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Magazine / Cover Story

The Resurrection

As Vikram Pandit’s remaking of Citigroup shows, Wall Street is no longer waiting on Washington. The result: a global financial elite even less under U.S. control than before the crash.

Rising power: The financial industry is back.(Chris Hondros/Getty Images)

photo of Michael Hirsh
March 28, 2011

In contrast to a lot of Wall Street CEOs, Vikram Pandit seems quite human. Vulnerable, even. No one ever heard Pandit say, “Let’s go kill someone,” as John (Mack the Knife) Mack of Morgan Stanley reportedly used to bark to his derivatives team at the start of a trading day. It’s hard to imagine the soft-spoken CEO of Citigroup as a “vampire squid… relentlessly jamming its blood funnel into anything that smells like money,” as in writer Matt Taibbi’s notorious description of Goldman Sachs.

Yes, Pandit is ridiculously rich, like his peers, having sold his hedge fund to Citi for $800 million before taking over as CEO and then spending nearly $20 million to purchase the late actor Tony Randall’s 10-room palace on tony Central Park West. And, of course, Pandit and his giant bank—like all the spoiled behemoths of the Street—have been endlessly coddled by Uncle Sam, saved by $45 billion in bailout funds that still support Citi (even as Pandit ordered up another corporate jet, outraging Congress).

But more than other members of the reemerging Wall Street elite—think of Jamie Dimon, the disdainful lord of JPMorgan Chase, or Goldman’s plaintive chief, Lloyd Blankfein, who once whined that he was “doing God’s work”—Pandit has sought to get ahead of public outrage, to mend his ways and atone for past sins, to affect a little humility. After the crash of 2008, Pandit insisted on taking only a dollar a year in salary and promised “a return to the basics of banking as a core of our business.” Pandit even backed a limited “cram-down” of mortgage payments—government-imposed reductions in what homeowners owe—outraging the other banks that refused to give an inch. He pledged to get his institution out of the speculation business and declared his vision to make it “America’s global bank.” Citigroup, he told National Journal in an interview, “is back to serving the real economy.”


(PICTURES: 5 CEOs Who Defy Washington)

The question is, whose real economy? Not necessarily America’s. In Pandit’s 10- to 20- year plan, the “America” part of Citi’s banking business clearly shrinks and the “global” part only grows. Pandit has sought to pare down his nearly $2 trillion company, disposing of asset management and other businesses. He sold half of Smith Barney to Morgan Stanley; and he shrank his bank’s $827 billion in mortgage-related and other unwanted assets by nearly $500 billion after sequestering them in a separate entity called Citi Holdings. This week, Pandit finally succumbed to investor pressure and announced a 1-cent dividend—the first since Citi’s near-death experience—and a reverse stock split that will drive the bank’s price back into the $40 range.

Yet in its return to health, Citi is already earning most of its resurgent profits overseas—especially in Asia and Latin America. That revenue stream will rise dramatically as investment demand in emerging markets more than triples from $3.5 trillion in 2008 (compared with $7.5 trillion in developed economies) to $12.7 trillion in 2030, according to Citi’s projections. Citi has targeted what it calls its 150 “top priority” cities around the world. Only 16 of them are in the United States. A total of 116 cities are in emerging markets, and “this concentration will likely only increase,” Pandit says.

The concentration of elites on Wall Street is increasing, as well. The largest surviving banks—mainly Citi, JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, and Wells Fargo—are growing bigger and more global relative to the rest of the industry. They have already snapped up weak sisters at fire-sale prices (Bank of America swallowed Merrill Lynch, and JPMorgan gulped down Bear Stearns). They are pushing out smaller banks in key areas, having increased their overall market shares in deposits, mortgages, credit cards, home-equity loans, and small-business loans. And as these giants broaden their global reach, international regulators agree even less on a common approach than their Washington counterparts do. Wall Street traders have themselves begun to identify certain institutions as too big to fail, giving them an additional commercial advantage.

The upshot is that, in the wake of the worldwide financial meltdown and in direct opposition to the intentions of Washington reformers, the U.S. government may have become the guarantor of last resort for even-larger global banks over which it has even less control and oversight than before.



Pandit, who says he is chasing 2.5 billion “unbanked consumers” in emerging markets, is certainly not waiting around for regulatory clarity. The vastly complex Dodd-Frank financial-reform law—touted by President Obama as the “toughest financial reform” since the Great Depression—is not expected to come fully on line for another six months or so. “We’re doing our own thing,” Pandit says, although he acknowledges that the Federal Reserve, Citi’s main regulator, must still bless his plans.

