Business Times - 02 May 2009
Piyush Gupta, Citi CEO for its South East Asia Pacific business, candidly admits that the past six months have been the most challenging in his banking career. By Rahul Pathak
AROUND Sept 15 last year, Citi customers in Singapore and the region started receiving calls from their bankers. Calm, cheerful voices assured them that their deposits were safe, answered their questions and wished them a good day.
That was the time Lehman Brothers had filed for bankruptcy. A chill spread across the banking world as financial institutions contemplated their own mortality. Citi's Singapore war room was a spacious 39th storey office in Millennia Tower with a view of the Marina Bay Golf Course, where Piyush Gupta plotted survival.
'We were really concerned because we saw a lot of people coming in, wondering if they can cash out. Now the first rule in banking is never to let a bank run happen. Once a bank run happens you're just dead.
'So we worked overnight through the weekend to make sure we were adequately funded in all our branches. We didn't want a situation where a client comes in and says he wants to withdraw his cash and we don't have cash. We also took ads out in the papers and called every single customer and said look, you don't need to worry, we are safe and everything is going to be all right.'
Some customers still withdrew their cash. Later they put it back. Citibankers thought they had dodged a bullet. But then Citi's stock price fell below a dollar and the whole cycle of panic and persuasion started again. Now Mr Gupta can smile about it, but he admits that it isn't easy to calm jangled nerves.
He has the air of a man who generally has things under control. Some of his colleagues tell you, with a tinge of awe, how quickly he can spot inconsistencies in presentations, how long he hits the golf ball (though not always straight) and how accessible he is to the staff. The man, himself, candidly admits that the days gone by have tested him.
'The last six months have been, in many ways, the most challenging in my banking career,' he says. 'I've dealt with recessionary cycles where excesses of greed are being addressed, but it's unusual to be in a situation where you're dealing with fear. There's fear in your counterparties, there's fear in your clients and there's fear in your employees. People are worried whether they should do business with you, they're worried whether their deposits are safe with you, they're scared whether their jobs are safe with you.'
As the man charged with running one of the world's biggest banks in this part of the world - at a time when it has both contributed to the financial crisis and suffered from it - Mr Gupta says that his primary task is to build confidence among his clients and counterparties and to tell them exactly what is going on.
'There is no short cut to being honest and being honest constantly and with everybody,' he says. 'You've got to be constantly in people's faces, no matter how difficult the conversations are ... the worst thing you could do is to shy away from a face-to-face conversation.'
The markets have collapsed and some clients have lost half their net worth. 'The first reaction among many people is 'I'd better not call this client because he'll be angry'. But then you'll always lose. It's most important to call the client then, get over the anger and let him know you're there for him to rebuild this thing ... you have to have the moral courage to recognise that you've screwed up, and we screwed up, or rather the system screwed up but we're a part of the system.'
So exactly who screwed up?
Mr Gupta, a Singapore permanent resident who once left the security of his Citi job to become an Internet entrepreneur during the dotcom boom, has spent a lot of time thinking about the mechanics of risk and reward that led to the current crisis. He is willing to stick his neck out and say that at the heart of the mess is a sound banking concept, poorly executed. The concept itself, he feels, was nothing short of revolutionary.
Twenty years back, a bank would work out your credit-worthiness before lending you money. Globalisation and technological advances have turned this model on its head. 'It became possible to do one really creative thing. And that was that instead of holding the loan in my books, I could take the risk associated with it and slice it and dice it and then pass it on to tens and hundreds and thousands and eventually millions of other people,' says Mr Gupta.
'This means that I give you a loan but the risk is going to be borne by some dentist in Norway or a pensioner in Bangkok,' he adds. On the plus side, borrowers could tap into the whole global pool of savings. But the psychology of greed kicked in. Freed from risk, the lenders were no longer cautious about who they lent to. And with hedge funds and private equity funds joining the game as alternative intermediaries, the system became opaque and complex.
'If you look at the heart of the problem, it really stems from that. You have risk distributed all over the world and it just kept ballooning because the system was so opaque,' says Mr Gupta.
So who should take the blame? In Mr Gupta's book, it should be everyone who contributed to the cycle of greed - from the home owner who took loans he could not repay, to the mortgage banker who advanced the loan, the investment banker who sliced and diced these pools of risk and the ratings agencies who looked the other way.
Then the music stopped. Mr Gupta still marvels at the sheer speed of the decline. But with the benefit of hindsight, he has concluded that it was inevitable.
It started out as a liquidity issue, he says. Since there was too much credit in the system, it had to be sucked out, making investment banks particularly vulnerable. 'Look at the first people who went down: Bear Stearns and Lehman Brothers, for both of whom it was a liquidity problem since they didn't have their own sources of funding and had to rely on inter-bank markets.' But Mr Gupta had figured that a bank like Citi, with a trillion dollars in deposits, should be safe. He was wrong.
