Citigroup's CFO Talks About the Bailout

Gary Crittenden: Citi and the federal government "had a common objective: the stability of the financial system"

Last July, just months after joining Citigroup (C) as chief financial officer, from American Express (AXP), Gary Crittenden addressed the analyst community in his first earnings conference call. It was a particularly upbeat event, given that the bank had just turned in record quarterly profits of $6.23 billion. Ever since, however, it has posted nothing but losses. Worse, Citi has been fighting for survival. After Citi's share price plummeted to values not seen in 15 years, Crittenden recently became a key player in talks with the government about a deal to not only backstop some $306 billion in the bank's assets, but also bolster the institution with more capital.

Crittenden talked with BusinessWeek Banking Editor Mara Der Hovanesian about why the deal marks a turn in federal support for banks and why he thinks Citi is better as a whole than split up. Here's an edited version of the interview.

How would you describe your mood in the last week?

Honestly, I'd have to start with "tired." Anyone who has my job in a period like this has been working a lot of hours. The world is a different place. We're challenged, and we have to find creative solutions to this situation. There's an interesting balance between the unknown and the exhilaration of figuring out the right answers.

What are the right answers?

Right now there's a lot of encouragement for banks broadly to lend to consumers for cars and mortgages and credit cards, and we are certainly doing our part within proper risk parameters to make sure that happens. The consumer is weak but there are a couple of things that are positive. Consumers are saving more and gas prices are falling. If there is a stimulus package of size over the next year, that could have a positive impact on employment and bank earnings. And to the extent that you have positive impact on earnings, banks will be increasingly interested in participating in the market.

What is the best argument for keeping the bank intact?

The argument that monoline financial-services businesses can succeed is difficult to sustain. There aren't many freestanding mortgage companies or freestanding credit-card companies. There aren't many investment banks that haven't become bank holding companies. All of those have morphed one by one to have deposit funding. Although I think it makes for interesting reading, you have to ask yourself a very sober question about splitting up Citi: If we spun off a stand-alone wholesale business, would it have the ability to fund itself wholesale in today's environment? The universal bank model also is the predominant model in the developing world. We think about options and alternatives in the context of the fundamental strategy that [CEO] Vikram Pandit laid out.

What is the right size for Citi? The mandate to cut costs is huge.

We've made a lot of progress already. In the fourth quarter of last year we had $16.1 billion in expenses, and in the quarter we just reported they were $14.4 billion, so that means since the end of last year we have taken 11% of our expenses on a reported basis. We just announced that we will cut our expenses to between $50 billion and $52 billion next year. If you take the last four quarters, our expenses were about $60 billion, so that would be a 15% reduction. We've already made substantial progress this year, and we have every intention to continue to cut expenses. After years and years of growing head count and peaking at 375,000 employees, we are down to about 350,000 and we aim to get below 300,000 in the first part of next year. That's obviously a change in direction. This has come through just plain old hard work, changing compensation plans, widening the spans of control and cutting out layers, eliminating redundant technologies.

Our total assets peaked at $2.3 trillion in the third quarter of last year, and we've cut $300 billion of relatively low-returning assets. Again, that was after years and years of increasing assets. We have bent that growth curve and now obviously we are coming down the other side, which should lead to a better return on assets.

We have also cut the absolute amount of exposures we had to mark-to-market securities. If you look at the magnitude of our collateralized debt obligations, structured investment vehicles, the size of our Alt-A trading portfolio, and the amount of auction-rate securities that we hold, [and] the magnitude of the leveraged loan portfolio—we've sold some and we have written some of these down. In May, Vikram laid out the actions we would need to take to "get fit": cutting costs, reducing unproductive assets, lowering risk exposure, and increasing the quality of our talent pool. On all four of those, the progress is noticeable and there's more we intend to do.