In a nasal voice that bears a faint accent of his native India (Pandit’s wealthy father, a Brahmin, moved the family to Queens, N.Y., when Vikram was 16), the 54-year-old CEO speaks in confident, staccato bursts that belie the criticism he encountered early on as Citigroup’s once-soaring stock price slid to a dollar a share during the financial crisis. Now he has overseen four straight quarters of operating profits. “I came in three years ago to do a lot of things that I’m starting to do now,” he says. “In those three years, we had to do a complete financial transformation. A complete strategic transformation. A complete structural transformation. And we are in the midst of a cultural transformation.” The new tone is already evident: Everyone at Pandit’s globe-girdling company calls him “Vikram” as he ambles the hallways, struggling to erase the baleful legacy of Sandy Weill.

Weill. Big Sandy. The self-proclaimed “shatterer of Glass-Steagall,” as the sign that Weill hung in his Citi office had it. No man better symbolized the hubris and absurd excesses of Wall Street in the years leading up to the 2008 catastrophe. No one better embodied the arrogant idea that Wall Street’s humongous companies were smarter than everyone else—certainly the bureaucrats in Washington—and could regulate themselves. And no company better symbolized Wall Street’s complete domination of Washington than the old Citigroup that Weill created. (One joke around D.C. in the late 1990s was that the repeal of Glass-Steagall, the Depression-era law that separated investment banking from commercial banking, should be called the “Citigroup Authorization Act.”)

It was Weill, for years the premier deal-maker on the Street, who turned Citi, an aggressive but respected global bank, into the monstrosity it became—a witch’s brew of businesses and trading products so complex that no one could fully grasp the total. Weill then handed it all off to an overwhelmed successor, Chuck Prince, who at the height of the bubble famously begged authorities to stop him before his bank speculated again, declaring, “As long as the music is playing, you’ve got to get up and dance.”

In the lead-up to the crash, the bitter conflict between Citi’s former co-CEOs, Weill and John Reed, was in many ways emblematic of the industry’s transformation. The low-key, cerebral Reed had solidified Citibank’s reputation as the premier global retail bank—and a somewhat conservative one—in the 1980s. Weill brought a high-risk trading mentality and a yen for synergies that never appeared. Weill finally won out, ousting Reed from Citi in 2000.

“We’ve gone back to the roots of who we are.… Now it’s been updated for the new age, because there are vibrant capital markets. We have new functionality, more breadth and depth.” —Citigroup CEO Vikram Pandit

Now, Pandit says he is engaged in a wholesale reversal of that high-risk mind-set. He is trying to purge Citi of most things Weill and return to the culture, practices, and business strategy of Reed and his mentor, legendary banker Walter Wriston, who popularized ATMs and sought to make Citi the Coca-Cola of banks—globally recognizable, highly conventional. Analysts are generally enthusiastic about Pandit’s strategy. “Since he came to Citigroup, he has not made one serious mistake,” says Richard Bove, a high-profile banking-industry analyst at Rochdale Securities. “He’s built equity, built liquidity, decentralized operations, and dealt with most of the problem sectors. You could go on and on.”

The rebirth of Citigroup and its fellow Wall Street giants was supposed to be the payoff of a huge bet that Treasury Secretary Timothy Geithner, Federal Reserve Board Chairman Ben Bernanke, and other federal regulators laid down in 2008. Their gamble was that a deep, no-questions-asked bailout of the Street would lead to new lending and financing, followed by a quick economic recovery. But it may not be working.

Pandit, for one, appears to be giving the regulators what they wanted: a return to robust health and sounder banking. Yet the reemergence of Citi and other big banks doesn’t seem to be boosting the broader U.S. economy as much as Geithner and others had hoped. The mortgage market remains in serious trouble, with some 11 million home loans underwater, amounting to $700 billion in “negative equity” (assets worth less than the loans taken out on them), according to U.S. financial authorities. And the banks don’t seem to be using their new capital to lend in this country as much as to invest and trade elsewhere.

Government data indicate that lending abroad is up even as investment in plants and equipment at home continues to decline or remain flat as a percentage of GDP. (See “The Phantom 15 Million,” 1/22/11, p. 20.) FDIC-insured banks loaned nearly twice as much, $62.7 billion, to banks in other countries as of the end of 2010 as they did the year before.