The mark-to-market regime kicked in and banks across the world had to start recognising losses as they let markets evaluate the worth of the financial assets on their books. To underline his point, Mr Gupta whips out an elegant Mont Blanc and says: 'Suppose you and I are the only people in this room and you say I'll give you one dollar for this pen, does that mean the pen is worth one dollar? Obviously not. So the problem with fair value accounting is that it assumes a liquid market. And when you don't have liquidity, you might not get a true reflection of the value of your assets.'
Nevertheless, banks still had to mark their portfolios down to lower and lower values.
'So the problem changed from liquidity to capital adequacy ... people started asking, 'Do you have enough capital, can you withstand the losses?' '
Lehman's fall pushed markets over the edge. People who had assumed that the US government would backstop everybody's credit losses panicked. In no time, the issue was not greed but fear.
'So interestingly, in terms of what you need to do to unwind the process is just the reverse. You first have to take the fear out of the system and then you have to get the excesses of greed fixed. That's exactly what governments around the world are doing. They turned on the liquidity taps to make sure that no other institution fails because there isn't enough liquidity. They're pumping capital in, recapitalising the banks ... and to the extent that banks still have bad assets, they will create a way to take the assets out, which is what they did in Asia 10 years ago.'
The difference, he says, is that while about US$4 billion was needed during the Asian crisis to inject capital and buy out assets, the US situation will call for US$2-3 trillion.
Then one day, hopefully, the storm will calm and the crisis will end. But Mr Gupta knows that the past few months have changed the future of his industry and the face of his bank forever.
'You know, one of the things that I'm proud of what we did at Citi, and I'm not proud of several things that we did, is that we recognised the losses early. Then we focused on the solutions. We thought we'd better raise capital. It's not easy raising capital at low prices because you're diluting the shareholder, but it's something we had to do. If we hadn't raised capital at that time, we would have gone the AIG way.'
Citi's US$2.4 trillion balance sheet has been cut to US$1.9 trillion. Its expense base reduced from US$64 billion to US$50 billion. The management team responsible for the poor risk-taking has been let go. Its global headcount of 375,000 is steadily being pruned and could be reduced to 300,000 by the year's end. Many Citibankers, including Mr Gupta, are poorer than they used to be as the company stock they hold is still hovering around the basement level. Most significantly, the US government's huge infusion of funds means that it can potentially take up a 36 per cent stake in the company.
The only way to clamber back is to generate more business, says Mr Gupta. 'Every day we open our shop and people come and put their deposits with us because they trust their money with us,' he says. Despite last year's jitters, the franchise's share of deposits has gone up. 'And we did more investment banking and capital market activities in the first two or three months of this year than we did all of last year,' says Mr Gupta. As the clouds lift, the group could go back to net earnings of US$15 billion a year. The US government's advances to date are in the region of US$45 billion.
'So in five years' time there's a realistic possibility that we'll pay off or retire most of this US government stake,' says Mr Gupta.
By then, of course, banks might sport a different look, though it is too late to turn the clock back.
'There is no doubt in my mind that the compensation in our industry is going to be changed,' says Mr Gupta. 'It will be more aligned to long-term results. Also, a part of me believes that the amount of remuneration that society has paid bankers is quite disproportionate to, say, what is paid to a good teacher or doctor.'
The other change could come in the parcelling out of risk. 'You can't go back to the world of 40 years ago, to the days of simpler, gentler banks, but you can put in some safeguards,' he says. 'If I am a lender I may be told that you can only distribute 80 per cent of the risk, but you must keep 20 per cent on your books. That will make me more circumspect.'
But risk distribution, itself, must go on, he says. 'It's like when America opened up. It was the Wild West with cowboys and guns but also a land of huge opportunity. Over time, you had to build the roads and the plumbing and put rules in place. In the last 20 years, technology has allowed us to distribute risk is ways we never thought possible. Like the Wild West, we need some rules, we need some traffic signals but it's not right to say that if this doesn't work, let's go back to another world.'
CEO, South East Asia Pacific, Citi
Born in 1960 in Meerut, India
Married with two children
Education: BA (Hons) Economics, St Stephen's College, Delhi; Post-graduate diploma in business management, IIM Ahmedabad
Career: Joined Citi in New Delhi in 1982; Held senior positions in Citi's Singapore and London businesses;
Was Citi Country Officer in Indonesia
Left Citi in 2000 to join Go.4i.com, New Delhi
Rejoined in 2001 and served as Citi Country Officer in Malaysia and Singapore before taking over current post in which he is responsible for all of Citi's businesses in Australia, New Zealand, Guam and Asean countries