and he had influence with you. I mean, he is so respected within financial circles and so much so that a number of people who are colleagues and protégés of his, including Tim Geithner and Jason Furman and others are now looked to to help lead  the financial world - the Treasury Department and the White House economic planning in the new administration.

Vikram Pandit:
Mm-hmm.

Charlie Rose:
So there was a collection of friends. But people are asking, and that article asks the question again, and people today, knowing that I was going to see you, said, you know, I want to know what was Bob Rubin’s role, and was he, as the New York Times suggested, pushing for more risk.

Vikram Pandit:
It’s great to talk to Bob always. Bob has great points of view. He is very, very thoughtful. He has got perspectives. But in the 11 months that I have been in this job, as I worked with him, it is pretty clear that he doesn’t drive the execution decisions. There’s only one place those decisions.

Charlie Rose:
CEO.

Vikram Pandit:
That they stop for the CEO.

Charlie Rose:
In terms of change of management, people are asking this question, as you well know, should we trust this amount of money (the US government is giving) to the management at Citi today ? Should there not have been, perhaps, a demand for a change in the board and a change in the CEO ? Did that come up in the negotiations ?

Vikram Pandit:
You know, Charlie, it’s a lot easier to get into these situations than it is to get out of them. And you see that a lot of different places in the financial industry today. And so the real question over the weekend was one, again, of confidence in the financial markets, confidence in the banking system and creating stability in the financial market, stability for the US banks. And for our part, we raised capital with the government, and we actually bought insurance from the government.

Charlie Rose:
Right.

Vikram Pandit:
When your risks are that large, you can’t go to Aetna. You have to go to the US government.

Charlie Rose:
Is the US government becoming the world’s bank ?

Vikram Pandit:
The banking system is still the banking system. 

Charlie Rose:
But it’s dependent on rescue by the US government which has the opportunity to print money, if necessary, whatever the impact on the dollar might be.

Vikram Pandit:
You know, Charlie, the central bank’s function, ultimately, is to make sure financial markets work.

Charlie Rose:
Yeah.

Vikram Pandit:
And that we have.

Charlie Rose:
And are stable.

Vikram Pandit:
And are stable.

Charlie Rose:
And don’t collapse.

Vikram Pandit:
And that there is confidence in the marketplace, and they are playing that role. And they are doing it, in my view, very well.

Charlie Rose:
Will anything change because of what’s happened in this economic collapse? What will be different ?

Vikram Pandit:
I think that’s the debate. What is going to be different ? Because let’s think about where we are. We went from a funding architecture for banks and financial institutions which was a completely free market, funding architecture to where the funding markets have basically been withering away, and the central banks around the world have had to step in and help fund financial institutions. We’re all going to have to get out of that on the other side. And when we get out of that on the other side, the question is, what’s the architecture of the financial system ?

Charlie Rose:
Tell me what it’s going to look like.

Vikram Pandit:
Exactly. Well, let’s talk about it. What is the architecture? What’s the regulatory system? What do we need to do? And one of the best things I read, by the way, in the last I think it’s two or three weeks was what I read coming out of the G20. I thought that was a great document. 

Charlie Rose:
What came out of that document you liked other than the call for coordination among central banks ?

Vikram Pandit:
Well, first we went from G8 to G20.

Charlie Rose:
Exactly.

Vikram Pandit:
That’s a very important distinction. The second is not only a coordination point, but they talked about regulatory architecture. They talked about how funding markets were important. They talked about how free market banking systems were important. There were a lot of different things that were there.

Charlie Rose:
Yeah, but certain people, certain of those central bankers, including the president of France came in wanting to criticize American capitalism. That was part of the sort of debate at the beginning.

Vikram Pandit:
Everybody is going to have a point of view in terms of what went wrong and what’s to blame, et cetera. What’s most important is it that you have an architecture, and you have a set of questions that you can debate. And one of the great things about the document that came out of G20 is that they set out a pretty clear sense of, Here are the important things that we stand for. And they said, with those things, here are the questions that come up. Here are the set of people we’re asking to say, Let’s go have a debate. Let’s come up with the answers. And here is the timeframe by which you need to come back with. And that’s pretty good. And if we get half of those things done, we’re in a great place.

