[Senate Hearing 111-472]
[From the U.S. Government Publishing Office]
S. Hrg. 111-472
CITIGROUP AND THE TROUBLED ASSET RELIEF PROGRAM
=======================================================================
HEARING
before the
CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
----------
MARCH 4, 2010
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Printed for the use of the Congressional Oversight Panel
S. Hrg. 111-472
CITIGROUP AND THE TROUBLED ASSET RELIEF PROGRAM
=======================================================================
HEARING
before the
CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MARCH 4, 2010
__________
Printed for the use of the Congressional Oversight Panel
U.S. GOVERNMENT PRINTING OFFICE
56-805 WASHINGTON : 2010
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CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Elizabeth Warren, Chair
Paul Atkins
J. Mark McWatters
Richard H. Neiman
Damon Silvers
C O N T E N T S
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Page
Statement of:
Opening Statement of Elizabeth Warren, Chair, Congressional
Oversight Panel............................................ 1
Statement of J. Mark McWatters, Member, Congressional
Oversight Panel Public..................................... 5
Statement of Damon Silvers, Member, Congressional Oversight
Panel...................................................... 6
Statement of Paul Atkins, Member, Congressional Oversight
Panel...................................................... 10
Statement of Richard Neiman, Member, Congressional Oversight
Panel...................................................... 11
Statement of Herbert M. Allison, Jr., Assistant Secretary for
Financial Stability, U.S. Department of the Treasury....... 15
Statement of Vikram Pandit, Chief Executive Officer,
Citigroup, Inc............................................. 55
CITIGROUP AND THE TROUBLED ASSET RELIEF PROGRAM
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THURSDAY, MARCH 4, 2010
U.S. Congress,
Congressional Oversight Panel,
Washington, DC.
The Panel met, pursuant to notice, at 10:03 a.m. in Room
SD-538, Dirksen Senate Office Building, Elizabeth Warren, Chair
of the Panel, presiding.
Present: Elizabeth Warren [presiding], Richard Neiman, Paul
S. Atkins, Damon Silvers, and J. Mark McWatters.
OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL
OVERSIGHT PANEL
Chair Warren. The March 4 hearing of the Congressional
Oversight Panel will come to order. Good morning, I am
Elizabeth Warren and I am the chair of the Congressional
Oversight Panel.
As everyone in this room knows, in late 2008 a financial
crisis threatened to bring the worldwide economy to its knees.
Citigroup's special role in this is that on October 28, as one
of the nine financial institutions that received extraordinary
assistance from the United States government, Treasury injected
capital into Citigroup of about $25 billion. Eight weeks later,
on December 31st, it injected another $20 billion; and on
January 15th, 2009, it extended guarantees of $301 billion in
assets.
This was not the first time that Citigroup has needed
government assistance to survive. During the Great Depression,
Citigroup, then National Bank, stayed alive only because of
generous policies put in place by the U.S. government. Again in
the 1980s, Citigroup, then operating as Citicorp, benefited
from regulators' decisions to waive standards during the Less
Developed Country debt crisis.
So today, we have Citigroup--the largest financial services
company in the world--it has 200 million customers spread
across 100 countries. It is really three different kinds of
businesses combined: a commercial bank, an investment bank, and
an insurance company. It's worth noting that the merger of
these three companies required special permission from the
Federal Reserve in order to occur and that, to operate, it
required ultimately that the Glass-Steagall laws be repealed so
that Citigroup could do its business in this new form.
Now, the turmoil that rocked Wall Street in 2008 has
largely subsided, and along with its peers, Citigroup appears
to be returning to profitability. Last December, Citigroup
repaid $20 billion in TARP assistance and terminated the asset
guarantee arrangement. Treasury planned to sell its remaining
27 percent stake in Citigroup in December, although it was
delayed because Citigroup's share price in December was below
the price Treasury had paid and it would have meant a certain
loss for the United States government.
The sheer magnitude of Citigroup's operations, and the
company's history of receiving extraordinary government
support, has led this Panel to an inescapable conclusion:
Citigroup, along with a handful of other financial
institutions, enjoys an implicit government guarantee. Evidence
thus far suggests that the United States government will bear
any burden and pay any price to ensure that Citicorp does not
fail.
In a February 10th research note, Standard & Poor's issued
Citigroup a credit rating of A, three grades higher than it
otherwise would have rated the company, quote, ``To reflect the
likelihood that if further extraordinary government support
were needed, it would be forthcoming.'' In other words,
Citigroup is too big to fail, and this fact is now directly,
measurably affecting its credit rating.
Were it not for the market's view that Citigroup enjoyed
this implicit government guarantee--a view reinforced in
dramatic fashion by the bailout that this Panel oversees--then
it would be viewed as a riskier investment, and frankly it
would cost Citigroup more to do business.
So, we will ask a number of questions today about the
consequences, both to the taxpayer and Citigroup's business, of
the implicit guarantee; how Citigroup has used the tax dollars
it received over the course of the crisis and that it continues
to hold today; and perhaps most importantly, what are
Treasury's and what are Citigroup's strategies for ensuring the
American taxpayer will never again be asked to fund another
bailout for this institution?
To help the Panel examine these issues, we will first hear
from Assistant Secretary of the Treasury for Financial
Stability, Herbert M. Allison, Jr. and then from Citigroup
Chief Executive Officer, Vikram Pandit.
To both of our witnesses, please know that we are sincerely
thankful to you for joining us. We appreciate your willingness
to help us learn from your perspectives.
Before we proceed with the first panel, allow me to offer
my colleagues an opportunity to provide their own opening
remarks. I want to say that I understand that Mr. Atkins has
been caught in traffic, so I will ask Mr. McWatters if he would
like to make an opening statement.
[The prepared statement of Chair Warren follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT OF J. MARK MCWATTERS, MEMBER, CONGRESSIONAL OVERSIGHT
PANEL
Mr. McWatters. Thank you, Professor Warren. I very much
appreciate the attendance of Assistant Secretary Allison and
Mr. Pandit, and I look forward to hearing their views.
Over the past two years, the taxpayers have repeatedly
heard the phrase ``too big'' or ``too interconnected to fail''
ascribed to certain financial institutions, and they have, no
doubt, wondered, what is captured by such a concept and why
these financial institutions merited the investment of hundreds
of billions of dollars of taxpayer-sourced TARP funds.
Today we have the opportunity to learn why Citigroup was
considered too big or too interconnected to fail, why Treasury
allocated $45 billion of TARP funds to the institution, and why
Treasury, the Federal Reserve, and the FDIC guaranteed over
$300 billion of its assets and liabilities.
Although I doubt if Citigroup's credit card, branch
banking, or even its commercial lending division created the
too big or too interconnected to fail problem, it is critical
that the taxpayers fully understand why the failure of specific
investment strategies and business operations within Citigroup
threaten the underlying financial stability of our country.
The taxpayers are also interested to learn if Treasury or
the financial markets consider Citigroup, as presently
structured, too big or too interconnected to fail and whether
yet another reversal of its economic fortunes will necessitate
the expenditure of additional taxpayer-sourced TARP funds.
Perhaps the most troublesome aspect of such status is the
moral hazard risk arising from the implicit guarantee generated
by the willingness of the United States government to bail out
excess risk-taking and ill-considered business decisions
undertaken by certain financial institutions.
In addition, the implicit guarantee afforded those
financial institutions considered too big or too interconnected
to fail may place such institutions at an inappropriate
competitive advantage over their smaller peers. As long as the
possibility exists that Treasury or the financial markets may
consider Citigroup as too big or too interconnected to fail, it
is critical that Citigroup clearly articulate to the taxpayers
what actions it has taken to eliminate such status, as well as
the possibility that its directors, officers and employees will
engage in needlessly risky behavior that may impair the
continued viability of the institution, and our overall
economy. Citigroup should disclose what risk management and
internal control policies and procedures it has implemented so
as not to require a future bailout from the taxpayers.
In my view, one of the principal causes of the financial
crisis was the separation of risk from reward, where officers
and employees of TARP recipients were financially motivated to
structure transactions so as to pass all of the risk of loss
embedded in such transactions to their employer, or to third-
party investors, while earning significant personal
compensation derived from the initial closing of such
transactions. It will be interesting to learn how Citigroup has
modified its compensation structure, so as to appropriately
link remuneration with the inherent risk arising from the
underlying transactions, as well as the performance of the
institution, as a whole.
It is also my expectation that the taxpayers will learn
today whether Citigroup will require additional TARP funds;
whether Citigroup is solvent on a fair market value basis after
considering contingent liabilities; whether Citigroup would be
required to raise additional capital if the stress test were
repeated using current and existing economic conditions;
whether Citigroup has sold any mortgage-backed securities to
the Federal Reserve, the Treasury, Fannie Mae or Freddie Mac at
a price in excess of then-fair market value; whether Treasury
has developed a rational exit strategy for its investment in
Citigroup; and, whether enhanced underwriting standards and the
precipitous drop in demand from prospective borrowers has led
to a material decrease in consumer and commercial lending.
Thank you for joining us today, and I look forward to our
discussion.
Chair Warren. Thank you, Mr. McWatters.
Mr. Silvers.
STATEMENT OF DAMON SILVERS, MEMBER, CONGRESSSIONAL OVERSIGHT
PANEL
Mr. Silvers. Yes, thank you, Chair Warren.
Good morning. Like my fellow panelists, I am pleased to
welcome, once again, Assistant Secretary Allison to the Panel,
and Citigroup Chief Executive Officer Vikram Pandit. Before I
turn to the substance of our hearing, I want to note how much I
particularly appreciate Mr. Pandit's presence here today, and
the thoughtfulness of both witnesses' written testimony.
This is one of these extraordinary Washington moments where
I confess that I'm not sure I have much to add to my colleague,
Mark McWatters', statement. I want to congratulate him on the
thoroughness and appropriateness of his remarks. But, because
this is Washington, I can't resist making my own.
Citigroup has played a unique role in the history of TARP.
In comments I've submitted for the written record, I go into
this in some detail, but in essence the uniqueness of the role
is defined by the fact that despite the existence in November
of 2008, under the TARP, of a Systemically Significant Failing
Institutions Program, and Citigroup's obvious status at the
time as a failing systemically significant institution,
Citigroup was not given aid under that program. Instead, it
received its additional aid--beyond the Capital Purchase
Program described by my colleagues a moment or so ago--it
received that additional aid under what appeared to be more
favorable ad hoc terms.
Now, obviously, Mr. Allison was not present at that time,
and the decisions at that time were made by Secretary Paulson
and his team. But these events have helped define TARP from its
inception. The Citigroup bailout, and the Bank of America
bailout that followed, which was modeled on it, raised--and
continue to raise--serious issues of transparency and equitable
treatment for financial institutions of varying size and
political clout.
Now, more recently, up until December of last year,
Citigroup's regulators were unwilling to allow Citigroup to
repay TARP funds and thus emerge from TARP-related oversight.
The regulators reversed themselves in December of 2009, and
Citigroup completed a common stock offering whose proceeds were
used to repurchase the government-owned preferred stock that
had not already been converted into common, but the government
was left as Citigroup's largest common stockholder.
Now today, in the aftermath of that transaction, it appears
clear that the Obama Administration's Treasury Department has
managed TARP's holdings in Citigroup to affect what is
essentially a limited balance sheet restructuring; effectively
requiring or inducing Citigroup's preferred stockholders to
become common stockholders--not just the government, but the
private preferred stockholders that preceded the government on
the balance sheet. Now, this step, this move, diluted common
stockholders' share of future profits substantially, and this
is something I strongly support from the perspective of
fairness and moral hazard--some of the considerations that my
colleagues were mentioning a moment or so ago. But these
transactions did not appreciably alter Citigroup's total Tier 1
capital, as a percentage of Citigroup's risk-adjusted assets,
nor did it result in any consequences for Citigroup's
bondholders.
As a result, I remain concerned that Citigroup's balance
sheet remains vulnerable, that Citigroup is only intermittently
profitable, and that there are continuing pressures on
Citigroup to repeat the events of the bubble cycle by weakening
its capital structure in the pursuit of unsustainable returns
on equity. In particular, I note that in the report that our
chair referred to a moment or so ago, a relatively sympathetic
report, Standard and Poor's noted that its credit rating for
Citigroup, as was just mentioned, was three notches higher than
it would have been were Citigroup standing on its own, that
Citigroup remained on the less well-capitalized end of its
global peers, fully risk-adjusted. And I think this is a
critical fact, at least that Standard & Poor's believes this,
and I want to explore this later with the witnesses. And
finally, that the outlook for Citigroup remained negative.
Now, these events, in total, leave many unanswered
questions, frankly, more than we will be able to address today.
I hope, though, that we will be able to focus today on the
following key issues: (1) What aspects of Citigroup's business
model prior to the financial crisis made the company
particularly vulnerable to that crisis, and do those
vulnerabilities remain? (2) Has Citigroup's balance sheet been
sufficiently restructured, meaning has a hard enough look at
the assets been made, per my colleagues Mark McWatters'
comments? And have the liabilities been dealt with adequately
to reflect the true state of the assets, and (3) What is the
proper strategy for the Treasury Department now in relation to
its current continuing role as Citigroup's largest shareholder?
And finally, in light of this history, what steps should the
Treasury Department take to ensure that in the future Citigroup
is treated fairly in the context of how other banks, both large
and small, are treated under TARP and related government
programs?
So, I look forward to discussing these and other issues in
the body of this hearing. And once again, I want to express my
deep thanks and appreciation to the witnesses.
[The prepared statement of Mr. Silvers follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you, Mr. Silvers.
Mr. Atkins.
STATEMENT OF PAUL ATKINS, MEMBER, CONGRESSIONAL OVERSIGHT PANEL
Mr. Atkins. Thank you, Madam Chair.
I'd also like to add my thanks to Mr. Allison and Mr.
Pandit for appearing before this panel today. You are here
voluntarily, and are taking valuable time out from your very
busy schedules--especially this time of year--to be here in
Washington. We, and the taxpayers, thank you for helping to
bring some openness and personal connection to our oversight
role.
Like the rest of the financial services industry, Citigroup
has had huge challenges during the past couple of years.
Without the U.S. taxpayer, Citigroup might not be in business
at all today. Citigroup's stock chart over the last 3 years
shows a sad decline from more than $55 per share in 2007, to $3
a share today. That represents a huge loss for shareholders,
ultimately retirees on fixed incomes, parents saving for
college, and people putting money away for a rainy day fund.
But it also means a huge loss of wealth for employees, many
of whom have lost much of their most important asset. It's
difficult to rebuild loyalty, enthusiasm, innovation, and
motivation in that sort of environment. A financial services
firm may have lots of assets, but ultimately--like any
company--it's only as good as the quality of the people that it
attracts. Does a huge stake owned by Treasury help or hurt that
effort? A financial services firm, ultimately, like any company
is only as good as the people that it attracts.
There are many risks to taxpayers as shareholders of an
enterprise such as Citigroup which, of course, is going through
many major changes. Its holdings of self-described ``non-core
businesses'' have decreased by some 40 percent over the last
year or two. There is, of course, no assurance that this
realignment will be successful, or that it will reposition
Citigroup for success in the future, and that's the risk that
an equity holder takes, analyzing management's decision-making
and deciding whether or not to go along for the ride. Of
course, the taxpayer in this case is both, as Treasury terms
it, ``a reluctant shareholder,'' and also, ``a totally
inexperienced shareholder.'' It's certainly not Treasury's core
expertise.
I should make a couple of points regarding regulatory risk,
because Citigroup, like a lot of people in business, faces
business risks, credit risks, counter-party risks, exchange
risks, and of course, also political and regulatory risks.
Congress, of course, is considering several bills that could
reshape the regulatory landscape significantly, and I strongly
disagree with some of the positions that Citigroup has taken in
this regard and I'm concerned that Citigroup is allowing itself
to become a politicized entity.
It's difficult to avoid the impression that one of the
motivations is for the company to curry favor with the hand
that feeds it, whether it be crammed-down systemic risk
regulator, resolution authority or whatever, my fear is that
Citigroup is currying favor with its largest shareholder at the
expense of the enterprise and all shareholders.