“What Washington doesn’t understand is that the major financial institutions may be domiciled here, but that doesn’t mean they’re focusing their business here,” says Richard Bernstein, a prominent New York investment adviser. The Troubled Asset Relief Program—the $245 billion bank bailout launched in 2008—“was less effective than they thought it would be in getting [banks] to lend money domestically,” he says. “And one of the things we have to seriously consider is that major financial institutions get in trouble because of events outside the United States. If their huge real-estate commitments in the emerging markets were to deflate, should the Fed bail them out? Nobody is talking about those kinds of issues.”

Nor is anyone likely to now, with Wall Street back on top and Washington ever more distracted. This month marked the two-year anniversary of the lowest point in the greatest financial crisis since the Depression—March 9, 2009, when the Dow Jones industrial average bottomed out at 6,547.05, and the abyss of total financial collapse was still in sight. Today, the mood couldn’t be more different. Despite the assorted upheavals and disasters around the world, from the Middle East to Japan, the market is still on the bull run it began on March 10, 2009. Bankers are again feeling feisty—and fed up with Washington. In yet another example of how Wall Street is returning to its old, in-your-face hubris, Bank of America Chairman Brian Moynihan this month held his first big gathering for analysts in two years and used the occasion to dismiss efforts by state attorneys general to restructure mortgages. (Pandit, as always, is more circumspect about the proposal’s workability: “I don’t think we can say right now.”)

The numbers bear out the banks’ self-confidence. According to figures from the Federal Deposit Insurance Corp., the nation’s 30 or so biggest commercial banks—those with $50 billion or more in assets—jumped from a 57 percent share of the market as recently as 2005 to 68 percent in 2010. Anointed by Dodd-Frank, the major institutions also get to keep the biggest part of their derivatives business in interest-rate and foreign-exchange swaps. (JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America, and Morgan Stanley control more than 95 percent, or about $200 trillion worth, of that market.)

The same banks may end up controlling, or at least dominating, the new clearinghouses through which they are being pressed to trade derivatives. The clearinghouses were intended to add transparency and safety to the derivatives market, but some worry that they will just become a new center of systemic risk that, along with the banks that own them, can’t be allowed to fail. Meanwhile, changes that require more capital and less leverage have erected high barriers to financial firms wishing to enter the market.

During all of this churning in the real world of finance, Dodd-Frank is still in mid-birth, with nearly 250 rules and studies yet to be written on such crucial issues as derivatives trading and liquidating failing firms. The Republican-led House is seeking to starve regulators of money, and the regulators themselves can hardly agree on the next steps: Mary Schapiro, chairwoman of the Securities and Exchange Commission, for example, is trying to keep over-the-counter derivatives trading much as it is, excusing the traders from new rules that require competitive bidding. Chairman Gary Gensler of the Commodity Futures Trading Commission wants to take a tougher stand and shed sunlight on open bidding.



So, Wall Street is going at one speed—full ahead—and Washington at quite another. If anything, Washington is slowing down. It’s not just the new Republicans in the House who don’t like Dodd-Frank. Regulators in Washington, in Basel, Switzerland, and elsewhere have failed to agree on rules for the much-touted “resolution authority” in the new law. Theoretically, this rule is supposed to give the United States the right to liquidate or unwind a failing firm, no matter how big, without the systemic crash that nearly followed the Lehman bankruptcy of September 2008. The rule is still just a draft, however, and so far it doesn’t look very workable internationally.

That’s because countries are addressing the same issue in very different ways. Whereas resolution authority has statutory weight in the U.S., and Washington is requiring big banks and firms to develop “living wills” to show how they can be liquidated in a crisis, some other countries in the Group of 20 developed economies are going a different route. They are instead considering asking regulators to use their discretion to require banks to put up “contingent capital” for emergencies or to create “bail-in bonds.” Straddling all these fractured lines are Citi and the other big global banks. “Citibank is a $1.8 trillion company, in 171 countries with 550 clearance and settlement systems,” says one senior Federal Reserve Board regulator who would speak frankly only on condition of anonymity. “We think we’re going to effectively resolve that using Dodd-Frank? Good luck!” He calls the failure to clarify resolution authority one of the law’s “major failings.”

Bove, a widely followed banking analyst on Wall Street, calls Dodd-Frank “the dumbest piece of legislation ever created by the U.S. Congress. They wanted the big banks to have less control, yet they built in rules that ensure the increased control of the financial sector by big banks.” The hundreds of new regulations drive up the cost structure of banking, as do new capital and liquidity requirements. The new law even reduced some of the modest profit centers for small and medium-sized banks, such as overdraft fees, Bove says. “And there is nothing in Dodd-Frank that will do anything to stop a meltdown from occurring.”

