VideoSo there's a culture of accountability and integrity. That gives me the ability to sleep well at night. The final part is you have to have really, really talented people working with you. We have one of the finest finance functions of any business in the world.
I suppose the upside to being exposed to risks worldwide is that your diversification also gives you natural hedging capabilities.
The most important risk-management tenet is diversification, because you almost never have perfect foresight into the future. We just don't allow large concentrations of risk anywhere, in any credit, in any country, or in any market.
Second, there must be independence from the businesses. A risk manager who signs off on a loan can't be the loan officer who is paid for making loans. We've structured an independent risk-management organization to provide the right kind of checks and balances as we continue to push business managers to drive revenue growth.
Third, you have to pay attention to risk daily; it's got to get senior management's attention. The people in the risk-management function have to feel that they're doing really important work; they have to have good career paths.
We hate losing money. We just hate it. When you're in the business of taking risk, every once in a while you're going to lose money, and we do. In our business plan every year, we have expectations of billions of dollars of credit losses, but we hate it. So we spend a lot of time and energy trying to minimize the losses that we take.
That's the legacy of Sandy Weill, I assume.
Sandy wants all the return and none of the risk. [Laughs] And he considers that a reasonable request.
One way that banks have minimized risk in recent years is to spread it out into the marketplace. Isn't there also a danger of spreading credit risk out to market participants that are less able to handle it, are less regulated, or are simply less aware of what types of risk they're assuming?
I think there may be some players out there that end up taking on credit risk—because they're buying bonds or credit derivatives or whatever—that are less sophisticated than others. But the reason Moody's has been so pleased with the performance of the financial-services industry through this downturn is that banks and financial-services firms can take losses that might otherwise be concentrated in a fairly small number of players and spread them out to a large number of players in the marketplace. The result is a stronger banking system. And I think the market has plenty of ability to absorb those.
New Leaf or Fig Leaf?
Citgroup's list of internal reforms was derided by one analyst as "just-in-time corporate governance," but CFO Todd Thomson says he wants Citigroup to be a leader, not a laggard. A partial list of Citigroup's "business-practices initiatives" includes the following:
- All research is housed in a new retail brokerage unit, Smith Barney.
- Research analysts may not attend pitches, roadshows, or other efforts to solicit investment-banking business.
- Investment banking is banned from any involvement in setting analyst compensation.
- Analysts must certify to the accuracy and impartiality of their views.
- Analysts may not own any securities they cover.
- Customers are required to publicly disclose the net effect of structured finance transactions on their financial condition.
- Citigroup's tax department must review and approve all tax-sensitive financial products or strategies.
- Stock options are expensed as of January 2003.
- Stock-option repricing is prohibited.
- Pension-return assumption has been lowered to 8 percent from 9.5 percent.
- Interlocking directorships between Citigroup executives and companies affiliated with Citigroup directors have been eliminated.
- Directors and their families are forbidden from receiving IPO allocations.
- Long-standing policy requires directors and senior executives to hold 75 percent of the Citigroup stock they own.
| The Global Settlement Citigroup paid the highest fines of any financial institution in the so-called global settlement (in $ millions). | ||||
| Firm | Fines | Independent Research | Investor Education | Total |
| Salomon Smith Barney (Citigroup) | $300 | $75 | $25 | $400 |
| Credit Suisse First Boston | 150 | 50 | 0 | 200 |
| Merrill Lynch | 100 | 75 | 25 | 200 |
| Goldman Sachs | 50 | 50 | 10 | 110 |
| Bear, Stearns | 50 | 25 | 5 | 80 |
| Deutsche Bank | 50 | 25 | 5 | 80 |
| JP MorganChase | 50 | 25 | 5 | 80 |
| Lehman Brothers | 50 | 25 | 5 | 80 |
| UBS Warburg | 50 | 25 | 5 | 80 |
| Source: Office of the New York State Attorney General | ||||
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