Just last year, in the Citigroup branch here in Washington
on 18th and Pennsylvania, just one block from the White House,
the tellers all had several copies of a book by Barack Obama at
their stations. When I asked if that were a political
statement, the teller told me, ``No, we're giving them away to
people who open new accounts.'' Well, that certainly is a
political statement, or at least, an amazing example of
sycophancy to your biggest shareholder.
So, today I'll be very interested to hear how Treasury
manages its investment in Citigroup and what its timing for
divestiture will be, given the current marketplace situation
and its contractual limitations. Citigroup has many ambitious
plans, and several decisions to make before a Treasury offering
can be accomplished, so I look forward to exploring these
issues this morning.
Thank you very much.
Chair Warren. Thank you, Mr. Atkins.
Superintendent Neiman.
STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT
PANEL
Mr. Neiman. Thank you, and good morning.
Today's oversight hearing, in my opinion, is a unique
opportunity. In addition to the reasons stressed by my panel
colleagues, my hope is that we will be able to view critical
oversight topics through two different perspectives: that of
the Department of the Treasury, the creator and administrator
of the TARP program, and that of Citigroup, one of its largest
recipients.
Having Assistant Secretary Allison and Mr. Pandit here
together at this event is an occasion to consider whether TARP
strategies are working, and to determine if we are taking the
right steps going forward.
I will be especially interested to hear whether our
witnesses believe that larger banks like Citigroup have turned
the corner. After the public confidence inspired by the stress
tests and subsequent earnings reports, are larger institutions
still in need of TARP support? Does the return of many larger
institutions to profitability signal a return to sustainability
in their business model, or are temporary trading gains masking
continuing weaknesses and losses in loan portfolios?
Citigroup has engaged in serious realignment and
reorganization efforts, both through the creation of Citi
Holdings and in divestitures of business lines. Has the
taxpayers stake in Citigroup been well-served by these actions?
Are there lessons learned from Citigroup's experience that
could apply to other institutions?
Finally, we must take advantage of Mr. Pandit's presence
today to question him not just from the perspective of our
ownership interest in Citigroup, but also as homeowners and
consumers. Citigroup has a large number of mortgages at risk of
foreclosure, so I intend to fully explore Citigroup's
modification efforts under HAMP and alternative programs.
Citigroup is also a large and important consumer lender, so
the public will gain a great deal by exploring their lending
practices and their view on how regulatory reform should
protect consumers.
If we have learned anything from this crisis, though, it is
that risk can materialize where it is least expected.
Therefore, a strategic vision for institutions, for TARP, and
for broader regulatory reforms, must creatively think about the
range of developing risks and how best to protect consumers and
taxpayers.
I look forward to your contribution to this process through
your testimony today and the answers to our questions, and I
personally want to thank you again for your attendance.
[The prepared statement of Mr. Neiman follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you, Superintendent Neiman.
Mr. Allison, would you like to make some opening remarks?
If you would, hold yourself to five minutes. We will, of
course, take any written remarks and include them in the
record. Thank you.
STATEMENT OF HERBERT M. ALLISON, JR., ASSISTANT SECRETARY FOR
FINANCIAL STABILITY, U.S. DEPARTMENT OF THE TREASURY
Mr. Allison. Thank you very much, Chair Warren and members
Silvers, Neiman, Atkins and McWatters, for the opportunity to
testify today.
I will discuss Treasury's investments in Citigroup, our
reasons for making these investments and our progress toward
exiting them.
In September 2008, the nation was in the midst of one of
the worst financial crises in our history. The economy was
contracting sharply and fear of a possible depression froze
financial markets. The U.S. government took unprecedented steps
to prevent the complete collapse of the financial system that
threatened the economy. In one of the most important responses
to the crisis, Congress enacted the Emergency Economic
Stabilization Act, or EESA, which granted Treasury authority to
restore liquidity and stability to the U.S. financial system
through the Troubled Assets Relief Program. Since TARP's
creation, Treasury has made cash investments of $245 billion in
707 banks.
There is broad agreement today that, because of TARP and
other governmental actions, the United States averted a
potentially catastrophic failure of the financial system.
In a series of transactions under TARP, Treasury invested a
total of $45 billion in Citigroup and agreed to share losses on
a portfolio of approximately $301 billion of Citi's assets. In
February 2009, Treasury announced stress tests for the 19
largest U.S. bank holding companies to measure how much
additional capital each institution would need in order to
remain sufficiently capitalized if the economy were to weaken
further. The stress test results, announced in May, indicated
that 9 institutions had adequate capital and that the other 10
would have capital needs totaling $75 billion. Of this amount,
Citigroup's additional capital requirement was $5.5 billion.
After the stress test was completed last May, Citi
conducted a series of exchange offerings from preferred shares
to common, and significantly improved its Tier 1 common equity.
Treasury converted $25 billion of its preferred to common at
$3.25 per share. Large banks have subsequently raised $110
billion of new common equity, and $43 billion of capital in
other forms. The banks renewed access to capital in the public
markets has enabled them to make repayments to Treasury
totaling $169 billion to date, representing 70 percent of all
TARP investments in banks.
While the financial markets have not yet fully recovered,
conditions have significantly improved. Treasury has notified
Congress that it does not expect to use more than $550 billion
of the $700 billion authorized for TARP, and is terminating the
Capital Purchase, Asset Guarantee, and Targeted Investment
Programs.
In December of 2009, the Federal Reserve agreed to allow
Citigroup to repay Treasury's exceptional assistance and
terminate the asset guarantee. To be permitted to take these
measures, Citi--like the other institutions subject to the
stress test--was required to have a post-repayment capital base
at least consistent with the stress test standard, and to have
further demonstrated its financial strength by issuing senior,
unsecured debt for a term greater than five years and without
the backing of FDIC guarantees.
Today, Citigroup has repaid the $20 billion in exceptional
assistance and has paid $2.8 billion in dividends to Treasury.
Taxpayers have earned a profit on these investments. The
government's contingent liability for the asset guarantee has
been terminated at no loss to the government, in fact,
taxpayers have made a profit from this guarantee.
Additionally, Treasury has announced plans to divest the
government's holdings of Citigroup's common shares in an
orderly manner over the next 12 months. Decisive actions taken
by the U.S. government have created a financial system far
stronger than a year ago. However, the financial system is
operating under the same rules that led to its near collapse.
These rules must be changed to address the moral hazard posed
by large, interconnected financial institutions that present
risk to the financial system. The Administration has proposed
comprehensive financial reforms that seek to force these
institutions to internalize risk, remove expectations of
government support, and protect taxpayers from having to
finance future interventions.
Thank you very much.
[The prepared statement of Mr. Allison follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you, we appreciate your being here, Mr.
Allison.
I'd like to start this morning with Treasury's role in
overseeing TARP, generally and overseeing Citi, in particular.
On October 14th, 2008, Secretary Paulson announced the
creation of the Capital Purchase Program and the infusion of
cash into nine financial institutions, including Citi, and
under the program he announced--these are the words he used--
``These are healthy institutions, and they have taken this step
of accepting taxpayer money for the good of the U.S. economy.
As these healthy institutions increase their capital base, they
will be able to increase their funding to U.S. consumers and
businesses.'' On October 28, under that program, Citi got $25
billion and was pronounced a ``healthy institution.''
And yet, on November 23rd, which I think is about three
weeks and four days later, the Secretary of the Treasury said
that Citi was--Citi and Citi alone--was in such dire straits
that it would need an additional $20 billion, and that was,
then, followed by another $102 billion in guarantees.
What I want to understand is, now we describe Citi as a
``healthy institution,'' what does ``healthy'' mean now that it
didn't mean on October 14, 2008?
Mr. Allison. Thank you, Chair Warren, for your question.
Again, as you know, the Treasury does not make comments
about the financial health of any particular institutions. In
having the funds repaid----
Chair Warren. I'm sorry, I was quoting the Secretary of the
Treasury on the health of Citi and other financial
institutions.
Mr. Allison. I think at the time that was an extreme
situation.. I'm not going to comment or second-guess what the
Secretary of the Treasury at that time had to say.
Chair Warren. So, your position is that we declared it a
healthy institution, and now we take no position on the
financial health of Citi?
Mr. Allison. It's not our policy to comment on whether any
institution presents a systemic risk or on its particular
health.
I might also say that, because we're a large shareholder in
Citi at this time, as you pointed out, we can't make comments
on the prospects of Citigroup.
Chair Warren. But you're making the decisions at Treasury
about Citi's backing out of the TARP program.
Mr. Allison. I think it's very important to point out that
that's not the case. In fact, under the law passed by Congress,
we have no decision-making with regard to Citi's repayment to
Treasury. That authority is given to the regulators of these
banks. They make that determination after--as I mentioned in my
testimony--they conduct additional tests of the capital
adequacy of the institution that is proposing to repay. We
then, once they've made that determination, that is, the
regulatory agency, we have no choice but to receive the funds
in repayment.
Chair Warren. So, you see the role of Treasury here as
passive on the question of Citi's financial structure? Passive
on the question of Citi's overall economic health?
Mr. Allison. We certainly----
Chair Warren. Treasury is not involved in this?
Mr. Allison. Chair Warren, we are strongly advocating
financial reforms to prevent this situation from happening
again, by assuring that no single institution can threaten the
financial system.
Chair Warren. I appreciate that, but are you telling me you
are exercising no supervision over Citi in its financial
operations today? No oversight of the financial health of this
institution?
Mr. Allison. As you know, Madame Chair, we are a very
reluctant shareholder, as Mr. Atkins pointed out. We wish to
dispose of those shares into the public market as soon as
circumstances permit, in an orderly manner. We are--we have
agreed, with Citigroup, in a contract and we've stated
publicly, this is the general policy of the U.S. Treasury--we
are not going to be an active shareholder, we are not going to
interfere in the day-to-day management of these companies----
Chair Warren. So----
Mr. Allison. We will only vote in a proxy on certain, well-
defined, and limited circumstances.
Chair Warren. So, the health of Citi is not your
department. That belongs somewhere else in government.
Mr. Allison. Again, we are concerned about the financial
system. We're concerned that no institution should be able to
present significant risk to the financial system, and that's
why we're strongly advocating financial reforms that we hope
will be enacted by Congress shortly.
Chair Warren. Right, I understand that about going forward.
Let me just ask one other quick question, if I can slip it
in, and that is, under the stress test, Citi was required to
raise $58 billion and in exchange, offered another $5.5 billion
in fresh capital. If Citi had not been able to raise that
money, what would Treasury have done?
Mr. Allison. Well, I think that's a hypothetical question--
--
Chair Warren. Yes, it is.
Mr. Allison. Yes, it is. Citi did make these exchanges, we
participated in that exchange, as I testified.
Chair Warren. What would Citi have done if it could not
have raised the money?
Mr. Allison. I can't speculate on that.
Chair Warren. You can't speculate.
Mr. Allison. I can't.
Chair Warren. About what they would have done?
Mr. Allison. No.
Chair Warren. All right, thank you. My time is up.
Mr. Atkins. Thank you, Madam Chair.
I wanted to explore a little bit about the offering that
Citigroup did last fall, last summer, I guess it was. So, I
just wanted to get your explanation, there was obviously, it
looked like, not as smooth as probably either you all or Citi
wanted it to go. So, I wanted to ask for your explanation of
how that hiccup happened in the offering process?
Mr. Allison. Well, again, Citi managed the offering. That
was their decision. We did announce, at the time, that we
intended to sell not our entire offering, but $5 billion,
perhaps, alongside Citi's offering.
We decided that, because of the behavior of the stock at
that time, it was not in the taxpayers' interest to make that
sale, on our part. As to their offering, I wouldn't comment on
the offering. They did succeed in placing $20 billion of new
shares, and obviously shareholders were willing to make that
investment, in the public market. And what's really important
is that they were setting the stage to replace government
capital with public capital, which we think is much stronger
capital. We don't want to be a shareholder in that company and
we think that companies are far stronger if they're public--if
they're financed out of the public, rather than the government.
Mr. Atkins. Well, when we look now, then, at the situation,
with respect to the stock and there's some 27 billion shares or
so outstanding. The most shares of any New York Stock Exchange-
listed company that I know of and, of course, the government
owns about 27 percent of that.
So, have you all considered that once the lock-up period
ends, how you will tackle such a large disposition of shares?
Especially with the share price being below $5?
Mr. Allison. Yes, Mr. Atkins, we've given this very careful
thought, as you can imagine. I'm not in a position to make a
public statement about how we will dispose of our shares--
that's not in the taxpayers' interest--but I can assure you
that we've looked at many different alternatives and consulted
widely, and we will be making our decision apparent over time.
Mr. Atkins. So, you intend to hold, perhaps, a number of
offerings rather than one?
Mr. Allison. As much as I'd like to be responsive to your
question, I don't think it's in the taxpayers' interest to do
so, sir.
Mr. Atkins. No, I agree. Okay.
Well, as far as, then, your involvement with respect to
management and the Board of Citigroup, could you sort of
explain to me how often you have contacts and what sort of
contacts those are?
Mr. Allison. We have contacts with Citi as we do with many
other banks. We are taking a very limited role as an investor.
We are not getting involved in the day-to-day management of
Citigroup. Instead, we will only be active as a shareholder in
voting for Directors, in voting on major corporate events, in
voting on issuance of significant new shareholdings in major
asset sales, in changes in by-laws or charter. Other than that,
we intend to act as any public shareholder.
Mr. Atkins. Well, when we had a hearing last week with
respect to GMAC and when the government took the position in
GMAC which, of course, was declared to be a bank holding
company, they took seats on the Board and are increasing the
number of seats because of the amount of the holding has
increased in GMAC. Citigroup is, of course, in a different
position, although two Board members have recently announced
are leaving the Board. Is there any plan for the government to
have members of the Board?
Mr. Allison. We have the right and the ability to vote on
Directors and that's the position that we'll take at the
appropriate time.
Mr. Atkins. So, you have no plans to put a government
representative on the Board?
Mr. Allison. No, I would note that Citigroup's Board has
changed significantly in recent times. In response, I presume,
to this crisis.
Mr. Atkins. But that was not due to government prompting
or----
Mr. Allison. I cannot comment on that, and I don't have
that information.
Mr. Atkins. I see. Okay.
My time is up, thank you.
Chair Warren. Mr. Silvers.
Mr. Silvers. Thank you.
Assistant Secretary Allison--I'm somewhat disappointed by
the way in which you appear to be narrowing your testimony in
response to questions from the chair. I'm looking at your
written testimony and I want to make sure that I--it appears to
me that the statement--the statement on page three of your
written testimony--in relation to Treasury's investments in
Citigroup--that Treasury believed its actions were warranted
and necessary, that represents the taking of a position on
several questions related to Citigroup. So, I'm going to try to
unpack what I believe the position you're taking is.
For starters, would you concur with the statement that in
November of 2008, Citigroup was a systemically significant
financial institution?
Mr. Allison. I would.
Mr. Silvers. You would. Okay. So, at least we've
established something, here.
Mr. Allison. We have.
Mr. Silvers. Secondly, would you concur with the statement
that on November 21st, 2008, Citigroup was a failing
institution?
Mr. Allison. I think that the entire banking system was at
risk. Virtually all major banks were having difficulty, or
would have had difficulty, funding themselves. I think that
that was probably the most significant financial crisis the
country has faced.
Mr. Silvers. Assistant Secretary, did any other financial
institutions contact the Treasury Department on November 21st,
2008 and express the view that they were going to fail within a
week?
Mr. Allison. Mr. Silvers, I was not there at the time, I
cannot comment on that.
Mr. Silvers. Okay, can you check the phone records, perhaps
and see if anyone else happened to have made such a call?
Mr. Allison. We'll be happy to respond to your question,
yes, sir.
Mr. Silvers. There is now voluminous press and I think,
now, book accounts and--for all I know--songs and TV shows in
which this, what I just stated to you, has been asserted. Do
you have any reason to believe that Citigroup did not do that?
Mr. Allison. I have no reason to believe, either way. I
have no knowledge of it, and therefore I cannot comment, but we
will respond to your question.
Mr. Silvers. Well, you said the entire financial system was
failing. Do I interpret that to mean that you agree that
Citigroup was failing on that date?