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Indeed, top regulators, including Fed Chairman Bernanke—who has long fretted about the too-big-to-fail problem—worry whether they’ll have the tools they need if a large global bank has a liquidity or bad-debt crisis. “In my judgment, as best as I can recount history, not just the last three years but the history of mankind, I can’t think of a single case where we were able execute the orderly wind-down of a systemically important institution—especially one with an international footprint,” says Gerald Corrigan, the widely respected former head of the Federal Reserve Bank of New York. “There’s a reason why we’ve never been able to do it—and it’s because it’s so damn hard to do it. It’s really that simple. Therefore, if there are serious flaws in the design and execution of enhanced resolution authority, there is a risk that the system ends up less stable.”

In a February speech, Thomas Hoenig, the outspoken president of the Federal Reserve Bank of Kansas City, declared that Dodd-Frank creates as many incentives for big banks to take new risks as it removes old ones. “It is even worse than before the crisis,” he said in February. The continued “existence of too-big-to-fail institutions poses the greatest risk to the U.S. economy.” The largest financial firms “are now more powerful and more of a threat to our capitalistic system than prior to the crisis.” The only solution, Hoenig said, is to break up the biggest banks. That’s a nonstarter in today’s environment.

Dodd-Frank has its defenders, of course. FDIC head Sheila Bair—the regulator most responsible for implementing the resolution authority—says that the rule is still being developed, along with the 250-odd other Dodd-Frank regulations and studies in process. In an interview with National Journal last week, Bair sternly warned Wall Street against overconfidence and defended the government’s stance. “The first thing everybody needs to understand about [the rule] is that it puts the burden on the institution itself to show it can be resolved. It’s not our obligation to show whether Citi or any large institution can be resolved” or broken up in a crisis, said Bair, a tough critic of banks, who plans to leave her job by summer. “If they’re not able to rationalize their legal structure or the resolvability of financial operations,” she said, the FDIC and the Fed will have the power to order structural changes and the divesting of assets.

Serious questions remain, however, about whether the Fed, FDIC, or other regulators will ever have the know-how—or backbone—to demand that firms divest themselves of dubious or risky assets. “Bottom line: Nobody on Wall Street believes that these big institutions are no longer too big to fail,” says Dan Senor, a New York City hedge-fund manager who doubles as an informal Republican advisor in Washington. “No one believes they would not be bailed out and backstopped in some way by the government. That’s just the reality.” Senor, a graduate of Harvard Business School, adds: “No one on Wall Street believes you can look at the financial statements of these big companies and understand them. They’re incomprehensible. They were incomprehensible before the crisis, and they’re incomprehensible today. So how [are] the SEC or other regulators going to be able to do it?”

Bair says that the major international financial institutions would be well advised to remember that “the law is the law,” and that it would be dangerous indeed to assume that firms like Citi are too big to fail. “If I were an investor, I would not assume that whatsoever,” she says. “I think some of these large entities try to make it sound more complicated than it really is. I don’t know that’s the case.… Most of these international operations are concentrated in major jurisdictions where we have a good bilateral relationship.”

But other skeptics of Dodd-Frank worry that Washington has set up an enormously complex structure—multiplying the number of regulators, rather than streamlining them—that the banks will just arbitrage their way through, as they always have. Take proprietary derivatives trading. If the “Volcker rule” prevents banks from doing it, why not just fob that revenue stream off on an affiliated insurance company? The insurance industry, after all, still has no national regulator.

The regulatory flexibility of the past has been quashed and in its place is a rigidity, complains the Fed regulator who agreed to speak anonymously. “Rule 13.3” was the emergency lending authority enacted during the Great Depression to allow the Federal Reserve to provide liquidity during panics. That’s gone now. In its place is a law that prevents regulators from bailing out any single company, instead limiting them to stepping in only to save the system as a whole. Is it reasonable to think that a slow-moving interagency committee—the Financial Stability Oversight Council—shackled by such vague regulatory rules, will be able to agree how to tackle a crisis now that the Fed no longer has the authority?

Not everyone is gloomy about the prospects of getting the financial system under control. “Anybody should be pretty humble about saying they know what the future’s going to look like 10 years from now,” says Michael Barr, who as assistant Treasury secretary in the first two years of the Obama administration designed many of the Dodd-Frank provisions—including a tough requirement protecting the funding stream for the new Consumer Financial Protection Bureau.

