"We are going back to our core.…As we do that, the size of the company will continue to shrink"
Two banks were conspicuously absent from the institutions being allowed to repay government bailout money on June 10—Bank of America (BAC) and Citigroup (C). And it is no secret that those two banks' chief executives, Ken Lewis at BofA and Vikram Pandit at Citi, continue to be under a federal microscope. In fact, news stories on June 5 suggested that Federal Deposit Insurance Corp. chief Sheila Bair is pushing for a shakeup at Citi that would include Pandit's stepping aside. In talks with Pandit over the past couple of weeks, we discussed the pressure from Washington, repaying TARP money, and downsizing the behemoth Sandy Weill built.
The Wall Street Journal reported on June 5 that Sheila Bair of the FDIC is pressuring Citigroup to have you step down. How much heat are you feeling, and will you move aside?
Given the losses we've taken, and until we return to sustainable profitability, we will have speculation. That doesn't make the speculation correct.
One FDIC criticism seems to be that you haven't moved fast enough to streamline Citi, which could be a problem if there is another burst of financial turmoil. Do you worry that the FDIC will push Citi onto the list of so-called problem banks if you don't bow out?
We just went through the government's stress test, which demonstrated our ability to withstand a tougher environment. This stress test validated all of the actions we've taken consistently to return Citi to financial strength. We have reduced expenses by almost 25%, our headcount is down almost 20%, our balance sheet is down 25%, with our riskiest trading assets down over 50%. And we have a clear strategy to separate Citi into its core businesses and those that need to be rationalized. Our leadership has done a great job under tough circumstances.
Can you give shareholders a sense of how different Citi is today than it was, say, a year ago?
We're a much smaller Citigroup. More important, we want to be Citicorp, not Citigroup, going forward. Citicorp is our global bank for consumers and businesses. At the same time, we've also decided there are some businesses we need to sell. We closed one of them, the Morgan Stanley Smith Barney joint venture. And we're methodically selling and rationalizing what we call Citi Holdings.
So it sounds as though the jewel at Citicorp is plain-vanilla banking.
We are going back to our core. This is a unique franchise. We are in 109 countries around the world. We move $3trillion to $9trillion in cash every day around the world, and 99% of the Fortune500 are our clients. And we have very strong regional banks, particularly in the emerging markets.
Will Citi be even smaller in a year?
We have taken our balance sheet from approximately $2.4trillion at the peak to slightly less than $1.8trillion right now. We are going to continue to rationalize Citi Holdings, which is the set of businesses we think are not core to our franchise. As we do that, the size of the company will continue to shrink.
How much does Citi now owe the government, and do you have a timetable for repaying TARP?
We had a total [government] investment of about $45 billion [in preferred stock]. You know that $25 billion of that is going to be converted into common stock. That leaves $20 billion of preferred we still have with the government. Part of the stress test was a requirement for a capital plan, so like other banks, we're creating one. Then the regulators and Citi will decide on the [payback] timetable.
A recent BusinessWeek story said investors have made significant progress separating toxic assets from relatively good assets. Are you seeing that sort of distinction?
Actually, we've been selling a lot of [assets] in the marketplace. And by the way, a lot of these are good assets. They just happen to be assets in businesses we're rationalizing.
But you still hold toxic assets.
We have reduced what we call our higher-risk assets substantially. And while we still own some of those in our mark-to-market account, they're half of what they were.
Jamie Dimon [of JPMorgan Chase (JPM)] told me he's not seeing the kind of borrowing demand people would like to see. How much demand is there on the lending side?
There's demand for lending in facilitating M&A activity around the world. There's demand for refinancing some mortgages. But by and large, demand for credit is tied to GDP. And so lending will follow GDP.
Where are we in this downturn? Does it feel better to you?
The markets do feel better. We are seeing some good signs, such as better jobless claims than what we were expecting. But having said that, it's still early. We have to get a few more data points to know whether we're truly stabilizing.
You came to Citi in 2007 after it acquired your hedge fund, Old Lane Partners, for $800million. The SEC now plans to police hedge funds more aggressively. Do you support increased oversight?
Transparency is good for capital markets. Frankly, one of the most interesting things we've seen is that some hedge funds and private equity funds have grown so much that they've become systemically important.
Do you worry about overregulation?
There is clearly a lot of debate about what failed and what ought to be done to avoid some of the problems we've seen. Having been part of some of these debates, I kind of feel they are pretty rational. Everybody understands that it isn't about government. It is really about governance. You need to ensure that good governance keeps the markets going, keeps entrepreneurship going, keeps growth going, and at the same time makes sure that we have systemic stability. In many ways, it's kind of the question of how tightly you want to hold the canary.