Mr. Allison. I believe that incredibly strong action was
necessary at that time to prevent a catastrophic failure----
Mr. Silvers. But Mr. Assistant Secretary, that's not my
question. My question is--and I don't disagree with you, by the
way, that strong action was needed at the time, and during that
period. But I'm asking you, was Citigroup a failing
institution? This, clearly, can't be that complicated a
question to answer.
Mr. Allison. I'm trying to comment on the broader issue,
and----
Mr. Silvers. But I'm not asking you about the broader
issue, I'm asking you about a specific firm.
Mr. Allison. Yes.
Mr. Silvers. The subject of this hearing.
Mr. Allison. I'd like to respond to your question, if I
may.
Mr. Silvers. Sure.
Mr. Allison. I think that Citi, and a number of other
banks, many banks, would have been on the brink of failure had
the system not been underpinned by actions of the government--
including the Federal Reserve and the U.S. Treasury.
Mr. Silvers. But no other--the Treasury Department took the
type of systemic action that you're talking about, truly
systemic action, a month earlier.
Mr. Allison. Yes.
Mr. Silvers. And, as you note, the Fed took certain other
actions, but a unique step was taken that week with respect to
Citi.
Mr. Allison. In the case of Citi in that week, what action
was taken. Citi was in a position where it was--and it did
communicate this to Treasury, I know this--that they could have
difficulty funding themselves at that time. Their debt spreads
had widened considerably, and so, in the opinion of their
management, they were facing a very serious situation.
Mr. Silvers. These sound like euphemisms for ``failing.'' I
don't understand, frankly, and I have the greatest respect for
you and the work you've done with the TARP, and I don't mean to
be taken in any other way, but I do not understand why it is
that the United States government cannot admit what everyone in
the world knows, which is that, in that week, Citigroup was a
failing institution. And I don't understand why--since no one
denies that they called the Treasury Department and asked for
extraordinary aid and said, effectively, they would run out of
cash, why it is that we can't all agree that they were failing.
Can you explain to me why that is?
Mr. Allison. I'm not trying to take issue with your
characterization.
Mr. Silvers. Okay, let's move on.
Mr. Allison. What I'm trying to do is to describe what the
actual situation was.
Mr. Silvers. Well, we agree, then that they were failing.
So, they were a failing systemically significant institution.
We've established that much.
Now, can you explain why they were not placed in the
program that Treasury had at the time--and again, I know that
you weren't there but you devoted a substantial part of your
written testimony to defending these actions. Can you explain
why a systemically significant failing institution was not
placed in the Systemically Significant Failing Institutions
Program?
Mr. Allison. There was a program, a Targeted Investment
Program and----
Mr. Silvers. But, Mr. Assistant Secretary, that program did
not exist on that date.
Mr. Allison. Well, I don't have the details on the
particular circumstances around that investment. It's my
understanding that that investment--if you're talking about the
additional $20 billion--was characterized as part of the
Targeted Investment Program. I'd be happy to look at that,
too----
Mr. Silvers. Six weeks after it was made, Mr. Secretary.
Mr. Allison. Right.
Mr. Silvers. Can I just--I know my time is expired, if you
can indulge me for five more seconds, or 10 more seconds--I
just find it--I find it extraordinary that it's not possible to
simply have a straightforward conversation about this.
Mr. Allison. I'm trying to--Mr. Silvers, at the time I was
not there.
Mr. Silvers. I know you weren't there. I don't understand
why, then, you're so protective of decisions that I don't think
make any sense.
Mr. Allison. I don't think I'm being protective, I'm trying
to describe what I know, sir.
Chair Warren. Thank you.
Mr. Allison. In a factual way and not a normative way.
Chair Warren. Thank you, Mr. Allison.
Mr. McWatters.
Mr. McWatters. Thank you.
Mr. Allison, do you have any reason to anticipate that
Citigroup will require additional TARP funds?
Mr. Allison. None.
Mr. McWatters. I'm sorry, I don't understand your response.
No more TARP----
Mr. Allison. I have no reason to expect, and we have no
plans whatsoever to make further investments in Citigroup.
Mr. McWatters. Fair enough.
On a fair market value basis, after considering contingent
liabilities, do you believe Citigroup today is solvent?
Mr. Allison. Again, we rely on the determinations by the
regulator which, I know, carefully reviewed their financial
situation before they agree to permit repayment to the Treasury
Department by Citigroup.
Mr. McWatters. That sounds like yes.
Mr. Allison. I make no comment, as I mentioned before,
about the state of Citigroup. We, as a shareholder, cannot
comment on their condition or their prospects.
Mr. McWatters. Let me ask this--if the stress tests were
conducted again today, using current economic conditions and
the expectation of future economic conditions, would Citigroup
be required--most likely be required--to raise additional
capital?
Mr. Allison. That would be a determination by their
regulators, not by the Treasury Department.
Mr. McWatters. So, what do you think?
Mr. Allison. I would like to be as forthcoming with you as
I can. I am here to provide you with information. We cannot
make a comment on the Citigroup's prospects or their financial
condition, as a shareholder in Citigroup at this time, and as
an institution that is not their regulator.
Mr. McWatters. But after the taxpayers invested $45
billion, $300 billion guarantee, your answer is the financial
equivalent of the Fifth Amendment? I mean----
Mr. Allison. No, sir. What I would point out is that
Citigroup has repaid the U.S. Treasury $20 billion and we have
terminated that guarantee for $301 billion----
Mr. McWatters. Yes.
Mr. Allison. So, today we are a shareholder in Citigroup,
only.
Mr. McWatters. Which is the reason I ask----
Mr. Allison. Yes, sir.
Mr. McWatters [continuing]. If they're solvent, and whether
you anticipate additional money will be required from TARP?
Mr. Allison. I've said that, we don't anticipate any
additional money will be required from TARP. We have no plans
in that regard, we are intending to dispose of our investments
in Citigroup, as rapidly as we responsibly can.
Mr. McWatters. What do you anticipate the exit strategy
will be?
Mr. Allison. Again, as we said, we intend to dispose of our
holdings in a responsible, careful manner within the next year.
Mr. McWatters. Okay.
Have you thought about completing another round of stress
tests under current economic conditions?
Mr. Allison. We, again, understand and know that the
regulators are carefully monitoring these banks. It is not our
role to perform stress tests of the banks, that's done by the
regulators in close consultation with those banks.
Mr. McWatters. But have you thought about the issue? Have
you made a recommendation? Do you think the stress tests should
be run again? Or is everything okay?
Mr. Allison. We believe that the financial system is in far
better shape than it was before, evidence of that is the fact
that banks have been able to raise substantial amounts of
equity, and also have been raising debt funds without
government guarantees. And therefore, as we look forward--as I
testified--while we still see some problems in the financial
system, it's far stronger than it was a year ago.
Mr. McWatters. Have the current stress tests been audited
by GAO? Are they in the process of being audited?
Mr. Allison. I don't know whether GAO has audited those
stress tests. We will get back to you on that question.
Mr. McWatters. Okay. And I would like to know when you
expect the results of the audits, what you anticipate they will
say and whether or not there was an understatement of required
capital?
Mr. Allison. Again, I can't speak for other agencies of the
U.S. government.
Mr. McWatters. I understand.
I have a short time left, but why, specifically, do you
think that Citigroup needed to be bailed out? What happened?
What was the problem? And again, as I said in my opening
statement, it wasn't branch banking, it wasn't credit cards, I
think, it was something else. What was that, and has it been
fixed?
Mr. Allison. Well, I think what we saw was a great deal of
risk in the financial system at that time. It became quite
evident as the markets began to seize up that these
institutions were facing large exposure in a variety of ways,
and that their capital could be rapidly depleted, which led to
the TARP program, where Congress itself agreed that this was an
unprecedented crisis, and that the U.S. government would have
to step in to provide support.
Mr. McWatters. Okay, my time is up.
Chair Warren. Superintendent Neiman.
Mr. Neiman. Thank you.
Mr. Allison, as you know, on our next panel, we're all
going to be hearing from one of the largest banks in the
country and one of the largest TARP recipients. I'd like to
explore with you, during my time, the dynamics around large
banks, both in terms of current market conditions, and the
future direction of TARP?
So, the question is, how do you view the trend of
repayments from Citi, but also the larger institutions that
have repaid TARP funds? And, specifically, how much of it
reflects a return to health and how much of it reflects--or is
a reaction against programs, standards, or the stigma of
participating in TARP.
Mr. Allison. Well, first of all, we are pleased to see that
large banks have succeeded in raising substantial amounts of
equity capital in the public markets, and that they are
replacing government capital with public capital, to the point
we've now received back 70 percent of the government's
investment in banks at a significantly profit to the U.S.
taxpayers. And, as they replace government capital with public
capital, the quality of that capital is certainly far better,
and it provides a base for them to do additional capital
raises, going forward.
So, we are highly encouraged and pleased by the progress
that has been made in these banks recapitalizing themselves in
the public market.
Mr. Neiman. So, does that return of capital--and in many
cases, profitability--does it reflect a return to sustainable
profits in their business model? Or do you see it as a
reflection of temporary trading gains that may possibly be
masking continuing weaknesses and losses in loan portfolio?
Mr. Allison. Well, we look at their capital ratios--the
large banks have shown material improvement in the Tier I and
equity ratios, which is the most important type of capital. And
they're able to raise funding in the markets--the markets are
observing the health of these banks, and what we're seeing is
evidence--through these capital raises--of greater public
market confidence in the health of these banks.
Mr. Neiman. And what does it say about the quality of the
earnings? Is that sustainable as to where it's coming from? And
to the extent that it's coming from lending versus trading, I
think is an important factor.
Mr. Allison. Well, again, if I start commenting on earnings
streams, some may interpret it as my commenting on Citigroup,
and I've got to be extremely careful.
Mr. Neiman. Right. Let's talk more broadly, because we do
have metrics.
Mr. Allison. Yes.
Mr. Neiman. And I think some of the more important ones are
those that have come out of the Federal Reserve, the
quarterly--from the FDIC on lending statistics--their last
quarterly banking report, issued last week, shows historic
drops in lending levels. In fact, it's the largest yearly
decline since the FDIC was created. How would you analyze and
interpret this data regarding decreased lending levels. Does it
show a significant lack of progress in financial stability, or
other factors, in your interpretation?
Mr. Allison. Well, there are many possible reasons for the
decline in lending and this has been widely discussed.
It can be due to a natural caution, during a recession, on
the part both of borrowers and lenders. And, as I'm sure you
know, we have announced a program to provide--to make
available--additional capital to mid-sized and small banks who
do outsized amounts of lending to small businesses around the
country. We're going to announce a $30 billion program, we're
hoping to get congressional approval for aspects of that
program, and to move it forward as rapidly as possible. And
that program is geared to lending, because it will--it provides
for sharp reductions in dividend payments to Treasury on the
part of banks that lend materially more than they are today.
Mr. Neiman. One more question on metrics--one of the
important metrics that we have used is the Treasury's monthly
snapshot of the largest banks who have been reporting.
Mr. Allison. Yes, yes.
Mr. Neiman. As I look at the data, most recently, of
February 16th, the snapshot now only reflects 11 institutions,
because it no longer contains institutions that have repaid
TARP funds, and I think in this report it was, ``Have repaid in
June of 2009.''
Mr. Allison. Yes.
Mr. Neiman. I think that will have limited, continued
limited usefulness, this data, as we go forward, to the extent
that institutions are excluded from the report. Is there any
consideration of expanding it? I could see continuing asking
institutions to continue to report, despite the fact that TARP
funds may have been repaid.
Mr. Allison. Yes, yes. In fact, when the banks began to
repay last summer, we called the banks that were repaying and
requested that they continue to report through the end of this
year, and they all agreed to do that. We'll be happy to take
your question under consideration.
Mr. Neiman. Yes, I think early on we've even encouraged
expanding it more broadly----
Mr. Allison. Yes, yes.
Mr. Neiman. And we'd be very concerned to the extent that
it is limited.
Mr. Allison. Yes. Thank you.
Mr. Neiman. Thank you.
Chair Warren. Thank you.
Mr. Neiman. My time is expired.
Chair Warren. Thank you.
Thank you, Superintendent Neiman.
So, I was struck by your comment, Assistant Secretary
Allison, that the taxpayers made a profit on your deal with
Citigroup, that Citi has a too big to fail guarantee, that is
very valuable right now. It shows up in their credit rating
that the American taxpayer will not let them fail. What is Citi
paying the taxpayers for that guarantee?
Mr. Allison. First of all, there is no too big to fail
guarantee on the part of the U.S. government. And I can't
account for any statement that some outside agency may make.
We intend, as I mentioned, to dispose of our shares in
Citigroup as soon as possible.
Chair Warren. Mr. Allison, I understand that. But the
question I'm asking, the market clearly perceives that there is
a too big to fail guarantee, and the market is rating Citi
higher because of that. That gives Citi an advantage in raising
capital, that is very valuable to Citi and it is potentially
very costly to the American taxpayer, and I want to know if the
American taxpayer gets paid for that.
Mr. Allison. Well, really what you're pointing out is the
need for re-regulation of the financial system.
Chair Warren. I understand that.
Mr. Allison. Because it's essential that no institution is
viewed----
Chair Warren. I will take that as a no, that we are not
being paid for the guarantee that we are----
Mr. Allison. There is no guarantee of that institution, or
any other institution.
Chair Warren. I will take that as a no.
So, let me ask, you said we have no more plans to put TARP
funds into Citigroup. Part of the reason that Citigroup had to
be bailed out stemmed from the difficulty of untangling the
operations and counterparty risks around the world. So, what
I'd like to know is, how has Treasury managed systemic risk
questions posed--not just by Citigroup--but by all of the large
companies, but particularly by Citigroup in consultations with
your regulatory counterparts around the globe? What are you
doing about that? Are we any safer than we were a year ago?
Mr. Allison. There are continuous conversations with
financial leaders around the world and I think you've seen them
say that there's closer coordination today and much better
communication.
Chair Warren. Well, I'm glad that there may be more
coordination, let me ask it in the more specific, perhaps, with
respect to Citi. Are you making any effort to separate Citi's
activities, it's counterparty risks and operations around the
world, that we say could cause systemic failure? Are we making
any effort to segregate that, say, from their trading activity
that's a fairly high-risk undertaking?
Mr. Allison. Again, as you know, we've made many statements
and taken the initiative to request major changes in financial
regulation in this country which could address a number of
those issues.
For example, insisting on capital adequacy, comprehensive
oversight of these institutions, and very important, a
resolution authority so that no institution and--the government
should not be put in the position of having to take over an
institution, or to somehow support it.
Chair Warren. Mr. Assistant Secretary?
Mr. Allison. Yes.
Chair Warren. I appreciate the need for reform of the
financial system. And looking forward, I think that's exactly
what we have to do. The question, however, is that we have a
system in place right now. Treasury came to the United States
Congress and said, in October of 2008, ``We have to have $700
billion or the economy will fail.'' One of the specific
problems is that Citi had this deeply intertwined, overseas
operation that, we were told, as a people would, if we tried to
unravel it, cause a systemic shutdown in economic markets. The
results would be catastrophic. And that was one of the
principle reasons that the American Congress went along with
the TARP bailout.
So, my question is, what are you doing about that now? What
are you doing to isolate the part of Citi, and Citi's
operations that could cause systemic failure if they go down
from Citi's other high-risk undertakings? For example, their
trading activities?
Mr. Allison. Yeah. Well, as you know, there is the Volker
rule that is being discussed today----
Chair Warren. Well, you're talking to me about the future.
And the future you're talking about is one that puts it back on
Congress to change the laws----
Mr. Allison. Let me----
Chair Warren. I'm in favor of that, Mr. Assistant
Secretary.
Mr. Allison. Yes.
Chair Warren. But we have to survive day-to-day and it is
Treasury who is responsible. We don't want you back here asking
for money.
Mr. Allison. Chair Warren, we totally share your concerns.
And that is why we are advocating that reform be initiated and
passed as rapidly as possible.
Chair Warren. I'm going to do this one more time.
Mr. Allison. Please do.
Chair Warren. Please don't tell me about advocating change
for the future. What I'd like to know is what are you doing to
manage the risks that are in front of Citi and facing the
American people, right now?
Mr. Allison. Well, Citi, again, is under regulatory
oversight--comprehensive regulatory oversight--and the
regulators are responsible for assuring that Citi is being
properly controlled and that it has adequate capital.