Among other improvements, Barr says, Dodd-Frank “brings more buffers into the system and brings derivatives trading out of the dark and into central exchanges.” Corrigan, the former Fed banker, who now oversees risk management for Goldman Sachs, describes a “sea change” in the attitudes of both banks and regulators toward understanding that both capital and liquidity levels must raised to safer levels and that it’s critical to have plenty of cash on hand. But here, too, regulators are still writing the final rules.



Pandit, of course, makes the future sound very hopeful. “We’ve sort of gone back to basics,” he says, and Citigroup announced a return to profitability in 2010. “This has been our strategy for the last 199 years” since 1812, when the then-City Bank of New York began to finance trade between Liverpool, England, and New York. “We’ve gone back to the roots of who we are. This is the Walter Wriston bank, in some ways. Now it’s been updated for the new age, because there are vibrant capital markets. We have new functionality, more breadth and depth.” Pandit proudly trumpets the fact that Treasury has divested its bailout holdings in his bank. (Washington still owns a small piece of Citi, however; the FDIC holds some of its trust preferred stock and has pledged up to $15 billion in temporary liquidity guarantees if they are needed.)

One regulator says, “Citi is the only major bank in the world, with the exception of HSBC, with a bona fide retail franchise literally all the way around the world.” Citi is already earning about 60 percent of its profits from operations in emerging markets, according to 2010 figures. Its return on assets—which, along with return on equity, is a bank’s basic measure of profit—is consistently higher overseas, especially as the U.S. market continues to drag. Overall, Citi made more than twice its return on assets in Latin America (1.96 percent); Asia (1.34 percent); and Europe, the Middle East, and Africa (1.33 percent) as it did in North America (0.63 percent), despite its bounce back in the U.S. last year.

Asked if Citi might ever consider moving its headquarters elsewhere, Pandit hesitates. “What I would say is that we’re very comfortable with being in our home country, which is where we started. We have a very collaborative relationship with our regulators, and we have no plans to change that.”

But like other firms, Citi is not entirely going back to boring banking. It is retaining investment banking and trading. It’s going to be a risk-taking market maker, as are Goldman, Morgan Stanley, and other investment banks. Citi remains a dealer in commercial paper and credit derivatives. All to serve large Citi clients—such as globally based oil companies—that need those functions to hedge against oil price changes and market swings.

Pandit recently named his closest associate and former hedge-fund partner, John Havens, as president and chief operating officer. Havens has spent his whole career in investment banking. Citi is setting up trading floors in dozens of countries.

All of these elements of Citi’s growth strategy pose potential risks. It’s necessary to recall that the 199-year Citigroup history that Pandit is so proud of is also a saga of excess. After the 1929 crash, the famed Pecora Commission that investigated Wall Street practices blamed the bank—then called First National City—for reckless practices. According to a history posted on the FDIC’s website, the government found that the bank repackaged its Latin American loans and securitized them in the 1920s without disclosing its own confidential findings that the loans carried big risks. As for Wriston, he was indeed a visionary, but he also nearly sank the bank when he embraced the belief that countries never went bankrupt and lost billions on loans to Latin American governments in the early ’80s.

Like almost all Wall Street CEOs, Pandit has also botched things here and there. Wells Fargo outmaneuvered him in the purchase of Wachovia, once earning him a place on Portfolio magazine’s “Worst CEOs of All Time” list. Still, he took command of Citigroup late in the game, well after it had saddled itself with billions of dollars in obscure credit guarantees called “liquidity puts,” which came close to destroying the institution when the bubble burst.

Pandit identifies “three big things” that Washington still has to grapple with in its rule-making: calibrating between economic growth and safety; dealing with the still-unregulated shadow banking system; and ensuring a level playing field internationally. “There’s a lot of detail behind this that hasn’t been done,” he says. “Those are the kinds of things that still remain open.” As for his own plans, he says that all he is asking for is a little trust from Washington and other regulators. “In leadership, the No. 1 principle is integrity. Take the high road. Nothing else matters if you don’t have it,” he says. “Now that the government is paid off, don’t expect to see a different Pandit.”

His confidence is not entirely out of place. Citi is far more conservative than it was under Weill; Pandit has capital reserves up to nearly 11 percent, more than double what they were in 2007 and far more than the 7 percent that regulators in Basel are talking about as an international standard. If it’s possible to roll Citigroup back into something like John Reed’s Citibank, the industry might discover a newer and safer model by resorting to an old one.

Clearly, however, Washington and Wall Street do not see things the same way. Washington is way behind wherever it is that Wall Street is going, led there by an aggressive new elite such as Vikram Pandit. 

Correction: The original version of this story misstated Vikram Pandit's title at Citigroup. He is the CEO of the company.

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