Citigroup (C), which has been at the epicenter of the financial crisis, is one of the best-performing U.S. stocks since March. But CEO Vikram Pandit's fix-it job is far from complete. Citi's shares remain 90% off their high in 2006. Its books are still loaded with risky assets. And the economy faces headwinds. Pandit sat down to talk with BusinessWeek Editor-in-Chief Stephen J. Adler on Sept. 17 as part of the Captains of Industry series at the 92nd Street Y in Manhattan. Here are some excerpts of their conversation:
What's it like to have the government owning 34% of your company? What's the relationship?
They're not in our board meetings. They're not involved in day-to-day management. I know there may be a perception that there is something more meaningful here as part of the stake that they own. But outside of the regular conversations that we and other regulated institutions have with their regulators, we are responsible.
I wanted to ask you about Sheila Bair, the chairman of the Federal Deposit Insurance Corp., who has reportedly criticized Citi's management team. Isn't that kind of a bad enemy to have?
I'm not going to comment on any particular regulator. What I can say is that we're now all aligned with our regulators. They want us to succeed. They want us to be stable. They want us to grow. They want us to be profitable. All we need to do is just keep executing.
President Obama recently gave a speech on Wall Street where he seemed to be chiding the industry for not supporting the regulation he thinks is needed and for not participating as much in the solution. What is your view of the speech?
I think the regulatory plan the Administration is thinking about is based on the right principles. We need level playing fields around the world. We need to make sure you don't have a banking system that's regulated and a shadow banking system that's unregulated. Those are the same principles that most of the Group of 20 nations are talking about. It's not about the U.S. It's about how the world all agrees to the same principles because money flows everywhere around the world.
Should there be a single, global regulator?
I'm not sure you need that as much as you need the same types of rules. If you have global standards, then you can have different regulators.
What about the proposal for a Consumer Protection Agency?
In general, making sure banks and other financial-services companies are doing right by their clients is a good thing. But on the other hand, you want to make sure that as you think about what's right for consumers, it's in the context of the fact that these entities also run businesses. It is an important detail to work out.
The theory, you're for it? But you may run into trouble on the details?
Isn't that the case about everything?
There is a dispute about the $100 million pay package for Andrew Hall at Citigroup's energy-trading unit, Phibro. Do bankers make too much money?
There are compensation structures that actually create what's called moral hazard: Heads I win, tails you lose. [Such a structure] drives you to take excessive risks. So the art of compensation is really about driving the right behavior. In my business talent is my most important asset. I want to create an environment where [employees] are recognized for performance, where they operate within the right culture, where they're paid competitively.
Aren't there some sums that are just too much, like $100 million?
It seems Citi has shifted from a financial supermarket model to a traditional banking model. Is that a correct assessment?
We've turned the company from a balance-sheet-intensive, risk-lending-oriented company to a client-facing business, which is about loans, services, things of that sort. That's a substantial shift. In our own case, we're going to be 40% smaller in our balance sheet vs. where we were when all of this got started.
What kind of recovery will it be?
You really have to disaggregate the world. Look at Latin America, below Mexico. The economies are doing well. The same thing is true in India and certain Southeast Asian countries. [China's] doing well because of government spending. That leaves us with the U.S. and Europe. We like what we're seeing out there [in the U.S.]—stability. We like what we're seeing in terms of inventory. Some businesses are hiring people back. But we've got to appreciate that this recovery is happening against the backdrop of some of the worst imbalances in economic history. It's not going to feel like a recovery for a while because we're going to have to work out these imbalances.
Where would you say GDP growth is going to be in 2010?
I'm less interested in what the number is. I'm more interested in the shape of the recovery. Does it snap back and then stay flat? Or is it steady growth? Those are the things we're watching. But it's really too early [to tell].
Is Citi a good investment?
Well, I have two responses to that. Anything that's good for the government should be good for all of us. Second, whether you know it or not, you own it as well.
But are you recommending the stock because it is going to go up?
How can a CEO not like his stock? Obviously we've gone through a lot of painful decisions. But the result is we are in an extremely strong financial position. We have a clear strategy and a very good management team that's executing extremely well. That's the fundamental side. The other side is we're trading at book value. Other banks are trading at 1.6, 1.8 times book value. If you look at the valuation, we feel that there is an upside.
To watch BusinessWeek Editor-in-Chief Stephen J. Adler's interview of Citigroup CEO Vikram Pandit in its entirety, go to businessweek.com/go/09/pandit