Chair Warren. Are you telling me there are no efforts to
segregate the risky activities from the systemically critical
activities?
Mr. Allison. We are not involved in managing Citi on day-
to-day basis. And the regulators oversee Citigroup, I think
that's a question you might ask Mr. Pandit when he comes here,
shortly----
Chair Warren. Good idea.
Mr. Allison [continuing]. Finish.
Chair Warren. All right, thank you.
I apologize to my panelists for going over.
Mr. Atkins.
Mr. Atkins. Thank you very much.
I just have a couple more questions, here. One with respect
to--there was an interesting article by Reuters yesterday about
a small Midwestern bank called Midwest Bank Holdings--this is a
little bit off-topic, but it will get back to on-topic in a
second. I just want to read it here: ``The small Midwestern
bank has negotiated with the U.S. Treasury for the taxpayers to
essentially buy the bank's shares at an above-market value
price in an unusual transaction reflecting how the government's
bank investments are entering a new phase. Midwest Bank
Holdings agreed to swap $84.8 million of preferred shares that
it sold to the U.S. government in 2008 for securities that will
convert to about only $15.5 million of common shares, roughly
an 80 percent loss to taxpayers.'' And it quotes hedge fund
managers; there's a lot of funny stuff going on, here.
In Section 101 of ESSA, it basically says that, ``The
Secretary shall take such steps as may be necessary to prevent
unjust enrichment of financial institutions participating in a
program, including by preventing the sale of a troubled asset
to the Secretary at a higher price than what the seller paid to
purchase the asset.'' So, I was wondering if you can elucidate
us with respect to this particular transaction. Does this
portend a change with respect to Treasury's view of the assets
that it holds under TARP as they remain?
Mr. Allison. As we looked at the situation of Midwest Bank,
we determined that the best way to protect the taxpayers'
investment would be to convert our position into mandatory
convertible preferred on the condition that the bank raise
additional capital--a substantial amount of additional capital
from public sources. So, this is all about protecting the
taxpayers' interests and preventing, we hope, further erosion
in our position with that bank.
Mr. Atkins. Okay, so again, I know you said that you can't
really speculate with respect to Citi, and again, we have a
huge interest in that particular company and a huge number of
shares are outstanding. So, you might consider other sorts of
situations like this that might convert what we currently hold
into other sorts of security interests in the company?
Mr. Allison. Well, our interests are protecting taxpayers
and their investments. And there may be situations where we
will look at what we might do in the way of protecting
ourselves through a structured recapitalization that we might
participate in, but in each one of these cases, we're guided by
what's in the taxpayers' interests.
Mr. Atkins. Okay, so that gets me back to some of the other
things that the Administration is doing and whether or not
that's really in the best interest of the taxpayers and the
shareholders in this case, of Citigroup. And you mentioned, the
so-called Volker Rule--which I guess I saw a report that formal
language was sent up to the Hill today--what effect will that
have on my interest as a taxpayer in Citi as a shareholder, or
elected shareholder, at that, to the profitability of Citigroup
and its businesses?
Mr. Allison. Well, again, I think that's a question better
asked to the CEO of Citigroup and again, I cannot comment on
potential impacts on the company in which we hold a large
investment.
Mr. Atkins. Okay, well it seems to me that the government's
giving with one hand and taking with another, including now,
with respect to the resolution authority that you were talking
about, the Administration--and you note this in your
testimony--that, ``The Administration's proposals provide this
resolution authority subject to strict governance and control
procedures with losses absorbed, not by taxpayers, but by
equity holders, unsecured creditors and, if necessary, through
a fee on other major financial institutions, similar to the
Financial Crisis Responsibility Fee.''
So, first of all, aren't proposals like these actually
putting additional costs and burdens on banks at a time when
ensuring that banks are sufficiently capitalized should be
priority one?
Mr. Allison. Well, we think that these measures are called
for given the circumstances that the taxpayers have faced. We,
by the way, intend as the Secretary of the Treasury has
announced, to get back every penny that we have invested
through TARP, and the Financial Crisis Responsibility Fee is
one way of doing that.
We would also point out that many of these institutions
have paid very large bonuses. They can afford, we think, to
reimburse the taxpayer.
Mr. Atkins. Well, unfortunately, they also have to run a
business, as well. But, anyway, my time is up. We'll get into
that later, thank you.
Chair Warren. Thank you, Mr. Atkins.
Mr. Silvers.
Mr. Silvers. It might be helpful, Mr. Assistant Secretary,
if we try to clarify what the taxpayers' interest is, here, in
light of my colleague's question.
First, let me turn to what may be a painful subject, do you
agree that Citigroup today is a systemically significant
institution?
Mr. Allison. Again, Mr. Silvers, with all respect, we
cannot comment on a judgment about whether they're systemically
significant.
Mr. Silvers. But you agree that they were systemically
significant in fall of 2008, though?
Mr. Allison. The determination was made at that time that
they were systemically significant.
Mr. Silvers. I see. Your written testimony appears--you're
not going to answer that question frontally, I'm going to infer
from your written testimony that you believe that. If you wish
to tell me that you don't, that's fine. But let's start with
that.
It would appear to me that the United States--as has been
frequently noted--is a 27 percent common stockholder in
Citigroup and that that's a significant financial interest of
the public at this point. I assume you agree with that?
Mr. Allison. I do.
Mr. Silvers. All right.
It would also appear that there was at least a significant
probability, based on historical events that we are some sort
of guarantor of Citigroup's obligations, in light of the fact--
I think that we agree--that we did not allow Citigroup to
default on those obligations multiple times in the past, and
most recently a year or so ago.
You're free to disagree with me, I don't expect you to
confirm what I just said.
Mr. Allison. Well, we did guarantee a part of their assets
for a period of time and we were well-compensated for doing
that.
Mr. Silvers. Right. I'm suggesting that we have a broader,
somewhat ill-defined guarantee. Certainly the credit markets,
or at least credit market analysts, believe that to be the
case.
So, we're not in the position, as my colleague would appear
to suggest, of being simply a stockholder in Citigroup.
And then, finally, if we believe that there is, at least, a
possibility that Citigroup will turn out to be systemically
significant today, as it was in 2008, there's an even larger
interest at play, here. Would you disagree that that's, at
least, a possibility? That there is a systemic interest, here,
that the taxpayer has?
Mr. Allison. Well, first of all, let me say again that the
purpose of the regulatory reform initiative is to assure that
no institution could infer, or the public can infer, that
there's some type of implicit guarantee of a financial
institution by the U.S. government. We want to remove that
possibility.
Mr. Silvers. But as our chair has commented,
unfortunately--I think you and I agree--unfortunately, this
reform has not passed, and today we live in a ``reformless''
world.
Mr. Allison. Yes.
Mr. Silvers. And, I gather, at least one of my colleagues
would prefer to keep it that way, that we live in a
``reformless'' world. But, that's how Treasury has to function
in that arena.
It seems like the public has three interests at play at
Citi. My question to you is, what strategy does Treasury pursue
in the light of these three, somewhat conflicting, interests?
Mr. Allison. Well, again, our strategy as a shareholder in
Citigroup is, first of all, to dispose of our investment as
rapidly as we can in a responsible way.
Second, not to get involved in the management of the
company. We don't believe that is in the shareholders'
interests, or in Treasury's interests. We are casting our
involvement very narrowly as a voting shareholder, and voting
only on certain items in a proxy statement.
So, we think that the best thing that we can do is two-
fold: one, exit that investment as rapidly as we responsibly
can, and second, push hard for financial reform--let me say it
again--to make sure that the U.S. taxpayer is never again put
in a situation like we face today with Treasury owning 27
percent of Citigroup.
Mr. Silvers. Can I turn to a different matter, then, as my
time is about to run out?
I alluded in my opening statement to the fact that common
stockholders of Citigroup have been, over time, diluted.
Mr. Allison. Yes.
Mr. Silvers. And largely as a result of actions taken by
this Administration over the last 12 months, although not
exclusively--there was a little bit of dilution involved in the
initial, suspect transaction. However, it appears to me that
there's substantial differences, nonetheless, between AIG--what
I find to be the inevitable comparison in terms of a
systemically significant failing institution--the dilution
there, and the dilution in Citigroup. And I would like to ask
you to provide us with your comparative analysis of the
dilution in the two scenarios, and in particular, your analysis
of the effect of the difference between what happened in AIG,
where the Treasury came in with debt financing, entirely,
senior to the common stockholders and then took a large common
position through warrants, and the Citi situation in which
preferred stockholders were converted into common, and thus,
essentially more cash was put in pari passu with the common?
Obviously, I'm not asking you to answer that question now, but
I'd like an apples-to-apples comparison of the dilution in the
two firms as of today.
Mr. Allison. Well, first of all, AIG received assistance in
the fall of 2008. The Federal Reserve actually made the bulk of
that investment, and the Federal Reserve owns preferred shares,
voting shares, that control about 80 percent of the voting
rights, in my understanding.
And Citi, on the other hand, we made these preferred
investments in Citi, as you well know, and we had an exchange
last summer as part of a number of exchanges of preferred for
common that were done at the time to bolster Citi's tangible
common equity ratio.
So----
Chair Warren. Let me stop you there, Mr. Allison.
Mr. Allison. Yes.
Chair Warren. We'll come back to this----
Mr. Allison. Fine.
Chair Warren [continuing]. And we'll permit--we'll keep the
record open so that you can add more detail on this.
Mr. Allison. Thank you.
Chair Warren. Thank you. I just want to be disciplined
about time.
Mr. McWatters.
Mr. McWatters. Thank you.
Mr. Assistant Secretary, during calendar year 2009, did
TARP recipients sell any mortgage-backed securities to either
the Fed, the Treasury, or Fannie or Freddie?
Mr. Allison. I don't have an exact answer for that, Mr.
McWatters, I'd be happy to get it for you.
Mr. McWatters. If you'd look into that, and also look
into----
Mr. Allison. Sure.
Mr. McWatters [continuing]. The price that was paid?
Mr. Allison. Alright.
Mr. McWatters. Was it fair market value at the time? Was it
par or something in excess of fair market value, is what I'm
interested in knowing.
Mr. Allison. Okay.
Mr. McWatters. What actions has Citi taken again,
specifically, to negate the too big to fail problem? So we're
not having this discussion again in five years?
Mr. Allison. Well, may I respectfully ask that you pose
that question to Mr. Pandit, who is the CEO? I think he's in a
better position than I to describe the actions they're taking
internally.
Mr. McWatters. I know, but I suspect that you talk with him
on occasion?
Mr. Allison. Actually, I have not talked to Mr. Pandit
about this matter, no.
Mr. McWatters. Okay. How did Citi employ the $45 billion of
taxpayer funds?
Mr. Allison. Those funds were for general corporate
purposes--they were part of the capital of Citigroup. That
entire program was designed to provide additional capital to
banks.
Mr. McWatters. Okay. Does Citi use its retail or commercial
bank deposits to finance proprietary trading activity?
Mr. Allison. Again, I'd ask you to direct that question to
Mr. Pandit. I don't have that information.
Mr. McWatters. But this has been alleged as one of the
causes of the financial crisis, and so it's not a question
you've asked?
Mr. Allison. No, it's not.
Mr. McWatters. Okay.
Do you have a view as to how the activity of short-sellers
in the last quarter of 2008 affected the financial crisis and
affected Citigroup?
Mr. Allison. I don't have that information, sir.
Mr. McWatters. Okay.
Any views as to how the mark-to-market accounting rules,
particularly how they were revised in April of 2009, affected
Citigroup's financial reporting?
Mr. Allison. Again, I think you'd have to ask the CEO.
Mr. McWatters. So, these are questions you've just not
thought about or not--even though these are not obscure
questions about short sellers and mark-to-market and the like?
Mr. Allison. Yes. The role of my area in Treasury is to
manage the taxpayers' investments and to retrieve those
investments as rapidly as we responsibly can.
Mr. McWatters. Okay.
I can anticipate the response to this question. It has been
alleged that Goldman Sachs, among others, sold collateralized
debt obligations to investors, while at the same time betting
against--or selling short--those same securities. Are you aware
that Citi is engaged in any of that activity?
Mr. Allison. I'm not.
Mr. McWatters. Okay.
What is your view about the effect the implicit guarantee
from the taxpayers has had on the competitors of Citigroup?
Mr. Allison. Well, let me say, again, there is no
guarantee, today, of Citigroup or any part of Citigroup on the
part of the U.S. government.
Mr. McWatters. Well, I said implicit guarantee, not
explicit.
Mr. Allison. Well, I'm not sure I can comment on what
``implicit guarantee'' means. I'm trying to be as precise as I
can.
Mr. McWatters. Okay, fair enough. But, so as far as you
know, it has had no effect on competitors that--let me ask you
this way, is Citi, today, too big to fail? If the answer is,
``No, it can fail and be liquidated,'' then I would say it
would have no effect on competitors. But, I mean, is Citi too
big to fail today?
Mr. Allison. Again, as I've testified and as I've said
before, I can't comment on the condition of Citigroup since the
U.S. Treasury is a major holder of their shares.
Mr. McWatters. Okay, my time is nearing the end, so I will
stop there.
Chair Warren. Thank you, Mr. McWatters.
Superintendent Neiman.
Mr. Neiman. Thank you.
I intend to ask Mr. Pandit about their progress in
preventing foreclosures. I'm going to be particularly
interested in their modification process and particularly
around conversions from trial modifications to permanent
modifications. And I think this is more than just a process
question. I think some people tend to forget that the reason we
are in this financial crisis is because of the foreclosure
crisis. And until we solve the housing and foreclosure crisis,
we will never be assured of financial stability. So, I think it
is an important part of this hearing, and an important part of
the TARP program. Can you share with me your assessment of
Citi's performance under the HAMP program?
Mr. Allison. Yes, sir. Like other banks, we think they got
off to a pretty slow start. They have picked up speed, actually
Citi has today offered trial modifications or made final
modifications to about 60 percent of the eligible mortgages in
its portfolio which, I believe, ranks it number one in terms of
their progress. Nonetheless, they still have a long way to go.
And we are actively involved with Citi and the other major
banks which hold the bulk of these mortgages to make sure that
they are reviewing those portfolios, identifying eligible
homeowners and offering them trial modifications and final
modifications as soon as possible.
I should also point out that, today there are about 1.7
million people, we estimate, who are eligible for modifications
under the HAMP program, and the servicers have extended offers
to about 1.3 million, there are over 1 million trial
modifications in place today that are saving homeowners over
$500 a month.
Mr. Neiman. So, thank you for raising that, because due to
the Treasury's extension of that 3-month period by which
borrowers have to make payments before they are converted from
a trial modification to a permanent modification, that
extension expired at the end of January. So, we are anxiously
all awaiting the numbers that could even approach a half a
million individuals who we are awaiting to see whether they
were offered a permanent modification, whereas if they were
denied, what is the result of that appeal process? Any
expectations of what we may hear from Citi? And I certainly
intend to ask Citi----
Mr. Allison. Yes.
Mr. Neiman. And if you can't answer that----
Mr. Allison. Yes.
Mr. Neiman. Can you give us some idea--we expect that this
data will come out in the next week or so, if you can give us
some idea of what our expectations may be with respect to that
data?
Mr. Allison. Well, again, we're looking forward to the
release of the monthly data for January--I'm sorry, February--
and there was progress being made in the trial modifications,
considerable progress. And this will be taking place in the
weeks to come, as well, and also there are rights for
homeowners who are denied to appeal their denials, as well. So,
we tried to make this program as simple today, as transparent
as possible. We have been working very closely with the leading
servicers, especially, to assure that they are moving as
expeditiously as they can, and they have the resources, also,
to make decisions as rapidly as possible. We know these
homeowners are waiting. In the meantime, though, they're still
saving an average of over $500 a month and we are----
Mr. Neiman. To the extent that they are denied a permanent
mortgage conversion, there's a question of whether they would
have been better off pursuing another alternative, whether
short-sale and looking to rent, as opposed to staying in a
trial modification for three, four, five, six months.
Mr. Allison. Yes.
Mr. Neiman. I do want to--because in recognition of the
challenges in converting and those low conversion rates, you
have announced a new system starting June 1.
Mr. Allison. Yes.
