The Resurrection

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.

PAST AS PROLOGUE?

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.

This article appears in the March 26, 2011, edition of National Journal.

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