Charlie Rose:
Talk more about what the debate ought to be and what it’s going to look like. Take your own institution. What’s Citibank going to look like five years from now, or Citigroup ?

Vikram Pandit:
Let’s talk about the debate. In this market around the world, there are regulators of financial institutions and unregulators for financial institutions.

Charlie Rose:
There is nobody who doesn’t believe we will have more regulation coming out of the federal government.

Vikram Pandit:
And as importantly, it’s not only about regulation, it’s about a uniform regulation with common standards around the world for picking up a lot of institutions that are considered to be systemically important. That’s the first point. The second point is as you look at them, you need to have a uniform cap requirements. You’d have consisting accounting policies around the world. And the third point, I guess, is that you need to have a lot of transparency. Transparency at least to the regulators and the people who are going to provide oversight. So if you think about it, it really is about pick up everybody who is systemically important. You may have to go a little bit further than what you think today is systematically important. Two, is let’s have a level playing field around the world on all those issues that are important to manage them, capital, accounting, et cetera. Lost a lot of transparency. So that with financial oversight, people around the world, regulators, they can actually see a lot of the stuff that’s happening. Some of the markets that we deal in on the fixed income side are notoriously opaque. And hence, these call for a clearinghouse for CDS, et cetera. They’re part of that transparency concept. We got to get those three things right, because behind that is, then a back bone for the financial architecture, and therefore, the funding system.

Charlie Rose:
Okay. But let me go to Glass-Stiegel in 1999 was changed. Nobody was happy to see that change and Sandy Weill would be the first to tell you, because he wanted to build what he built there, which was the largest financial institution that had insurance and investment bank and all these other functions; correct ?

Vikram Pandit:
This is a incredible place. Citi is an incredible place. He built a wonderful business. Yes.

Charlie Rose:
But it will be a different business five years from now because we are going through the what some people are calling the worst financial crisis since the Great Depression, and one of the two most severe in this century.

Vikram Pandit:
Let me tell you what the most critical question is that we need to understand. As I said, we went from a free market funding architecture. We had just in time capital available, just in time funding available. We had plenty of sources of funding, a lot of liquidity. We’ve gone from that to if you really need sizeable funding, got to go to a central bank. Okay? If you need to raise a lot of debt, you need FDIC guarantee. Go do it. So we’ve gone from arms length free market just in time availability to saying that you need help and guidance to have that same access to funding. So the most important question in financial markets is going to be what’s going to be the shape of that funding architecture ? That’s important.

Charlie Rose:
What do you think the shape of that funding architecture ought to be ?

Vikram Pandit:
Well, I think deposit bases are going to be important as a source of funding.

Charlie Rose:
The regulations that go with that.

Vikram Pandit:
That’s exactly right.

Charlie Rose:
Which is the reason that Goldman Sachs and your former firm, Morgan Stanley, began holding companies; right ?

Vikram Pandit:
That’s one part. And now it’s a question of how are they going to fund themselves. But I’m sure they’re thinking through it.

Charlie Rose:
But back to Citigroup. What will it look like five years from now ? Will it be what functions will it no longer have ? What will be its attitude towards derivatives and mortgage securities and all these things that came about and are responsible for all the things ?

Vikram Pandit:
Right.

Charlie Rose:
It created a circumstance that is a huge crisis for this country and for the world. It is the focus of attention of every government, almost every government in the world. 

Vikram Pandit:
Absolutely. So let’s talk about what we are. We’re going to be a bank that does the basics, help people save by taking deposits, help people borrow by lending money, provide them investment ideas, provide them advice, and provide them payment services. That’s what a bank does. Every bank does that. Some do it as a community bank, some do it as a huge U.S. bank. Our distinctiveness is that we’re in 109 countries around the world and we’re a global bank. So the uniqueness of Citi is centered around our reach around the world.

Charlie Rose:
Global presence.

Vikram Pandit:
Global presence, and the ability to bring the world to our clients and clients to our world. That’s critical.

Charlie Rose:
And that will not change ?