Mr. Neiman. One that would require documentation up front.
And I think there are certain benefits to that. But do we run a
risk of shifting the problem? Yes, we will have higher
conversions, but will we have fewer people entering the process
unless we really modify those documentation requirements?
Mr. Allison. I think that's a good question, it's one we'd
be concerned about, as well. And that's why we've tried to
simplify the documentation requirements and also, we provide
the documents that a homeowner may need, on our website, as
well as voluminous information about how to apply, how to go
through the process, how to make appeals----
Mr. Neiman. And March 1 was the date, I think, we were
previously given about having that web portal up and running so
borrowers can identify--can you give me an update on the status
of expanding that? I think we were told earlier that there were
going to be over 100 servicers participating by March 1?
Mr. Allison. I don't have the exact number of servicers
that are participating, but that program has been moving ahead
very rapidly, and we'll continue to make enhancements to that
website going forward. And I would also point out, we've had
millions of people access the website.
Also, let me mention, we're working closely with counselors
around the country and holding events throughout the country to
bring people in who may be eligible for this program and help
them have their mortgages modified as rapidly as possible.
Mr. Neiman. Well, we look forward to the reports, and in
your efforts at transparency, understanding clearly how those
individuals were treated.
Mr. Allison. Right.
Mr. Neiman. Thank you.
Mr. Allison. Thank you.
Chair Warren. Thank you, Mr. Assistant Secretary.
I have one last question on behalf of the entire panel, and
that is, are you saying today that no one in Treasury monitors
the financial condition of Citi and that no one in Treasury is
trying to manage the systemic risk that Citi poses? Or, are you
saying that's just not your job?
Mr. Allison. We do look at, obviously, public information
about Citigroup.
Chair Warren. You don't have any private conversations with
Citi?
Mr. Allison. I personally have not had----
Chair Warren. Or request additional information from them?
Mr. Allison. I think that there have been conversations
with Citigroup over time. I, myself, have not had conversations
with Citigroup management about the condition of the company
and with the CEO about that subject.
Chair Warren. So, are you telling me--that was my question.
Mr. Allison. Yes.
Chair Warren. That no one in Treasury is systematically
observing and monitoring the financial condition----
Mr. Allison. No, no, no----
Chair Warren [continuing]. Of Citi?
Mr. Allison. Citi does visit with us from time to time and
provide updates on their situation.
Chair Warren. So, I'm still trying to understand.
Mr. Allison. Yes.
Chair Warren. So, that means we just had the wrong witness
here today? There were other people within Treasury who are
engaged in these jobs? It's just not your job?
Mr. Allison. I participated in briefings in the past on
Citigroup's situation. We do have conversations with Citigroup
about their situation, yes, that is true.
Chair Warren. All right. I appreciate it.
Thank you, Mr. Assistant Secretary. I invite you to stay
for the next panel and----
Mr. Allison. Thank you very much.
Chair Warren.--Hear from Mr. Pandit.
Mr. Allison. Thank you.
Chair Warren. Thank you. The witness is excused.
[The responses of Assistant Secretary Allison to questions
for the record from the Congressional Oversight Panel follow:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Mr. Pandit? Mr. Pandit? Gentlemen, if you
could excuse us.
Mr. Pandit, thank you for coming today, the Chair
recognizes you for five minutes if you'd like to make an
opening statement. I'd ask you to hold it to five minutes, we
will put your written statement in the record, whatever its
length.
Mr. Pandit, please.
STATEMENT OF VIKRAM PANDIT, CHIEF EXECUTIVE OFFICER, CITIGROUP
INC.
Mr. Pandit. Thank you, Chair Warren and members of the
Panel. Thank you for inviting me here.
Citigroup today is a fundamentally different company from
what we inherited two years ago. Citigroup is now operating on
a very strong foundation to generate sustained profitability
for the benefit of all our stakeholders.
For us, as for many other institutions, the bridge to the
other side to a sound footing came from the American people,
and I want to thank our country for providing Citi with TARP
funding.
Last year, we repaid $20 billion of the TARP investment. In
addition, we paid the government $3 billion in dividends and
another $5.3 billion in premiums on the Asset Guarantee Program
that we have now exited.
Taxpayers still hold 27 percent of Citi's common stock, and
we look forward to helping them make money on that investment.
Citi owes a large debt of gratitude to the American taxpayers.
We have renewed our financial strength, we have overhauled
risk management, reduced our risk exposures, defined a clear
strategy and we have made Citi a more focused enterprise. At
the end of 2009, we were one of the best-capitalized banks in
the world, with a Tier One ratio of 11.7 percent, a Tier One
Common ratio of 9.6 percent and $36 billion of reserves. Our
leverage is 12 to 1, down from 18 to 1 when I became CEO. We
have cut the size of our balance sheet by 21 percent from its
peak, by half a trillion dollars, and our riskiest assets have
been substantially reduced. Citi's cash liquidity is now a
strong $193 billion, and we have reduced operating costs by
more than $13 billion per year.
Perhaps the most important strategic action that we've
taken is to mandate a return to basics, return to banking as
the core of our business, and as a result we've sold more than
30 businesses and substantially scaled back proprietary
trading. Citi is a better bank today, but for Citi, being
better is not good enough. Our customers and America's
taxpayers need a different road map.
First, a lot still needs to be done to promote economic
recovery, particularly in the housing area. Since 2007, Citi
has helped 824,000 families in their efforts to avoid
foreclosure, total loss mitigation solutions increased by 50
percent versus 2008, and we remain number one in active HAMP
modifications.
In 2009, Citi originated $80 billion in mortgages and
provided $80 billion of credit card lending. And in addition,
our company used TARP funds specifically to support new lending
to individuals, to families, to communities and businesses.
Taxpayers have a right to know how we put that money to use,
and we were the only bank to publish regular reports on the use
of TARP capital.
Second, Citi supports reform of the financial regulatory
system. America and our trading partners need smart, common-
sense regulation to reduce the risk of bank failures, mortgages
foreclosures, lost GDP and taxpayer bailouts.
And I know these are issues that are being debated right
now, but let me share with you three areas that I think are
important.
First, financial institution reform. Let's address too big
to fail once and for all through the creation of a systemic
risk regulator and a resolution authority, by making sure banks
are banks, focused on clients.
Second, market reforms. Let's level the playing field with
common standards across the entire financial sector. Let's
create transparency, particularly in the derivatives markets
with the use of standardization and clearing houses.
And third, consumer reforms. We support the need for a
strong consumer authority that is part of the regulatory system
to promote greater transparency, sound practices, growth and
stability in the consumer credit market. Banks, and non-banks,
need to be more responsible.
These are reforms that could be costly for the industry,
but Citi believes they are necessary.
Thank you, Chair Warren, and members of the panel, for this
opportunity to review Citi's progress.
[The prepared statement of Mr. Pandit follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren: Thank you very much, Mr. Pandit. Again, we
appreciate your being here today.
I'd like to start with a little quote from the Emergency
Economic Stabilization Act, or TARP, as we've all come to know
it, where Treasury is to assure that its authority is, quote,
``Used in the manner that protects home values, college funds,
retirement accounts and life savings, and preserves home
ownership and promotes jobs and economic growth.'' That was
Congress' statement about why TARP was done and what Treasury
is authorized to use money to advance those specific goals.
In a June 22nd, 2009 Reuters article, you are quoted as
saying, ``We'll be playing the two growth themes very clearly.
One is globalization, the other is growth in emerging
markets.'' Wilbur Ross, this morning, referred to Citi as,
essentially, a foreign bank. So, the question is, why should
the U.S. taxpayer alone, carry Citi?
Mr. Pandit. Madame Chair, we're not a foreign bank, we're a
global bank. We're actually America's global bank. We started
in business years ago helping America's businesses export their
products and that's what we've been doing. And this particular
time, as we need growth, as we need jobs, it's even more
important that we help small businesses, medium businesses and
large business make those exports.
As we do that, we need operations on the ground and in many
of these operations we raise deposits to help large companies
in the U.S. get the loans on the ground they need, and as well,
some of those deposits help us facilitate loans in the U.S.
market.
Chair Warren. But you describe your growth as globalization
and growth in emerging markets. These are your words about
where you plan to expand your activities.
Mr. Pandit. We are completely focused on making sure that
we continue our lending to U.S. customers, making sure we're
helping our clients and our customers through the issues they
are facing.
Now, it's also very clear that our clients are coming to
us--small clients, middle-sized clients--they want to tap
foreign consumer bases. The growth is coming from the foreign
consumer, they believe that's how they will grow, that's how
they create jobs, and that's what I meant. We want to make sure
we support the businesses in America to get to the other side.
Chair Warren. Well, good. So let me get some data, then, on
what's happening. How much does Citi lend to U.S. enterprises
for U.S. operations?
Mr. Pandit. Our total loans outstanding for all U.S.
business is about $450 billion.
Chair Warren. Can I shrink that up? It's not all U.S.
businesses. The question I wanted to ask about is U.S.
enterprises for U.S. operations--jobs in America.
Mr. Pandit. I think the number is $450 billion lent in the
U.S.
Chair Warren. Can you divide that into how much you lend to
businesses that don't have any foreign operations?
Mr. Pandit. Madame Chair, I can't do that, but I can get
back to you with that information.
Chair Warren. Okay, that's fair.
So, can I ask one other question about just the lending
that you do. What lending and other transactions has Citi
participated in, involving the government of Greece?
Mr. Pandit. We do business with a lot of sovereign
countries who need our global expertise, including coming to
the U.S. markets, and so I know we've been doing business with
Greece, but I don't have the details with me.
Chair Warren. Do you know how much debt from the government
of Greece that Citi holds?
Mr. Pandit. I don't know the exact number, but I know it's
not a large amount, not a meaningful amount in our entire
operations.
Chair Warren. Okay, not a meaningful amount?
Mr. Pandit. Yes.
Chair Warren. Okay, good. That's fine.
Mr. Atkins.
Mr. Atkins. Well, thank you, Madame Chair.
Thank you very much, Mr. Pandit, for being here today, it's
a pleasure to have you take time out from your busy schedule to
be here.
I asked this of Assistant Secretary Allison last time, but
I also want to explore it with you, and it has to do with the
offering back in December. It seems that the timing and
experience of that particular offering is something that we'd
not like to repeat, and obviously the taxpayer, now, is the
largest single shareholder of Citigroup.
So, as an executive with a background in equity markets and
experience with the capital markets, I was wondering if you
could share with us your reflections on how the Treasury
Department should think about monetizing its position in
Citigroup common stock, going forward.
Mr. Pandit. Mr. Atkins, of course, I mean, that's the
Treasury's decision in terms of how they want to do it. We do
know that they would be able to sell stock after March 16th,
and they've announced publicly they do want to sell stock over
the next 12 months or so and there are lots of different
methodologies of doing it, right from selling it into the
market every day, but also, we believe there's substantial
demand for this stock.
It is not a secret that the government wants to sell. It's
not a secret that the stock price in the markets today reflects
the fact that they're a seller in a large amount, and that we
believe there are investors, here in the U.S., who are getting
ready for that offering.
As to how they do it, when they do, with whom they do it,
those are all the Treasury's decisions.
Mr. Atkins. Well, when you look back at the offering in
December, clearly it was a primary offering and then, trying to
be coordinated with a potential large secondary offering by the
government. So, as far as the interest goes in the marketplace,
was there a large cover issue for that offering at the time? Or
what exactly was the problem that we saw in December?
Mr. Pandit. Mr. Atkins, that was the largest common stock
offering ever done in the U.S.
Mr. Atkins. Right.
Mr. Pandit. And particularly when you consider that as the
percentage of Citi's common stock outstanding, it was extremely
large.
And don't forget, that was done in the face of the market
knowing the government was going to sell its 27 percent in the
not-too-distant future. So, they had a choice--do I buy now? Do
I buy later? That's the background--it was late in the year in
doing that offering, and, by the way, when we did that
offering, unfortunately another bank decided they wanted to do
a large offering right in the middle of what we were doing.
But we got it done. And we got it done as the largest
offering, and we were able to pay back the taxpayers, and we
were able to exit the guarantee program; I consider that to be
a success.
Mr. Atkins. Okay, now looking forward to, you have those
stock prices, about $3 a share, or so, which puts it in a
special zone as far as some institutions and the way the market
views them. What are your plans to address the price of the
stock in relation to the huge amount--I mean you now have the
the largest number of shares outstanding of any New York Stock
Exchange-listed company?
Mr. Pandit. And therefore, we're also the most traded
stock, on many days in the New York Stock Exchange. By the way,
the stock, last I checked was $3.44.
Mr. Atkins. Okay, sorry about that.
Mr. Pandit. I think, at the end of the day stock prices are
important, but what's really important is performance. What do
you earn? Sustained profitability--which is really what I'm
focused on. My biggest job is to make sure we make money on a
sustained basis, and therefore, help the government make money.
Mr. Atkins. Well, in your testimony, you mention that
you've sold out of Citi Holdings after having restructured your
firm versus the non-core businesses of about 30-some-odd
businesses in here, I think it said more than 20. So, how did
you decide as far as what is core versus what's not core?
Mr. Pandit. And that was job number one for me, coming into
Citi, looking at the businesses, trying to figure out, ``What
business are we in? What clients do we serve? What are we good
at?'' And you put all of those things together, it turned out
at the end of the day, we are a great bank that is basically in
the business of helping people manage their accounts--providing
them loans, providing them capital, providing them investment
services.
And it became very clear that we were in a lot of
businesses that were not directly related to being a bank. And
so, the fundamental decision that I made is that, we're going
to be a bank. We're going to be the global bank for America's
companies, serving them here, but also wherever they want to
go, but not only for companies, but the same capability should
be available to individuals, as well. So, that's the decision
we made. And on the basis of that, it became very clear what
was not core--and it was a large part of the company and that's
what I've been selling, very systematically, over the last two
years.
Mr. Atkins. I see.
My time is up, thank you.
Chair Warren. Mr. Silvers.
Mr. Silvers. Yes, thank you, Chair.
Again, Mr. Pandit, I want to thank you for being here and
express my appreciation both for your presence and your
testimony.
You said a moment or so ago that in trying to focus on what
Citigroup is good at that you viewed a return to core banking
as the primary direction you were headed. And you mentioned
some numbers on loans.
I have here a report I'm sure you're familiar with from
Standard & Poor's from last month that shows--and the numbers
don't match, so I wonder if you could explain it to me.
It shows that commercial and corporate loans by Citigroup
have fallen dramatically over the last two years: From a level,
according to S&P, of $206 billion at the year-end 2007, to $127
billion today, or the end of third quarter, I believe, 2009, I
don't think they had the fourth quarter numbers at that time.
In view of my understanding that your divestitures have
been largely unrelated to commercial loans, can you explain to
me what's happening, here?
Mr. Pandit. Sure, Mr. Silvers. When we decided what was
core and what's not, there were also assets that were part of
what was not core to us, as well. There were either clients
that we shouldn't be serving, or they didn't need us, or there
were businesses that were not core to us, there were assets
that were gathered through core businesses. And so, those
numbers reflect selling businesses that are not core to us,
selling assets that were not core to us, taking any marks on
assets that were not core to us. Let me reassure you, as well--
--
Mr. Silvers. But, Mr. Pandit, I don't understand how you
can reconcile the scale of that retreat from business lending
which is, after all, in my view, just absolutely central to
whether or not TARP is succeeding--the scale of that retreat
from business lending with your characterization of a re-
focusing on core banking. Because I look at other numbers, I
don't see that type of retreat from other types of activity,
other than obviously things that you're totally divesting from.
Mr. Pandit. Let me assure you, we will make any good loan
that we see to a client. The regulators want us to make prudent
loans, we are doing that. Some of those were leveraged loans.
They were part of practices that we shouldn't have been a part
of because they are not core to the banking mission. So, it's
very easy to look at those numbers and think that they actually
represent our lending appetite, or our appetite to serve
clients, but that isn't so. That reflects the narrowing and
focusing of our businesses to what we should be as a bank.
Mr. Silvers. Second question about this type of issue. In
the area of commercial real estate, which has been a concern of
this panel, again, the data suggests a kind of flatline, in
terms of the total assets in commercial real estate at the
holding company level portfolio--of around $75-$80 billion. My
question about that is, have you taken any write-downs in
commercial real estate? And how do I understand this flat level
and are write-downs coming?
