G20 Bankers of the Year: Faking It

Nov 15, 2010 8:15 AM ET

The Economy of Trust

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 to bring home. South Korea is a manufacturing center.)   What would account for the lack of love for Citi’s chief honcho in the real 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 King   Conversely, 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?   April Showers   I recall a lovely Spring day in 2004 at the Securities and Exchange Commission’s Washington D.C. offices when the issue of capital limits was on the table. The day was April 28, 2004 to be exact. The cherry blossoms had bloomed and the incumbent war president was declaring “mission accomplished.” Meanwhile back at the ranch (Wall Street), red-breasted robins were nesting in Battery Park; Trump was building new high-rises; Lehman Brothers was out to best Goldman, and Bear Stearns was on its way to trade at $159/share. The SEC was about to overturn leverage limits and bring on a global financial tsunami… Ah, but we were so young and foolish then.                                                  William Donaldson, Chairman of the SEC and former CEO of the investment bank DLJ, voted along with four commissioners to reverse the “net capital rule” which limited leverage to 12-1 debt to assets for three decades. Donaldson stated,“We will help the financial services industry by removing regulatory obstacles that tilt the playing field or impose needless costs.” The thought process was that banks knew best how to manage their risk limits. The great shock of the financial crisis was that banking CEOs and top managers had absolutely no clue.   Four years later on March 11, 2008, Donaldson’s successor Christopher Cox confirmed this by saying, “We have a good deal of comfort about the capital cushions at these firms at the moment.” In a matter of days on March 16, Bear Stearns the fifth largest investment bank in the world collapsed from excessive leverage and lack of adequate equity reserves. Lehman, Merrill, Morgan Stanley, Goldman, Bank of America, Wachovia, Washington Mutual, Wells Fargo, Indy Mac and the giant Citigroup followed shortly behind. Only a trillion dollar government bailout could stem the tide of defaults.   I know you remember all this, yet somehow global banking chiefs like Pandit seem to have forgotten.   Perhaps G20 officials also forget. Otherwise they would not be listening to the same bankers who created the crisis rather than non-partisan experts.  After all it takes real know-how to collapse a global economy. Besides, there is comfort in familiarity. Who is Simon Johnson anyway? He is only a professor at MIT. For goodness sake, who are you going to listen to: MIT or Citigroup?   The real question is why would banking chiefs be so misinformed or deliberately deceptive less than three years after the crisis began?   Admati asserts, “Many bankers oppose increased equity requirements, possibly because of a vested interest in the current systems of subsidies and compensation. But the policy goal must be a healthier banking system, rather than high returns for banks’ shareholders and managers, with taxpayers picking up losses and economies suffering the fallout.”   The word “possibly” is superfluous. The professor is referring to bonuses and payouts—the same system of compensation incentives that brought the system down after April 2004. No amount of economic sense or reason entered into the mortgage industry models. The big banking moguls failed to preserve themselves and in turn failed to preserve us—the public. They have proven beyond a shadow of a doubt that they cannot be trusted with public interest. So where is there any value at all to their debate?   Professor Admati mentions the social benefits of limiting leverage and diminishing the costs to society. This assumes the reader has a conscience—that he cares about social benefits at all.   The American banking system has revealed by its own behavior that it cares little for social benefits. It is simply not on the radar. It is clear to the American public that top bankers care nothing for the social costs of their actions as long as we pay their debts for them—that is the moral hazard and enormous social tragedy created by the unconditional bailouts. If Citigroup chief Vikram Pandit is not feeling the love—this is why.   So can we even believe anything Pandit or his fellow bankers have to say? Unequivocally no! Not unless you are:  a) naïve b) masochistic c) stupid d) a, b, c   As MIT professor Simon Johnson says: Enough of this nonsense!     Good-B invites you to join the conversation:   Do you think the Basel III capital requirements are adequate?   How do you view the opposing warnings from Citigroup’s Pandit and Stanford’s Admati?   Do you think our officials and bankers have learned from past mistakes?   Monika Mitchell
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