Vikram Pandit:
That is at the heart of what makes Citi distinctive. Then the question is, what clients do you want to serve ? And with what capabilities do you want to serve the clients ? We’re going to have three client bases. One is the corporate client base around the world. There are going to be more multi nationals. Multinationals need services around the world. We’re the bank they go to. That’s one. Two, we’re going to serve wealth management clients around the world. They need diversification around the world. They need a lot of ideas. And third is that we’re going to be high end retail bank. High end retail bank meaning let’s find those clients that need our globality. So the client choice for us is based on our distinctiveness and those people that need our unique global presence.

Charlie Rose:
You’ve just had, over the weekend, these negotiations, must have been the most incredible thing you’ve ever been through. I don’t know your life experience entirety, but it must have been incredible there, because your own institution, what you have been chosen to lead, was tottering, and it needed an infusion from the government to restore confidence or it might have been a collapse that, as you say, would have sent shock waves around the world. This question is asked by some. Why should we trust the present management of Citi to get that institution out of the crisis ?

Vikram Pandit:
Charlie, as I said before, it’s easier to get into these things than to get out of them.

Charlie Rose:
But unless you acknowledge the errors made, there is no guarantee you won’t repeat them.

Vikram Pandit:
And so let’s go back to what Citi is going to be. It’s going to be this global institution serving these clients in a very streamlined way. We’ve gotten rid of a lot of the businesses, we’re going to get rid of a lot more businesses over time to be streamlined against that concept. We take one step further. What do banks do ? I want to come back to what I said before. We take deposits and put them to work. You’ve got to take deposits in the most efficient way possible and put the money to work in the most diversified way possible, which means you need a strong treasury function, a strong risk management function, a strong CFO, and a strong CEO. We’ve made a lot of those changes, if not all of those on that side. And what we need right now is time to have the operating earnings of what we’re doing shine through, some of the challenged loans on which we’re taking losses. That’s what we need.

Charlie Rose:
So basically what you’re saying, we’re fundamentally strong. What happened to us was a level of confidence which was reflecting the stock price and whatever some people might have done. The question also comes with respect to your bank and to all these institutions. How do we know, because we’ve seen one iteration after another. There was Bear Stearns, and then there was Lehman Brothers, and then there was Fannie Mae and Freddie, and then there was AIG, and now this. We had the bill that went to Congress for the $700 billion. And then we have watched that happen. And the government seems to take one approach, and that doesn’t quite work, and then it takes another approach, and now it comes up with this. How do we know that a month from now or two months from now, same argument will be made ? We can’t let Citi or some other big financial institution collapse. We’ve got to call on more billions from the federal government to do something about it. Are you confident that that’s not going to happen, that you have this problem in hand ? You have identified the toxic securities, and now with a guaranty from the government that you are in a position to clean and fix it ?

Vikram Pandit:
Again, it’s all about confidence.

Charlie Rose:
Right.

Vikram Pandit:
And it is again this battle of fear and confidence. I thought what came out again from the regulators in Washington over the weekend was very strong. 

Charlie Rose:
Very strong commitment to, a belief in ?

Vikram Pandit:
Commitment to making sure that they use all the resources available to ensure confidence in the U.S. banking institutions. And then you had President Bush on the steps of the treasury with Hank Paulson, and he said exactly the same thing. Then you had President-Elect Obama say it’s really important we have a very strong financial system, and as well said he supports a lot of the policies that have been put in place to ensure confidence in the banking system. That’s an incredible statement. It’s a statement that says that we have the regulators watching, ensuring that nobody tries to attack that confidence.

Charlie Rose:
Let me talk about your confidence. Are you confident in the question I asked? That you have identified all these toxic securities. There is no exposure around the corner you don’t know about. That it’s not going to be necessary for another bailout to take place, another rescue plan to take place ? That the central bank is not going to have to come back one more time in another weekend and have a marathon session with you, and more negotiations, to one more time save it. That’s the question of the confidence in the institution that with this plan is out of the woods.

Vikram Pandit:
That’s where I am when we looked at all the assets we own, and really, this is not about the operating business, Charlie. The operating business is doing extremely well. As a matter of fact, with the efficiencies we’ve put in place, we’re doing even better than we did 11 months ago by a lot. It’s not about the footprint, it’s not about the operating business. Those earnings are coming in. As a matter of fact, just the quarter that ended, our business revenues were exactly the same as they were one year ago despite the challenging market, which means are people are doing a great job at developing and helping clients to develop business revenues and my cost structure is going down. So my question is really, as you said, all about the assets. And the loans that I made. That were made before I got there.