Mr. Pandit. A number of things. One, a lot of that
portfolio is mark-to-market, we have taken write-downs. Much of
that portfolio is community lending, and that's money good, as
well. There are some accrual loans that we've made and those
loans are well-reserved against.
Let me also say that most of our loans are for office
buildings, against leases in some of the major metropolitan
areas, so that is a very well-scrubbed over portfolio.
I'll make one more point on this, which is that commercial
real estate is less of an issue for Citi.
Mr. Silvers. Okay.
Can I turn to another question about your core strategy and
I think my time is going to expire. As I understand it, correct
me if I'm wrong, you've been telling the world that you are
going to be focused on, in addition to what might be described
as really old-fashioned banking, and two other areas, that
you're going to have a significant capital market with a broad
exposure to global markets, derivative currencies, and the
like, and that you're going to be continuing to put focus on
your global transactions services business, which has been the
sort of consistent profit driver over the last year. Am I
reading back to you correctly?
Mr. Pandit. That's correct, Mr. Silvers.
Mr. Silvers. We heard, I think, a fair amount about the
extent to which the GTS (Global Transaction Services) business
makes Citi particularly systemically significant, and it's my
understanding from press accounts that this was a core argument
Citi made to the government during November of 2008, that Citi
could not be allowed to fail because of the importance of that
business to the global capital markets. My question to you is,
can you justify having that business connected to the type of
capital markets desk you intend to keep connecting it to in
light of what appears to be taking something so systemically
important, and then tying it to something so relatively risky?
Mr. Pandit. Let me start by saying, I don't recall making
that statement to anybody, nor does any--nor do I recall
anybody who directly works for me making that statement.
Mr. Silvers. Which statement, sir?
Mr. Pandit. The statement you said about the fact that this
was the argument that we made to the government, about systemic
safety.
Mr. Silvers. Okay, well then, let me ask you this, would
you commit here that as long as you're at Citigroup that you
will not come to the government in the future and make the
argument that the GTS business requires being bailed out,
should your other businesses go south?
Mr. Pandit. Yes.
Mr. Silvers. Let me commend you for giving me a straight
answer. It's a rare experience in my role.
Mr. Pandit. Well, I think that's why we're here, Mr.
Silvers, for straight answers. I want you to hear from me what
we're doing at Citi and why we're doing the right things.
Mr. Silvers. But, if my colleagues will indulge me, please
explain, nonetheless, how those two businesses are compatible,
in your view?
Mr. Pandit. Let me explain this to you. We do business for
Coke and Pepsi. Coke is in 450 countries around the world. They
need to manage their operations, we do everything for them from
cash management, to custody, to clearing and settling for them.
They need foreign exchange management, they need liability
management, they need interest rate management, so we have to
have those operations to serve them in that particular way.
The fundamental shift that I made was to make sure that our
clearing operations and our cash management operations and all
of our banking operations are geared towards doing those things
that our clients need. And, by the way, if you do that
correctly--having been in the business for as long as I have--
those are the kind of businesses that generate good value for
clients without creating the risk that has been created in the
system, historically.
Mr. Silvers. My time is way over.
Thank you.
Chair Warren. Oh my goodness. Thank you, I apologize.
Mr. McWatters.
Mr. McWatters. Thank you.
And thank you, Mr. Pandit, for appearing today. I
appreciate it very much. Do you have any reason to anticipate
that Citigroup will need additional TARP funds?
Mr. Pandit. No.
Mr. McWatters. Great.
On a fair market value basis, after considering contingent
liabilities, is Citigroup solvent?
Mr. Pandit. Yes.
Mr. McWatters. Are any material divisions or subsidiaries
of Citigroup insolvent?
Mr. Pandit. No.
Mr. McWatters. Let me be very clear----
Mr. Pandit [continuing]. We look at the entire company.
Mr. McWatters. I understand.
Mr. Pandit. What matters is that we're well-capitalized, we
have the reserves, we have the liquidity and by the way, we
stress test ourselves very often to make sure that's always the
case.
Mr. McWatters. Okay, speaking of stress testing, if the
stress tests were conducted again today under current economic
conditions, would Citigroup be required to raise additional
capital? And, if so, how much do you think?
Mr. Pandit. No, no.
Mr. McWatters. Okay.
Could you tell us why, specifically, Citigroup needed a
TARP-funded bailout? What happened, what went wrong?
Mr. Pandit. Mr. McWatters, we came into this market--Citi
came into this market with assets on which it took substantial
losses in 2008. Now, we addressed that by raising $48 billion
of capital in the market in early 2008, we sold another set of
businesses to raise $10 billion in capital and we got $25
billion from the government in the first TARP round.
And, the result of all of that was that we have 10.7
percent Tier 1 and at the same time, we had reduced our assets,
we had reduced risks--fundamentally, we were in the right
place, and in any rational market, that would be a solid
balance sheet for the future, but we were not in a rational
market. Post Lehman Brothers, post-Wachovia breakup, the
capital markets froze, there was a general sense of concern
about where the economies might go, about where unemployment
might go and different stocks of different banks started
reacting to that, our stocks started going down in late 2008.
And so on that Friday, in late November, our stock was at
$3.37. Now, in a market of that sort, unfortunately sometimes
stock prices can have an impact on confidence on all sorts of
stakeholders that are out there, and rather than taking the
risk, as we talked to the Federal Reserve, as we talked to the
Treasury, the view was, ``Let's take that issue off the
table.'' That's what happened.
Mr. McWatters. Okay.
What actions have you taken to negate your status as ``too
big to fail''? I mean, how can we get to a point,
realistically, or if this happens again, where Citi is simply
broken up, sold off or recapitalized by the private sector
without government intervention?
Mr. Pandit. We have taken a number of steps, Mr. McWatters
to, first of all, it starts with capital. We have a very strong
capital base, very strong liquidity, very strong reserves.
That's the starting point on this.
The second part is, create earnings, which is why we took
$13 billion of cost out of there.
The third part of that is change your risk profile, and
we've done that. Now, we still have some legacy assets, so you
came in with a group of assets into this environment, but we
have changed that, as well. We manage our regional businesses
on the basis of cash on the ground, liquidity on the ground, we
work with our global regulators, so we've made significant
changes in the financial health of the company, we've made
significant changes in the risk management of the company, but
we've also targeted the company towards those businesses that
have clients, and really don't, necessarily, create the risk
that has been created in the past.
But, let me also say, I do think we need regulation, which
is why I said in my opening statement, let's get to that
resolution authority, so that this never happens again.
Mr. McWatters. Okay, one more quick question. You are a
veteran of the Capital Purchase Program. What advice can you
give for how that program can be improved? It's ongoing, I
mean, there's money out the door, not every institution has
repaid TARP funds. How can it be improved?
Mr. Pandit. The TARP funds were, from what I understand,
put in place--a lot of the reason was to inject capital into
the banks, not only so they could lend, and they could do the
right thing for the American people, but it was to create a
sense of confidence, so we took the confidence in the financial
system off the table, that was the point on that.
For those people who still have TARP funds, I don't have
any other advice but to say, step in and make sure that you
manage your business, to take the costs out of that, you need
to manage it as efficiently as possible and start creating a
story and a business model that can translate into earnings.
Because that's the best way in which the capital markets can
give you equity, which you can then use to repay the
government.
Mr. McWatters. Okay, thank you.
Chair Warren. Thank you, Mr. McWatters.
Superintendent Neiman.
Mr. Neiman. If you were here--and I believe you were, in
the back--when I was questioning Mr. Allison, I highlighted
that the mortgage crisis really gave rise to the financial
crisis, and for that reason I was very pleased to see in your
written testimony, as well as in your oral testimony, you
referenced your efforts toward foreclosures mitigation, and in
your written testimony highlighted the fact that Citi has the
highest percentage of eligible loans in active modification,
mortgage modifications, at 50 percent trial and permanents,
percentage of eligible mortgages.
And though you can be applauded for that outreach effort, I
think a more important metric is the actual conversion of trial
modifications to permanent, sustainable mortgages. I believe
the last report from Treasury has 110,000 mortgages that are in
active trial modifications.
With the extension of Treasury through January 31, we are
now awaiting results from all institutions but, I think,
anxiously awaiting your results, as well, as to how those
individuals were treated. And I think the important part is,
these are individuals who have been willing and able to make
these reduced payments and are awaiting final determination, we
know that there have been problems at servicers, we know there
are problems in the appeal process, so can you give us any
information about what we may expect to see in the decision-
making with respect to those trial modifications?
Mr. Pandit. Mr. Neiman, I completely agree with you that
attacking the issue of housing is important for the economy,
but particularly for our customers, our clients, as well.
We, as the Assistant Secretary said, we're number one in
active HAMP modifications right now, I think he stated 60
percent as the number. Right now, the ratio of completion is
about 18 percent of that.
Mr. Neiman. Right.
Mr. Pandit. We think that number is going to go up to 40
percent, maybe, pretty soon, that's where we think it's going
to go. And not everybody who's gotten into that program is
necessarily going to qualify because they may not have the
documentation, they may not have the information that's
necessary to do that.
Which is why what we've done is create a Citi modification
plan on the other side--if you don't qualify, and you don't
meet every standard, we still have modification programs and
plans available for these people who are going through this
particular change.
Mr. Neiman. Do you see documentation? Because this has been
an issue I've heard from other servicers. Partly, I think it's,
we've heard concerns on the resources and processes of the
servicers losing documentation, we've heard of instances of
borrowers reluctant in producing their own documentation, but
I'm also very concerned that the Treasury has not given enough
discretion to servicers and lenders to make those decisions.
Have you found that? Or would make any recommendations or
changes in the HAMP documentation process?
Mr. Pandit. Let me say, by the way, the Treasury already
has made changes, and they're all positive changes, and these
are the kind of changes that, I think, are going to have a
positive impact on modifications, as well.
Let me also say, we have 4,000 people that are doing this
for us, I have hired 1,400 people in the last year to make sure
we can help people get through these documentation issues.
These are case-by-case issues.
Mr. Neiman. In your modification process, are you utilizing
principal reductions, and could you share with us the
percentage of modifications that use principal reductions?
Mr. Pandit. So, the number one goal for us to keep people
in their homes is to make those homes affordable.
Mr. Neiman. Right.
Mr. Pandit. You've got to do that.
Mr. Neiman. And you can do so through a combination of
interest rates and extensions or principal reduction?
Mr. Pandit. Absolutely. It is interest rates, it is
extensions on mortgages, it is delaying amortizations of
mortgages, it is changing----
Mr. Neiman. And would you agree that reducing the principal
would increase the likelihood of reducing the re-default rate,
keeping more skin in the game for that borrower? Have you
experienced, to the extent that, coming down to the same
affordable payment, but including principal reduction and not
just interest reduction has long-term benefit?
Mr. Pandit. You know, what we've found is the most
important thing that's driving a re-default is unemployment
rates. Don't forget, over the last year----
Mr. Neiman. I agree with you on that.
Mr. Pandit [continuing]. Going in an increasing
unemployment rate. So, last year is not necessarily an
indicator of re-default, going forward.
Mr. Neiman. And one question before my time expires on this
subject is the issue of second liens because this has been a
real disincentive that we are hearing from lenders on making,
particularly, principal reductions. Only one institution, and
it was not yours, has signed on for the Treasury's second lien
program. Can you share with us whether you intend to join that
program?
Mr. Pandit. So, first let me tell you we are modifying
second liens, actively. We've been part of the FDIC program,
we've been part of our own programs to do exactly what you
want, we've said to the Treasury that we're all willing to work
with them as to what this program is, we have just seen the
details, I think it's prudent for us to go through that before
we sign on.
Mr. Neiman. All right. It's been out for awhile, I'd look
for it and hope that it is a positive response, and we'll keep
track of that.
Mr. Pandit. Thank you.
Mr. Neiman. My time is expired.
Chair Warren. Mr. Pandit, you started your testimony by
saying that Citi is a fundamentally different company from the
company of two years ago, but nonetheless, Citi continues to
pose significant systemic risk. In fact, Citi is often cited as
the poster child for ``too big to fail.'' Citi is this
combination of a commercial bank, an investment bank, and an
insurance company for which Glass-Steagall had to be repealed
so you could follow your business model.
I understand your response to Mr. McWatters was that we are
dealing with the problem of systemic risk and too big to fail
by making Citi a stronger company. There may be those who
agree, there may be those who disagree, but I want to focus on
a different part. Instead of that, why don't you concentrate on
breaking Citi into more pieces, so that no one piece is too big
to fail?
Why not break it up? The markets are calm, this can be done
in an orderly fashion, not in crisis, your shareholders will
get all of the value, you won't have as big a company to run,
but we will at least reduce systemic risk.
Mr. Pandit. And we have the same objective--shareholder
value is really important, and that's where I'm going, so let
me tell you, we are doing that. We're selling about 40 percent
of the company. We're breaking it up, and that's a huge piece.
We're not an insurance bank anymore, at all, we are primarily
in the commercial, corporate banking, individual banking
businesses and the business of providing those with account
management and creating services our clients need. We're only
as big as what is required to serve our clients in a
competitive market. That's really important.
But I completely agree with you that we, or no other
institution, should be in a place where we get to a too big to
fail situation and there are two ways of going at it. One, make
sure these banks are strong, because there are going to be a
handful of systemically important institutions, sometimes size
is important, sometimes just what they do is important. And for
that you need a strong risk regulator that prescribes capital
requirements, stress tests, liquidity requirements. Let's make
sure we game out every scenario and make sure we put these
institutions through that test. That is really important, by
the way. Sometimes things do go wrong, so let's have a
resolution authority, and we ask the Congress to act fast on
these.
Chair Warren. Thank you, Mr. Pandit. I just want to make
sure I understand your response. When John Reed, who built
Citi, says that he now believes it should be broken up, you're
saying yes, that is what I'm doing.
Mr. Pandit. What I'm saying to you, first of all, I've got
to go back and see what he said. I've been busy managing the
company, and I've been managing the company with the same
objective, which is, what is the company that best serves our
clients, what business am I in, and I have been selling pieces
of the company and breaking it up, to say, this is my core
business. That core business is the business that I think is
going to create the maximum value for our shareholders and
therefore the government.
Chair Warren. Thank you very much.
If I could ask another question, taking you back to
September of 2008. You wrote to your colleagues at Citigroup in
which you said, ``Our capital and liquidity positions are
strong and we have tremendous capacity to make commitments to
our clients.'' We all know that within a matter of weeks Citi
and another large financial institution were taking tens of
billions of dollars under TARP. I understand there are those
who believe that this crisis was not obvious in advance.
The part I'm still trying to understand is the second hard
bump for Citi, when the Secretary of the Treasury announced on
September 15th, in effect, that your were healthy. Mr. Allison
says he doesn't know if you were healthy or not, but by the
time four weeks had passed, it is clear that Citi needed
another $20 billion, and then shortly after that, more than
$300 billion in guarantees. What happened between healthy and
$20 billion and $300 billion in such a short span of time?
Mr. Pandit. And you're absolutely right on any fundamental
basis, we had 10.7 percent tier one capital. When you looked at
the entire portfolio of the assets we were carrying, the
earnings power, this was not a rational or fundamental issue,
but we were in very dysfunctional markets at that point. This
was post-Lehman Brothers----
Chair Warren. I'm sorry, Mr. Pandit, but everyone was in a
dysfunctional market, but it was only Citi that needed an
additional $20 billion after having been pronounced healthy.
Mr. Pandit. And Madam Chair, the capital markets looked at
every financial institution, and for a period of time, when
after the stock prices of every financial institution, that
happened to us too. Our stock price started dropping, and on
that Friday when it was $3.37, the issue was not the
fundamentals as much as an issue of confidence, not only in
Citi, but all the other financial markets.
Chair Warren. But why Citi, Citi was the target and Citi
was the only one that took the money.
Mr. Pandit. And we weren't the last one necessarily,
either. And so, the perspective--we weren't the first, we
weren't the last, different banks, different institutions got
their own thing. Some broker dealers became bank holding
companies overnight, so everybody got a----
Chair Warren. But of the original nine that needed money
within weeks of the original TARP infusion--you got $25
billion, someone said you--the Secretary of the Treasury said
you were financially healthy, and within weeks you needed
another $20 billion. I just want to understand why Citi is
special.
