Citigroup has just released its earnings, and they look worse than they did a year ago. CEO Vikram Pandit was actually just in London, where he made a few interesting remarks during an interview with the Telegraph.
- Pandit believes that low interest rates — and possibly all the other various types of extraordinary central bank support — will be a fact of life for the next 10 years.
“[T]o get through the next 10 years you will have accommodative monetary policy so the costs of capital will be contained too because of low interest rates.”
How does this compare with the Fed’s current forecasts? Its official stance is that interest rates — which were cut to a record low at the end of the 2008 — are likely to stay at their current level at least until the end of 2014. When the Fed starts to raise rates it will do so gradually, but Pandit seems to expect a much longer low interest scenario than other observers.
- Whatever investors do they will almost certainly underestimate political risk. Pandit reminds us that “we have 32 major elections around the world this year.” And it’s not just about the elections. For example, more than 50% of US territory is now in drought and conditions are now considered among the worst in history.
This has contributed to dramatic rises in the global prices for corn, soybeans and wheat.
Never forget that while conditions in the Middle East and North Africa were ripe for revolution, it was the spark of high food prices and inflation that actually lit the match in Tunisia, which started a domino effect all over the region.
- Pandit thinks we’re close to “regulatory overload” on the banks.
Safety and soundness is being addressed through more capital and liquidity and the requirements for resolution planning if a bank goes kaput. Having put all that in place, Pandit can’t resist a swipe at the UK’s plans for separate retail and investment banking. “If you have all these in place there shouldn’t be any need for ring-fencing.”
He may actually right about this one, but not in the way that he thinks. Since the crisis US regulators and politicians have assumed that putting more rules in place, forcing banks to hold more capital and demanding them to write living wills will be enough to ensure the end of taxpayer-funded bailouts. Never did they seriously consider forcing the Too Big and Too Interconnected Banks to split themselves up.
The UK, however, has taken a different approach. Its Vickers rule will force banks to build high garden walls between the traditional retail business and the riskier trading business of, say, the London Whale. Which approach is best? Each has its skeptics but the UK plan comes closest to a true split-up than the US plan. Even senior US officials have admitted that they don’t think Dodd-Frank, etc will do anything to stop bailouts the next time. So Vikram is right — there’s no need for both approaches when just the one will do. Now, of course the CEO of Citigroup would never advocate for anything that looks or smells like the return of Glass Steagall. Here’s why.
- Finally, Pandit made some bold statements regarding the moral fiber of his firm.
Fundamental to the strategy is having the right culture. For us this is a culture and strategy based on practising responsible finance.
“You know what that is? It’s about three questions. Before we transact, before we interact with our clients, we ask ourselves is it right for my client? Does it add any economic value? And is it systemically responsible? We should only proceed if the answer is yes to all three.”
One wonders whether these will prove to be famous last words. There’s a little matter called Libor. The wide-ranging investigation is still going and yes, Citi, is already implicated in several aspects. Is it just that Pandit’s sure that there’s no embarrassing paper trail, as there was in the Barclay’s case? Or is Citi about to join a group settlement with several banks, so that it need not stand out? Some advice for Vikram from his predecessor Chuck Prince: be very careful not to write your own epitaph.