Charlie Rose:
Fair enough. You have been in the job less than a year.

Vikram Pandit:
I understand. But that’s an important point in the sense that what happened over the weekend was to take 306 billion of those loans and we bought insurance against those loans.

Charlie Rose:
And the insurance came from the federal government.

Vikram Pandit:
Who else do you go to when you need to insure assets ?

Charlie Rose:
Absolutely. No one else can do it anymore.

Vikram Pandit:
That’s important. And we also put in another 20 billion of capital, and we are delighted. It’s great to have access to that capital. That in our view more than covers issues that might come up against the assets that we own and the loans that we’ve made going forward. So we’re extremely confident in both the earnings capacity of the company and our ability to manage it.

Charlie Rose:
[talking simultaneously]
What got you in trouble. What got you in trouble were these toxic securities; correct ? What value did you put on them at Citigroup, just to give America some sense of it. When you identified all these to value, market value of all these toxic securities, what was it ? Was it $2 trillion ? What was it ?

Vikram Pandit:
For these $306 billion ?

Charlie Rose:
Yeah.

Vikram Pandit:
Those are face values, these securities were about 350 billion, 340, 345, something of that sort. I don’t have the exact number. But these are securities that have been marked down.

Charlie Rose:
Mark to market, in a way, because that’s where the market is ?

Vikram Pandit:
That’s where the market is. Now, you know, people can argue whether the market is fair or not, but that’s where the market is. You mark them down.

Charlie Rose:
What were they at one time ? What would have been their value a year ago ?

Vikram Pandit:
There are a lot of securities in there, and so different securities are at different prices.

Charlie Rose:
Would it have been a trillion ?

Vikram Pandit:
Oh, no, no. These are securities that would have been higher but Charlie, I can’t tell you off the top of my head what the number was. But some of them are marked down a lot, some of them are marked down a little bit, some of them are accrual loans, and so there is not a concept of saying here’s how this works. The most important thing is we’ve got insurance against these assets which, then, allows us to manage our business on the operating side. You said there was not a question about operating earnings. It was a question about assets. 

Charlie Rose:
You said that, too. Isn’t that what you said ?

Vikram Pandit:
I think that’s exactly right.

Charlie Rose:
All right. When you look forward to this and tell me what it was like to be in the middle of the storm, that storm that you have been in for a year, knowing the pressures, knowing the pain that so many people were beginning to suffer, knowing the uncertainty that existed in the country as we watched this go from catastrophe to catastrophe to catastrophe. Watching a government trying to do something, but not knowing exactly what to do.

Vikram Pandit:
You’re right. There is not an owner’s manual of how to deal through this kind of an event or this kind of a market.

Charlie Rose:
Because it’s once in a lifetime.

Vikram Pandit:
It is unprecedented.

Charlie Rose:
Because of the housing crisis and the collapse and the bubble and all of that.

Vikram Pandit:
Exactly. And so a lot of the right things have been done but not everything that has been done has worked. 

Charlie Rose:
Could we have known that ? Clearly, Secretary Paulson has said that. Secretary Paulson said not everything is working. We have to do this on a case by case basis, and we have to realize that the circulation within the body had stopped. There was no lending and this function that was required to make our financial system go had come to a kind of stand still. That’s why you had to have a federal rescue; correct ?

Vikram Pandit:
And it comes back again to the point I made earlier. Financial institutions found themselves with more assets than they should have. All of them want to deleverage, not put on more loans.

Charlie Rose:
Which brings me to this question. The issue in many cases is when will we have this rescue effort taking effect so that banks will begin to do more of the function they do, which is lend money ?

Vikram Pandit:
It’s starting to happen. I think it is happening. It’s not fair to say that lending isn’t happening. It’s just fair to say it isn’t happening in the same quantity.

Charlie Rose:
Right. By a wide margin

Vikram Pandit:
And again, different things in different areas.

Charlie Rose:
But that’s the trust and confidence that you’ve got to acknowledge was there. Banks were not willing to loan to each other because they didn’t know the financial circumstance of the other bank.

