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Bottom line, is there potential for a big financial impact? Your 10Q says you would be well capitalized regardless of the outcome.
It won't matter to us in terms of capitalization. Some smaller banks could feel some pressure. But the Federal Reserve has said that for the time being, it will grandfather in any existing TRUPS for Tier 1 capital purposes. From the Fed's perspective, the nature of the instrument hasn't changed, regardless of how it is accounted for. It has said that those who have issued new TRUPS since FIN 46 came out will also receive Tier 1 capital treatment. We issued $500 million in trust-preferreds a couple of weeks ago. We checked with the Fed in advance and it said yes, they will receive Tier 1 capital treatment.
The conflicts between the Fed and the SEC seem to increase as FASB moves ahead to try to simplify accounting....
[Laughing] Simplify accounting!
Maybe that's the wrong phrase. As FASB tries to change GAAP to react to some of the excesses of recent years, accounting changes aimed at regular companies often conflict with the complicated financial mechanisms in place at banks. And that increasingly seems to put the Fed and the SEC at odds. As CFO of Citigroup, it sounds as though you often end up in the middle, writing letters and trying to explain the issues to both regulators.
FASB has been writing a number of staff papers on a number of issues, partly in response, as you said, to the excesses and abuses that have occurred. I think fixing abuses is good; no question about that. But as FASB comes up with new interpretations or rules, it is important that there be a very serious dialogue with us and others in the industry to make sure that we end up with only intended consequences. A lot of these things aren't as simple as they might appear. Some of them have more-complicated application for financial-services firms. We are trying very hard to make sure that we're involved in that dialogue. Eliminating abuse? Terrific. But we need to be careful of potential unintended consequences.
Are you spending more of your time on that dialogue?
Yes. Four years ago, we might have spent five minutes on accounting-policy issues once a month. Now, in my weekly staff meetings, we typically spend 15 to 20 minutes on such issues, plus special meetings. It's been very demanding.
In the wake of a lot of negative publicity last year, Citigroup has made it a point to present itself as a leader in business practices and corporate governance. During your second-quarter earnings call, Sanford Weill said, "We got the message on reputational risk." What exactly was the message you got?
he message is that the world has changed. We've changed from a period of excess, from a period of glorifying IPOs without profits and dot-comers who went to work and then six months later became multimillionaires on paper. Complicated off-balance-sheet structures were considered clever, and people were lauded for creating complicated structures and attempting to evade things. [Even] your magazine was part of that.
I think the message we got was that it's time to get back to integrity and good disclosure and good corporate governance. And frankly, I think everybody feels better about that. At Citigroup, we feel we should help lead that process. We should lead by example, because we have some influence on how the rest of the business community acts.
We've tried to work hard regarding instituting a number of reforms in how we operate the business, what we do and don't do with our customers, and how we handle corporate governance at Citigroup itself. We've done everything from eliminating cross-board seats to expensing stock options, establishing business-practices committees within each of our businesses, and putting in the reforms you saw in the corporate investment bank. Everything from separating research from investment banking to establishing the net-effect rule about which structured financings we are willing—or not willing—to do with customers.
Of all the firms involved in the global settlement, it's safe to say Citigroup made the most public statements of contrition—within the obvious bounds of what could be said given the litigation that is still pending. Yet Citigroup also wound up paying the largest fine. Is it possible that publicizing your internal reform efforts actually cost you more, or made you more of a target for regulators?
In hindsight, some of the industry practices around research, around IPO allocations, around structured products were inappropriate. They seemed appropriate at the time. If I can talk about structured products, bankers viewed their job as structuring things subject to accounting firms and law firms signing off on their accounting and legal appropriateness.
We decided we'd have to take some responsibility for how and why our clients do things, and how they disclose them. I don't know whether that sets us up to be more of a target or less of a target with the regulators.
On the other hand, in a separate structured-financing settlement, the SEC specifically mentioned Citigroup's cooperation.
The fact that the SEC noted how cooperative we were in the Enron and Dynegy structured-products settlement is a good thing. I want Citigroup to be viewed by regulators as a company that "gets it." And I think we do get it. I want regulators to view us as a company that is not dragging its feet on reform, but is leading reform. And if it costs us a little bit more money, I think it's a good price to pay.
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