Mr. Pandit. Again, what I would say to you is that you're
right, this was not a fundamental situation, it was not about
the capital we had, not about the funding we had at that time,
but with the stock price where it was--and by the way, a lot of
that was driven by short-sellers, and the short-sellers started
selling stock, the stock started going down, and when that gets
to that point, perceptions become reality.
Chair Warren. Okay.
Mr. Pandit. And that's exactly the reason why it was
important for all of us to take that issue off the table, and
the package that we got was a package that the Federal Reserve
and the Treasury and all the regulators thought was the right
package to insure that confidence.
Chair Warren. So this is not Citi was special, just Citi
had bad luck?
Mr. Pandit. You know, I don't mind being special and I
think we were in the sense that we came in--Citi came into this
market with assets on which we took a lot of losses. In this
particular case, the market dynamics were really important and
that caused us to get to that point.
Chair Warren. Right. Thank you, Mr. Pandit.
I apologize to my fellow panelists for running over.
Mr. Atkins.
Mr. Atkins. Thank you, Madam Chair.
I wanted to explore a little bit about Citigroup's
relationships with the government, its major shareholder. To
what extent--and we explored this a little bit with Assistant
Secretary Allison--to what extent is Treasury in contact with
either your office or other parts of Citigroup--on a daily,
weekly, monthly, periodic basis?
Mr. Pandit. Treasury is a very critical shareholder, very
important shareholder for us, and we do what we can to reach
out to them like we reach out to a number of our shareholders
as well. And we have those conversations with them at a variety
of different levels in the company. And they, as a shareholder,
have every right to call us to ask for the same public
information every other shareholder gets. We do that all the
time.
Mr. Atkins. Do they get any special information?
Mr. Pandit. Mr. Atkins, as you know, under securities laws,
especially given the fact that they have to sell stock, there
are limitations on what we can tell them.
Mr. Atkins. You know where I was going. Okay. So, as far as
the levels within Treasury, you're saying it's at various
levels within the----
Mr. Pandit. We are completely open on whatever information
they want, whenever they want, the same information that would
be available to any other shareholders.
Mr. Atkins. Okay. Now, it's been reported that Citibank, or
Citigroup, has the largest lobbying budget of any financial
services firm in Washington, and so I was wondering, as far as
your activities on the Hill and with the White House, and your
obvious support for, it sounds like a number of the
Administration's proposals, how you are spending your lobbying
dollars in Washington.
Mr. Pandit. I can't comment on where that budget is or not
versus anybody else. Let me just tell you that we do have
points of view on financial reform. We have points of view on
global markets, and we believe it's important to get those
points of views across to lawmakers and Congressman, and/or
people who are interested in our perspective as well. And we do
it, but this is an effort that's driven by what we think is
right for the financial system and, you know, I think it's the
right thing for us to express our points of view.
Mr. Atkins. Well, do you agree with the so-called Volker
Rule the President referred to--and apparently they've sent
formal language up to the Hill today.
Mr. Pandit. You know, I haven't seen the language, so I
can't comment on the details. But as a company, we've sold a
lot of proprietary trading businesses, we've sold a lot of
hedge funds, we've sold a lot of the private equity funds, and
we're completely focused on clients, and I do think that banks
should be banks. So now, you know, we're moving in that
direction.
Mr. Atkins. Okay, I made this point a little bit earlier,
but, you know, when it comes to systemic risk resolution, cram-
down authority, the Volker Rule, mortgage contractual
enforcement forbearance, these sorts of things--how do you
protect them against a sycophantic type of appearance, where we
have perhaps government motors and its allied bank, and now
maybe a government bank.
I mentioned that when I was in a Citi branch last year that
at every teller station there was a Barack Obama authored book
and they were giving it away to people that opened new
accounts. How do you protect against that?
Mr. Pandit. Well, first of all, I can't speak for my branch
manager who wanted to do that, that's their decision, that's
not my decision and I don't make those decisions as well. But
let me say, this is a tough position for me. Because if I say
what I believe and it happens to be in line with what somebody
else believes in the Administration, it looks like, hey, you
know, I'm doing this because the Treasury is a 27 percent
shareholder. It is a no win situation for us----
Mr. Atkins. Because you're not----
Mr. Pandit [continuing]. For somebody like me, but I
believe these things, that's why I'm here telling you that
these are the right things to do. And by the way, who better to
really share with you a systemic perspective other than a CEO
who's gone through a very interesting two years.
Mr. Atkins. I agree. Well, then going back to your
experience in the capital markets, what is now your strategy
with respect to your brokerage operations, if you think an idea
like the Volker Rule is good, you've gotten rid of Smith Barney
now, you have compensation things that might really harm your
investment banking business. Going forward, how do you perceive
that?
Mr. Pandit. What do we do? We commit capital on behalf of
our clients. That's number one. Number two, we make markets and
provide liquidity to the markets. Number three, we use capital
market instruments to hedge our risk, occasionally. Number
four, we do use our capital occasionally to create new ideas
and new products and test them before we take them out to our
clients. Those are the activities we're involved in, in our
brokerage businesses.
And again, when you look the full gamut of them, the
maximum value to our clients comes from performing those
functions, which, by the way, then translates into maximum
value for our shareholders.
Mr. Atkins. Would you take a short position that is
contrary to one of your client's positions?
Mr. Pandit. This is a hypothetical question.
Mr. Atkins. Yeah, exactly. It's just in general.
Mr. Pandit. Mr. Atkins, you know what it means to make
markets, you have to be a principal agent to make markets. And,
I would do what is right to manage a book on that basis, but
I'm not--if the question is, am I going to use some
information, the answer is no.
Mr. Atkins. All right. Okay. So proprietary trading and
other things are still an integral part of your view of how you
think your business should be run on the institutional side.
Mr. Pandit. Let me be very clear, we have to commit capital
on behalf of clients, that's what banks do. We have to make
markets, that's what banks do. And credit, as an example, we
have to do these things. Proprietary trading is when you have
people who actually don't interact with clients and they are
actually covered as a client by other people on the street.
They treat them as a client. Well, you're using the company's
capital, and I don't believe you should use--banks should use
capital to speculate that way.
Mr. Atkins. I agree, and I thank you, because that is the
rub, I think, is the definitional aspect of that, so, perfect.
Thank you.
Chair Warren. Mr. Silvers?
Mr. Silvers. Mr. Pandit, this may seem repetitive, but I'm
afraid that I can't resist this. In October of 2008, say
October 1st, was Citigroup a healthy financial institution? Yes
or no?
Mr. Pandit. Yes.
Mr. Silvers. On November 21, 2008, was Citigroup a healthy
financial institution? Yes or no?
Mr. Pandit. Yes.
Mr. Silvers. Why do you think that Mr. Allison was so
unable to answer those questions?
Mr. Pandit. You would have to ask Mr. Allison.
Mr. Silvers. You know, clarity is one thing, Mr. Pandit,
credibility is something entirely different. I think you've
given clear answers, but I don't believe you've given credible
ones, frankly. And I think it's easy to give those answers
having weathered the storm with the public's money.
Now, let me ask you this, did you speak to anyone in the
Treasury Department during the week from November 18th to
November 25th, 2008?
Mr. Pandit. Mr. Silvers, let me first say that I
appreciate----
Mr. Silvers. Nope, I'm asking you to answer that question.
Did you speak to anyone in the Treasury Department during that
week?
Mr. Pandit. I don't recall if I did.
Mr. Silvers. You don't recall.
Mr. Pandit. I don't recall if I did.
Mr. Silvers. Did anyone in Citigroup, to your knowledge,
speak to anyone in the Treasury Department during that week,
and I remind you that a few moments ago, you stated that,
``We,'' some we, ``agreed that it would be a good idea to back
up Citigroup during that week.'' Who's the we?
Mr. Pandit. That was over the weekend, the Federal Reserve
and the regulators talked to us and we also had conversations
with the Treasury and other regulators at that time.
Mr. Silvers. Okay, who's the we? What human being spoke to
what human being?
Mr. Pandit. At that point in time, there were numerous
conversations between the people of the New York Fed, people in
the Washington Fed, people at some of the other----
Mr. Silvers. Did you open that conversation by saying,
``We're a healthy bank and we're calling you because we would
just enjoy having another $20 billion of government money and a
$300 billion asset guarantee?''
Mr. Pandit. No.
Mr. Silvers. What--how did the conversation go?
Mr. Pandit. The conversation, again, was very simple. The
stock price was at $3.37, which was an exceptionally low level
of stock at that point. It was a result of short-selling, and
it was at a point in time where the stock itself could have
caused an issue of confidence, and therefore, the conversations
were around how to restore confidence----
Mr. Silvers. And what did you represent would have occurred
had Treasury and the Fed declined to act? Did you represent
that anything in particular might happen?
Mr. Pandit. You know, I do not recall any conversations
where I represented anything. These were issues about what----
Mr. Silvers. Well then----
Mr. Pandit [continuing]. Would happen--what----
Mr. Silvers. Did anyone who was representing Citigroup
speak to anyone--to your knowledge--speak to anyone in the
Treasury or the Fed about what would happen if there wasn't
additional aid forthcoming?
Mr. Pandit. Not to my recollection.
Mr. Silvers. Who do you--what is your knowledge as to who
spoke to either Treasury or the Fed on behalf of Citigroup
during that period?
Mr. Pandit. I can get back to you.
Mr. Silvers. Mr. Pandit, do I recall correctly that you
were the Chief Executive Officer of Citigroup during that week?
Mr. Pandit. Yes, I was.
Mr. Silvers. All right. I find it rather difficult to
believe that someone in your position cannot recall who--who
you spoke to or who spoke on your behalf to the Government of
the United States about the extraordinary aid that the
government provided to Citigroup during that period.
Mr. Pandit. You know, I want to give you----
Mr. Silvers. And you memory seems pretty good otherwise.
Mr. Pandit I want to give you a very complete answer, you
asked specific questions, I----
Mr. Silvers. Well, I don't mind getting an incomplete
answer. Share with me your fragmentary memories of that
weekend.
Mr. Pandit. Well, I'll tell you again, a number of people
at Citi talked to a number of people at the regulators, a
number of people at the Treasury, a number of people at the
Fed, the New York Fed, and that could be a large list. Let me
come back to you with specifics.
Mr. Silvers. Okay. Let me turn to a different matter before
my time expires. Mr. Pandit, you were hired in early 2007, I
don't recall the exact date, to be the CEO of Citigroup. At
that time, what were your performance goals?
Mr. Pandit. I was not hired in early 2007, I became CEO in
December, towards the middle of December 2007.
Mr. Silvers. Okay, well I misremembered.
Mr. Pandit. I came in there and the Board decided they
needed to make a change.
Mr. Silvers. Right.
Mr. Pandit. And we entered this market with the assets we
entered this market.
Mr. Silvers. And what were your goals at the time you were
hired?
Mr. Pandit. My goals were relatively simple, examine the
strategy of Citigroup, what is the right strategy for the
company, examine the capitalization and the financials of
Citigroup, put the two together and translate that into the
right culture for the organization on a long-term basis.
Mr. Silvers. Examine a few things. I mean, I would ask
you--and my time is up--but I would ask you in writing to
explain the answers to the following questions. I would give
you the opportunity to further expand on what the goals that
the board assigned to you at that time were, I would ask you to
assess whether you met them or not, and I would I ask you to
disclose the amount of money you were paid for meeting those
goals, between that date and the end of 2008, during the time
when--at least by press accounts, although not by your
account--Citigroup necessitated a bailout, absent which
Citigroup would have had to file for bankruptcy.
Chair Warren. Thank you.
Mr. McWatters.
Mr. McWatters. Thank you.
Mr. Pandit., in your written testimony, you say that
Citigroup no longer has a goal of being a financial
supermarket. I remembered the merger with Travelers, I guess it
was Citicorp a few years ago, Sandy Weil, this was a much-
touted goal, it was the future, it was the only way to really
compete on a global stage. Your goals are different now, why
are they different, why has the business model failed? Or if it
hasn't failed, why are you no longer interested in it?
Mr. Pandit. Mr. McWatters, markets are different, the
environment is different, the way competition is happening is
different. If we see what's happened over the last couple of
years, a lot of the places where funding was received, like
securitizations, and/or other areas, are largely not there. And
so, when you look at the changes that have occurred, that has
had an influence on that strategy.
But more fundamentally, as I looked at the company--and by
the way, it was a completely dispassionate review, a
dispassionate review of what we needed to be, and we did it
with complete integrity as a company. We concluded, by the way,
that that was an interesting model, but did not add sufficient
value to our clients and therefore did not necessarily create
sufficient value to our shareholders. But the biggest part of
the value came from the core businesses we had, which was the
banks, which is why we made the change.
Mr. McWatters. Okay. What aspects of your compensation
structure, not yours personally, but of your managers, let's
say, two years ago or so, when the securitization bubble was
inflating, do you think may have led to that? In other words,
you have people who are compensated on closing deals, but then
the deals leave their area, rather become a problem of the
institution itself, if they're retained, or they become a
problem with third-party investors. Can you explain how your
compensation structure has changed, and has it changed in a way
where you can still encourage innovation?
Mr. Pandit. Absolutely, I think that is a critical part of
how we changed culture, how you manage risks going forward in
the right way. Compensation structure changes we've made have
been those that say you get more stock as compensation. You
have to be around for a long time in order for them to vest as
compensation. We have claw-backs so that if something does go
wrong, we have an ability to recover compensation. We have say-
on pay as a company. As importantly, we take explicit risk
taking and risk management criteria into account when we pay
compensation, and we actually put some of that down on our 10K
that we just filed. And, one of the entities that looks at
these things looked at it, and I just saw something this
morning--they call it, sort of, the Cadillac version--of how
you take risk and compensation and blend them together.
So this is, to me, a very important cultural issue, and
it's actually at the heart of how you change a company into a
client-oriented company.
Mr. McWatters. Thank you. Last month we issued a report on
the commercial real estate market that did not have a
particularly favorable outlook. What is Citigroup's exposure
today?
Mr. Pandit. We do have exposure to the commercial real
estate market, however I would tell you that it is a smaller
exposure than many of our peers who are in this business, and
as well, it is to a big portion of the market, and so we have
taken the marks. And as importantly, a lot of that exposure is
in large cities, office buildings, leased buildings, et cetera.
So, when I look at the whole exposure we have, it is exposure
on the balance sheet, but that is less of a concern to me as a
CEO.
Mr. McWatters. Okay, thank you. Could you comment on the
activity of the short-sellers in the last quarter of 2008?
Mr. Pandit. You know, again, as I was talking about this,
there were a number of instances, post the Lehman Brothers
collapse, and in our case, post Wachovia break up as well,
where the markets were not really functioning in a rational
way, they were frozen. In those markets, there's always this
battle between fear and confidence. And, that there are ways in
which fear overtakes it, and particularly, that's the tool that
short-sellers need to make money. And so that was a very
dominant activity, and there were no real circuit breakers to
stop the short-selling, and that's one of the things that took
our stock down.
Mr. McWatters. Okay, thank you, my time is up.
Chair Warren. Thank you, Mr. McWatters.
Superintendent Neiman.
Mr. Neiman. Mr. Pandit, I'd like to come back to your
comments regarding looking forward and financial institution
reform. And you were very clear in saying Citi believes that
banks should operate as banks, focus completely on serving
their clients. I could not agree with you more. I think if
there's one lesson learned from the American public, it is what
do we want our banks to be. I think the lexicon of the federal
safety net is a new term that very few Americans have
understood previously, but are very focused on now, and it goes
well beyond FDIC insurance to the other forms of implicit and
explicit support that are provided to institutions, and that
can certainly subsidize bank and non-bank activities.
So, can I read your statement to also imply support for the
Volker Rule as you understand it?
Mr. Pandit. Again, Mr. Neiman, I haven't read the rule. It
just came out, so I don't know what it is.
Mr. Neiman. Understanding that separating out proprietary
trading, private equity and hedge fund trading.
Mr. Pandit. So, let me be very clear, proprietary trading
is not a significant--is not a big part of our business at all,
and I don't think banks should be speculating using bank's
capital. I completely believe that.