Vikram Pandit:
Which gets me back to the point of what happened over the weekend. And the point that this is our combined issue, it’s an issue for Wall Street, it’s an issue for Main Street, it’s an issue for the central bankers, it’s an issue for the Treasury. Our combined issue as step number one is you’ve got to restore confidence, because confidence is a necessary condition for anything else.

Charlie Rose:
And that has happened, you believe, because of the action over the weekend and what the secretary of the treasury announced today with the with the new program.

Vikram Pandit:
You know, Charlie, I guess clarity is a hindsight issue, although we live life on a forward basis. And there is somebody who said that. I think it’s an important expression. I think when you look back and think about what’s happened, you’ll probably come back to this weekend as being an important turning point on confidence.

Charlie Rose:
Finally this, and you’ve been gracious to listen to all of my questions. There are many people believe that people who lead financial institutions, who got us in this economic catastrophe in part because of these toxic securities owe an apology to the American people and those people who have suffered so much because of it and who risked their jobs and lots of other things. Isn’t that appropriate to ask explanation and apology for what’s happened and what that country is going through on the part of the leaders of the financial community who helped and okayed and made the decisions that got us where we are now ?

Vikram Pandit:
And I can completely understand how people on Main Street, people who are not close to this industry would be furious at what’s happened and furious at kind of where we’ve gotten to. And in lots of different ways, that’s affected, and it’s affecting them. And their housing prices are down. Their nest eggs are down. 401-Ks are down. Their college saving plans are down. I mean, there is a lot that’s going on, which is something that would make me extremely furious.

Charlie Rose:
And they are furious in many ways, as you know.

Vikram Pandit:
Exactly.

Charlie Rose:
And not understanding and asking somebody to take responsibility and accountability and that’s part of the reason they’re asking questions not just in the financial sector but in the banking industry, I mean in the automobile industry, a lot of people are now saying they want to bail these people out, they’re going to rescue these automobile companies because they have to because failure is unacceptable. Yet, at the same time, there is seemingly little accountability on the part of management.

Vikram Pandit:
And, Charlie, given where we are, the most important thing to do is to make sure that we have a plan for going forward. And the plan includes a lot of different things, but it starts with confidence. And there are some managements that have already gone. There are some managements that may go. If you start throwing everybody under the bus, we’re going to need a very large bus. Given what we have gone through, the most important thing is who can do the job going forward.

Charlie Rose:
And who makes that decision ?

Vikram Pandit:
I think that decision has to be made depending upon the circumstances you’re in, depending upon what institution it that is you need to run, and depending on what kind of skills and capabilities somebody needs to have to get it done.

Charlie Rose:
We’re nearing the end of this, and I said, you’ve been gracious about this. Looking back, what you have seen, what are the lessons you have learned? And what do you regret ?

Vikram Pandit:
It’s been 11 months since I took over the company. I built a great team around me. We didn’t like everything we came into this market with, whether it’s the loans that we had made or some of the businesses we were in. And we moved really fast. What this market tells you is one should have moved even faster. And I keep thinking about it, is there something else I could have done sooner than what I did. And I always wanted to do things that you can think about that one could have done sooner. But the most important thing, Charlie, is that it’s very, very important to look forward from where we are and acknowledge we still have a lot of work to do feel we need great teams. We need great people who are willing to work hard, who are smart, talented in their own way, dedicated to saying that this is an unprecedented market time we’re going through, and that we need to do a lot of hard work to figure out how to get from here to there.

Charlie Rose:
And you are confident that we can get there ?

Vikram Pandit:
We, as a country, have no choice. We as Citi will get there.

Charlie Rose:
Thank you for coming. It’s a pleasure to have you on this broadcast. I appreciate coming here and spending this hour with me and we will follow closely and I hope we can get you and people like you in positions of responsibility to be engaged in the debate in a public way, because the impact is so extreme and is so threatening to so many people in terms of their lives, that at least we owe, all of us, whether it’s the media, or executives, some sense of what’s going on, an obligation to respond to what their concerns are, and their fears, and their questions, which is some of what I tried to do here this evening. So I thank you again.

Vikram Pandit:
Charlie, thank you, it’s been great being here.

Source - The New York Times

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