Vikram Pandit, CEO of the once dead-in-the-water global banking firm Citigroup has staged a comeback that is sure to be the envy of his financial industry colleagues. So greatly is he admired that only a few months ago he was named Euromoney's "Banker of the Year." That's not a joke. Why? Because, "He did a pretty good job," states Euromoney. I guess reviving a brain dead bank with a trillion dollar government resuscitator merits some kudos, if not sheer admiration for outsized cajones.
Vikram Pandit did bring Citi back from the brink with a little help from Uncle Ben...I mean Uncle Sam. Pandit lamented this past week's at G-20 Summit in Seoul, South Korea that, "I'm living in parallel universes." It seems the Big Vik is welcomed warmly in Europe and Korea, while back in the U.S., "the real universe"its cold." (He might think about buying a sweater t0 bring home. South Korea is a manufacturing center.)
What would account for the lack of love for Citi's chief honcho in the rea l universe? Let's see"29% interest on credit cards? Nope, that is standard fare for Citibank. Arbitrary decrease of credit lines and loan terms? No, that is Citibank atypical too. Foreclosing on ordinary folks with abandon while the U.S. gov foots the bill for the bank's bad debts ? Now we are getting warmer. Or maybe its contributing directly to a global financial crisis that cost eight million people their homes, thirty million their jobs, and seventy-five million people their lifestyles, retirements, savings, children's education all while collecting $45 billion in direct government aid as a reward. By George, I think we've got it!
Yes, the government bailouts that just keep on giving (TARP, TALF, Fed Discount Window), really must account for the chilly embrace of U.S. financial institutions on this side of the wide Atlantic Sea. Citigroup has decided that the American people are just too much trouble and invested in Europe and Asia to everyone's delight--over there. Hence Banker of the Year .
However, none of Citibank's insolvency was Pandit's fault when he arrived in December 2007 just in time to clean up the mess his predecessor Chuck Prince left behind. Prince claimed, No one saw the losses coming ...So much for humility.
Nobility and heroism are not big on Wall Street these days. This month's banking reform negotiations at the G-20 conference are no exception. The contentious issue at hand is the ratification of the global financial reform bill, Basel III. The bill calls for higher capital requirements of 7% equity from bank holding companies. Some say the increase outlined is Basel is too high; others say it is not high enough.
In a Financial Times OpEd, Pandit writes that raising capital requirements over 7% will adversely affect consumers, small business and medium-sized businesses (SMEs) - "the primary job creators in our economy." He claims, "No one disputes that riskier loans should be backed by higher levels of capital. But basing risk measurements almost entirely on data from the crisis years will mean that the "haves" who need credit the least will get the most, and pay the least for it. The "have-nots" who need credit will be those hurt most."
The irony of his statement is that Citibank is already doing this- giving credit to those who "have" and denying credit to those who "have not." Citi like every other U.S. bank is closing credit accounts, lines-of-credit, and loans by the tens of millions. If Pandit really believes his passionate discourse, he would begin a major lending program for the dying-on-the-vine SMEs he so thoughtfully mentioned. To bet on your own country's economic recovery-- that would be a risk worth taking.
Cash is KingConversely, former Chief Economist and MIT economics professor, Simon Johnson writes in his popular blog that capital limits outlined in Basel are grossly inadequate. He emphatically disagrees with the banker's dramatic warnings. "Mr. Pandit is completely wrong." He cites the expertise of Stanford Professor Anat Admati and colleagues, "the kind of people that trained Mr. Pandit and his generation of bank executives."
Admati wrote a rebuttal to Pandit's claims in the Financial Times . It was endorsed by twenty world-class economists. She writes, "Basel III is far from sufficient to protect the system from recurring crises. If a much larger fraction, at least 15% of banks' total, non-risk weighted assets were funded by equity, the social benefits would be substantial. And the social costs would be minimal, if any."
Pandit claims 7% reserves are enough; the economists urge the G20 to more than double that amount. So who are we going to believe? A top banker who is part of a club renowned for its outsized self-interest that resulted in a global meltdown of unimaginable suffering for hundreds of millions of people? Or 21 of the top independent economists (meaning their paychecks are not contingent on the outcome) who warn of dire circumstances by repeating the awful mistakes of the recent past? Well"bankers of course!
"Officials listen to bank CEOs and an Op Ed gets their attention," writes Johnson. Did I mention that Basel III reform pact was headed by European Central Bank President Jean-Claude Trichet? That is the EU's equivalent to Ben Bernanke and the Federal Reserve Bank. Who did Big Ben listen to when structuring TARP? Former Goldman Sachs CEO Hank Paulson--naturally.
The argument is simple despite the complexities of global finance. Do you continue to borrow at high levels with little equity behind it? Or do you increase your safety net of assets to minimize potential losses? Many bankers in recent years blamed ordinary consumers for the economic crisis. They accused individuals of not saving enough and living beyond their means. Why don't they take their own advice?
Simon Johnson continues, "The deepest thinkers -- founders and mainstays of the entire field of finance -- are finally standing up and saying: Enough of this nonsense. You may wish to pretend that keeping capital requirements low is a good idea, but you should understand that this is pretense and bad science, pure and simple." Oh that hurts. He is essentially calling banking chiefs sneaky and stupid.
Yet, Chuck Prince's words echo in my mind" No one saw it coming . No one that is, on the receiving end of the big payouts. No one at the big banks. Those who did see it coming were in-fact world-renowned economists, Joseph Stiglitz, Nouriel Roubini, and you guessed it - Simon Johnson. It's remarkable when you have no agenda to gain or lose how clear your vision of reality can be. I guess bankers were blinded by the brilliant shades of gold and green in their view. Maybe MIT's Simon has a point.
Stanford's Admati writes, "High leverage encourages excessive risk taking and any guarantees exacerbate this problem." This sounds familiar. Hmmm...where have we heard this before?
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