Citigroup's CFO Talks About the Bailout

(page 2 of 2)

Where are you going to find the most cost cuts?

We've identified 11 themes that cut across the company that represent opportunities for cutting costs. We are universally applying an approach to reduce layers and expand spans of control. That's business by business, and every quarter we review the progress of each business against the targets for that particular theme. My own team in finance over the course of the last year has moved backroom activity out of the U.S. into Manila and Costa Rica. So that's a theme that we apply across the operational activities like customer service, transaction processing, and accounting.

Citi investors are an antsy lot. How will you give investors the assurances that you can turn this thing around?

There are a couple of things. You have to be very transparent about the results you are achieving. What can we control? We can control costs, capital, head count, risk concentrations, and ensure the business is well positioned when the cycle changes. What we can't control are the legacy positions that existed with the company when we got here. We can't control the magnitude of investments in mortgages or the dependence on the consumer.

Citigroup struck an unprecedented deal (BusinessWeek.com, 11/24/08) with the government to backstop $306 billion in assets on which the bank takes the first $29 billion in losses. What are the chances you'll blow through that $29 billion?

I would say what we were trying to ensure was that Citi would execute its strategy regardless of this dislocation in the market. This deal generated $40 billion in capital in a fairly innovative structure which allowed for the ring-fencing for assets. I think it is relatively remote but not impossible that we would blow through the first $29 billion. We have a loss-sharing arrangement with the government, and since they now have the lion's share of the second loss on these assets, we can reduce the capital that we hold against them.

The second thing that the deal did that was equally important was that it reinforced the commitment of the government to the stability of the financial system and the important role that Citi plays in it. The government invested capital in a way that preserved the common shareholder.

There have been other deals where the preferred shareholders have been wiped out or the senior debt holders have been wiped out. This deal is interesting and instructive in that the government made a capital investment in Citi, but at the same time was very thoughtful about the support that it would provide to the common shareholder. The government took warrants for a portion of the payment that represents 4.5% of the company, but importantly preserved the common shareholder which I believe is essential to the long-term recovery of the financial system. I think it represents an evolution in thinking of the regulators.

Is this deal backstopping the most toxic stuff on Citi's books?

No, the $306 billion portfolio is a mixture of assets. We agreed that the asset classes of what goes into this pool is broadly applicable to other institutions, such as residential or commercial mortgages. So there's a spectrum of quality in these pools: Good mortgages tend to be prime mortgages originated within your own banking system, while poorly performing ones are generally second mortgages originated by brokers. This represents the entire class of mortgages and so all of that is part and parcel of this pool.

Many have remarked that Citi had the highest Tier One capital, yet it required this infusion from the government. What's a good measure of capital strength, then?

I think it goes back to the uniqueness of this transaction. What this says is that, in transactions like this, the government uses preferred stock, as they did with TARP [Troubled Assets Relief Program]. There's two capital benefits: Tier One and Tangible Common Equity to Risk-Weighted Managed Assets. Those are the measures that are generally used by rating agencies and the regulators.

Does the government drive a hard bargain?

I would say that it was clear that we had a common objective: the stability of the financial system. It wasn't a negotiation; it was more of an iteration.

Business Exchange related topics:
Collateralized Debt Obligations
Asset Valuation
Cost Reduction
Recession Spending and Investing
Auction Rate Securities