Mr. Neiman. So, can I--because this is important, because
Citi, as we all well know, really was the poster child and the
impetus for Gramm-Leach-Bliley and really dramatically changing
the Glass-Steagall Act. So, when we hear CEOs say that this is
a step backward, that it could never be implemented, that it
would have disastrous results for banks business models, can
you say that it is unfounded and what is your perspective?
Mr. Pandit. My perspective is proprietary trading is not a
meaningful part of what I do as a bank. It's not a big part at
all of the business and I don't think banks should be using
capital to speculate. As well, banks should be using capital to
commit on the behalf of clients, they should be using capital
to make markets, provide liquidity to markets, and they should
be doing what it takes to manage that risk.
And, you know, that's fine, and occasionally if you want to
use small amounts of capital to create new products and new
ideas, you can do that, but outside of that, we don't see the
rest of the activities as core to banking.
Mr. Neiman. So do you think it is reasonable that rules,
whether drafted by Congress or by regulators, to distinguish
pure proprietary trading, using capital to support proprietary
trading, versus market making or hedging to support client-
oriented businesses is a practical solution?
Mr. Pandit. Well, I think the regulators are best
positioned to look at what everybody is doing, and we are in
constant consultation with them, and they are really quite
equipped to say, you know, this is not necessarily related to
core banking.
Mr. Neiman. Well, I look forward--because this is extremely
important, and not in the sense that proprietary trading
contributed to the crisis, but it really goes to the issue of
the federal safety net and how do you prevent the next crisis.
I'd like to now shift over to consumer protection, because
the scope of the foreclosure crisis painfully highlights that
we must do a better job of consumer protection. And you make
specific comments in your written testimony about the need,
seemingly in support of a consumer protection agency that would
adopt standardized rules across the country, and to provide a
level playing field.
National banks, including yourself, have often claimed that
complying with State consumer protection laws is uniquely
burdensome. I think another lesson that we all have learned
from this crisis, is that States were the first to sound the
alarm on predatory lending. And in fact, had many of those laws
been applied to national banks, we would not have been in the
crisis that we have today.
Mr. Pandit. And, Mr. Neiman, I think we should have a race
to the top on these things, but we should have national
standards.
Mr. Neiman. I think that is always what we hear from
national banks and I spend a lot of time, you know, working. I
started my career at the Comptroller of Currency and have
worked for national banks, so I certainly understand that
perspective, but it is clear that there are thousands of State
laws that banks comply with, whether it be enforcement of
contracts, foreclosure, zoning, debt collection processes. Why
is it when it comes to consumer protection that banks don't
seem to be able to comply and assert that these are overly
burdensome?
Mr. Pandit. We are living in a national market whether we
like it or not, and we are a national business in what's
actually a global market, as well. And for consumers, we
believe that if you go from one State to the other there should
be some parity on how you are treated. We also believe, by the
way, clearly, that these kind of rules can increase the cost to
us, and that can therefore, unfortunately translate into higher
costs for consumers. And more importantly, whenever you have
different rules in different States, you create the possibility
for regulatory arbitrage, which is almost a race to the bottom.
So, we'd rather have a race to the top with common standards--
the highest standards, you pick them.
Mr. Neiman. My time has expired, maybe we'll come back to
this. Thank you.
Chair Warren. Mr. Pandit, if you can bear with us for just
a bit longer. We appreciate your being here. We're going to do
just some short questions. We're going to get through this last
part quickly.
So, I just want to ask, since it seemed to be a problem for
Mr. Allison. Does Citi get a ratings bump from the market
perception that it is too big to fail?
Mr. Pandit. I didn't hear that part.
Chair Warren. Does Citi get a ratings bump, for the market
perception that it is too big to fail?
Mr. Pandit. Madam Chair, the rating agencies--and I heard
earlier--and the rating agencies have put out reports where
it's their opinion that there are different standards, and not
only for us, but other banks out there. But it is their opinion
as we've seen over the last so many quarters, it is only their
opinion.
Chair Warren. Only their opinion. Is it valuable to have a
higher credit rating?
Mr. Pandit. Now, let me take you through where the markets
are on this. The markets look at capitalization, the markets
look at reserves, the markets look at liquidity, they look at
core earnings power. In our own case, by the way, we've issued
debt that is substantially longer in maturity than any
presumption of necessary government assistance or how long it
might take to get----
Chair Warren. Mr. Pandit, let me stop there. I think it
would be hard to make the case that we can see some date in the
immediate future when Citi will not be too big to fail.
Let me ask it differently because I really want to keep
this in small pieces.
Mr. Pandit. Right.
Chair Warren. Is it valuable to have a higher credit
rating?
Mr. Pandit. Where the market is today, is that it is
presuming very clearly that the resolution authority is going
to get passed. And despite that, we're borrowing money at
longer maturities, based on our credit spreads. That's the
market's reaction.
Chair Warren. All right. But Standard & Poor's, the rating
agency, is giving you a bump. The bump is valuable. Do
borrowing costs differ for companies that are rated A, for
example, as Citi is, and BB as Standard & Poor's says Citi
would be if it did not have this too big to fail guarantee?
Mr. Pandit. As we look through how the credit markets look
at credit, ratings are one of the things they take into
account. But, in this particular case, they've also taken into
account the fact there will be a resolution authority.
Chair Warren. But----
Mr. Pandit. It's our view that we're borrowing on us being
around because of our capital base, because of our earnings.
Chair Warren. So, Mr. Pandit, it's your view, that despite
your A credit rating that you are borrowing at the same cost as
all of the BB companies?
Mr. Pandit. We're borrowing at our spreads, and the markets
reflect spreads that are based on our prospects, our earnings,
our capitalization.
Chair Warren. Maybe I should ask this a different way. Is
there a competitive advantage for a company that has an A
credit rating, as opposed to a BB?
Mr. Pandit. In any normalized market, there can be a
competitive advantage for an A rated versus a BB rated company
in terms of the cost of funds.
Chair Warren. But it's your view that Citi isn't getting
that from its higher rating, it's not getting that benefit of
being A rated?
Mr. Pandit. Our view is that we're borrowing on the basis
of our capital, or borrowing on the basis of the market's
understanding there's going to be a resolution authority, and
that we better manage our business correctly.
Chair Warren. And that unlike other businesses, you don't
get a competitive advantage by having that A rating instead of
a BB rating.
Mr. Pandit. Ratings are one of the factors that are taken
into account by borrowers, or lenders, when they buy our paper.
It's one factor. They have to take the whole picture into
account, including, by the way, the fact that we are
proposing--let's have a resolution.
Chair Warren. I understand it's one factor, but can we both
stipulate it's a very helpful factor?
Mr. Pandit. Again, of course, how can ratings not be
helpful, but it is a factor. I keep coming back to saying----
Chair Warren. I understand.
Mr. Pandit [continuing]. We raise money of very long
maturity.
Chair Warren. I understand, and if we had longer time, we
could talk about paying for that.
Mr. Atkins.
Mr. Atkins. Okay, thank you, Madam Chair.
I just have a quick question about looking forward and the
business generating--because we all want, obviously, to see the
bank happy, healthy, and paying back its TARP funds. When you
look at the growth of the deposit base, it seems like some of
your greatest opportunities may be abroad, rather than the U.S.
Do you see any potential problem there, vis-a-vis the
Treasury's interest, the U.S. taxpayers' interest in growing
your business overseas?
Mr. Pandit. Again, a big part of what we do is connect
businesses in the U.S. through the world. And we conduct those
operations on the ground that are necessary for us to be able
to do that effectively. That, by the way, is on top of the fact
that we actually are a significant factor in the U.S. market as
well. We lend in the U.S., we provide credit card loans, we
provide mortgage loans, we provide corporate loans. So, our
full package, as a company, is we can help you in the U.S., but
we can help you wherever you want to go to sell your products,
to whichever consumer base you want to sell your product.
Mr. Atkins. But on a risk management basis, isn't it good
to have a broad base, a business base, a deposit base, not just
in the U.S., but also in other countries?
Mr. Pandit. I think that sources of funding are really
important and having diversified sources of funding are always
an advantage.
Mr. Atkins. Now, there's a proposal for an industry
liabilities tax, which would basically treat foreign sources of
deposits as a tax liability in this case, and then be taxed
thus. How do you view those sorts of proposals?
Mr. Pandit. I think each of those proposals has to be
looked at in the context of what's the economic impact, if not
impacting the ability to serve our clients and their ability to
export. What does that mean for jobs? What does that mean for
GDP? I mean, those are the things that have to be looked at.
Mr. Atkins. So, it's a bigger view than just looking at
individual small questions, you have to look at the totality of
it.
Mr. Pandit. Absolutely.
Mr. Atkins. Now, there's an organizational study that was
done for you all that, I guess you didn't necessarily implement
all of the recommendations. Did that have an effect in helping
you decide what sorts of things went into Citi Holdings or
might yet go into Citi Holdings, and what is part of your core
business?
Mr. Pandit. We actually--yes, we went through a lot, again,
a very deep, very thoughtful process, markets had changed,
funding markets had changed, where U.S. growth is going to come
from changed, including by the way, that foreign consumers are
going to consume more. So we took all of that into account, and
that's how we came up with Citicorp as our future.
Mr. Atkins. So, the rest of these recommendations, are they
still potentially on the table or are you still reviewing those
sorts of things, or do you view it as a closed book?
Mr. Pandit. As you can imagine, I constantly look at what's
right for Citi, what's right for shareholders, what's right for
clients, but I believe a large part of our thinking is
reflected in what we already talked about.
Mr. Atkins. Okay, super. Well, again, thank you very much
for being here today.
Mr. Pandit. Thank you, Mr. Atkins.
Chair Warren. Thank you.
Mr. Silvers.
Mr. Silvers. Mr. Pandit, you were just talking about what's
in the interest of shareholders and obviously the United States
Government is a large shareholder. But, I am concerned about
what I read in analyst reports and the like about a reversion
to the kinds of dynamics that led your predecessor Mr. Prince
to come to Treasury and beg them to tell him to not lever up so
much. Effectively, there are ways of generating shareholder
value that are not sustainable, and if those values--if those
ways are pursued once again, it's the United States Government
that I believe will end up holding the bag, again.
In that regard, can you tell me what you're doing to ensure
that those types of short-term unsustainable strategies,
particularly releveraging, are resisted.
Mr. Pandit. We have a completely new clear strategy. It's
about serving clients. Why am I doing something, is it in the
interest of clients, that's number one. Number two, I have a
completely redone management team, lots of new people who
understand what it means to run business. It's a great team
we've put together. We have a new board with a lot of financial
services expertise, regulators on the board, people who are
asset managers, people who have run banks, run businesses,
they're on the board.
In addition to that, we've changed our risk management
completely. The risk management structure looks at products,
regions, businesses in triplicate to understand exactly what
our exposures are, and our risk profile and risk appetite has
changed. So, this is a different company. That's been the goal
I've been moving towards. I still have those assets that Citi
came into this market with, I'm working down, but it's a
different company.
Mr. Silvers. I'm not so much talking about the assets on
your balance sheet right now, just the liability side.
Mr. Pandit. Yes.
Mr. Silvers. And the pressures that I'm sure you are
reading about and hearing, as I am, on Citi to relever, to
reduce--the talk of Citi being over-capitalized and the like.
Mr. Pandit. Well, I'm glad to hear that we're over-
capitalized.
Mr. Silvers. It depends on who's saying it, right. If
people are saying it who have a clear interest who are short-
term equity traders, you know, if you listen to them we could
easily endanger the--we could easily, essentially put the risk
of the United States in play once again.
Mr. Pandit. You can count on me. You can count on my
management. You can count on the board to run this institution
prudently, in the interest, not only of our shareholders, but
starting with our clients and being systemically responsible.
The biggest change that I'm making at Citi is to develop a
culture of responsible finance. That's the legacy I want to
leave behind.
Mr. Silvers. Mr. Pandit, I appreciate your answer. Can I
just ask you one more brief question, which is, in you written
statement you alluded to Citigroup's support for a consumer
financial protection authority. That's a different word, and
here I'm trying to protect you against my colleague, Paul
Atkins' accusation that you parrot the Administration. That's a
different word than the Administration uses in its white paper.
They talk about an agency. Is there a meaning to that
difference?
Mr. Pandit. Well, I do believe that we need a focal point
for consumers. I do believe that this area has to set national
standards, has to promote clear, full disclosure, look at
consumer markets, all of that. But, there are lots of different
architectures that can actually create that.
Mr. Silvers. So, I'm wrong, you do agree with the
Administration's position on this? I just want to understand
what position----
Mr. Pandit. My position is that there are a set of
functions this consumer authority must serve. My position is
that this authority must have the ability and the authority to
execute on its functions, but that the architecture of this can
be looked at in a lot of different ways.
Mr. Silvers. Okay, thank you.
Chair Warren. Mr. McWatters.
Mr. McWatters: I have no additional questions.
Thank you for appearing today, Mr. Pandit.
Mr. Pandit. I appreciate it, Mr. McWatters.
Chair Warren. Thank you, Mr. McWatters.
Superintendent Neiman.
Mr. Neiman. I'd like to come back to our discussion on
consumer protection because I very much liked your
characterization of a race to the top, and in fact, with your
permission, I'd like to use that in future speeches. Because I
think that's really where we should be going and how it should
be characterized, but I would believe that the best way of
getting there is that rules at the federal level be a floor and
not a ceiling, if you really want to have a race to the top.
So, my question is, on this issue of preemption in that
context, is it a necessity or just a preference?
Mr. Pandit. Mr. Neiman, I can clearly see the different
points of view on this. I can see, by the way, rationally I can
see both points, I can just tell you what I believe. I believe
it's better for the country, better for the consumer that you
take the best standards and make them national.
Mr. Neiman. I agree with you, and to the extent that they
are national standards and they are the best, States, in fact,
have been very reluctant to go further. One good example is the
fear from national banks that there's going to be a patchwork.
Well, Gramm-Leach-Bliley and its adoption of the privacy
protection rules, said ``we're going to have a national
standard, however States can go further to protect consumers.''
And only a handful of States have done that. So, I think that
is the right model, and so I'd be interested in your
perspective on that.
Mr. Pandit. Again, my perspective is still the same, I
believe in the highest standards for consumers, absolutely. We
think what's good for the consumers is good for the U.S., it's
good for the banking system. I also believe we're a national
market. So, we really are a national market and shouldn't we
all just get together and figure out the best standard?
Mr. Neiman. And we should. But we also have to recognize
that events change very quickly, and one lesson that we've
learned is that the States had identified early on issues
around subprime lending and predatory practices.
One issue that is often lost in this debate is around duty
of care owed by financial institutions. There's been a lot of
focus on CFPA as to where it's located in product terms. But
what I think is at the core, that is often overlooked, is what
is the duty of care owed by financial institutions in offering
of products. Interest-only products may certainly suitable for
one level of customer, but not another. How would you address
the duty of care and issues around appropriateness of products,
in your retail business in particular?
Mr. Pandit. Absolutely. And by the way, that's one of the
first things that I made sure of that we changed when I came
in. We've changed the underwriting standards, we made sure that
our products are those that we believe are suitable for the
customers we're selling these products to. I think suitability
is an important issue.
Mr. Neiman. Well, I'm glad you raised that term because
that is at the heart of it. Yeah.
Mr. Pandit. But I also believe, by the way, that you can't
be the Lone Ranger on some of these things, and that you do
need collective action occasionally, and it's not going to
happen by having just one bank stand up and say that's where I
am. It needs a focal point, that's why we think we need a----
Mr. Neiman. And that's why I think we need a new
federalism, a new level of cooperation between the States and
the Federal Government, with respect to bank supervision----
Chair Warren. Thank you.
Mr. Neiman [continuing]. And consumer protection.
Chair Warren. Thank you.
I wish that Assistant Secretary Allison had stayed to hear
your testimony and to participate in this part of the oversight
process.
We appreciate your coming here today, Mr. Pandit. On behalf
of the entire panel, thank you.
The record will be held open so that we may submit
additional questions in writing, and you may submit additional
answers.
Otherwise, this hearing is now ended.
[Whereupon, at 12:47 p.m., the panel was adjourned.]
[The responses of Mr. Pandit to questions for the record
from the Congressional Oversight Panel follow:]
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