19-Dec-2007

Today's House Special - Citibank

Ramesh Ramanathan in Mint (no link, this came in with the email).

THE CASE OF THE AMERICAN BANK, THE ABU DHABI LIFELINE AND THE INDIAN CEO


It's a potent recipe - take a household name in global financial markets, grill over the heat of a mortgage meltdown, marinate in the mystery sauce of middle-eastern money, and garnish with the spice of an Indian CEO. Each of these ingredients by itself would be sufficient for heated dinner-table debates among the cognoscenti, but taken collectively, this dish is hot.

 

  For the uninitiated in the cuisine of the financial markets: the bank – Citibank. The middle-eastern bailer-outer – the $ 850 billion Abu Dhabi Investment Authority (ADIA) which took a $7.5 billion stake.The Indian CEO – Vikram Pandit.


The situation begs so many questions that I've clubbed them into four categories.

About the CEO

  • Why did Vikram Pandit take the job? What's the motivation for someone already worth  few hundred million dollars to step into a near-impossible situation?
  • What are the odds that he will succeed? (See the next question on mega-banks)

About institutions

  • Is a global full-service bank with businesses in investment banking, brokerage and   consumer products spread across hundreds of countries, actually possible to run as      a single entity, with sustainable value accretion to shareholders?
  • What's the role of governing boards? AIDA's investment does not give it a seat on       Citibank's board, but so what. There is an interesting story in the Wall Street Journal    about Robert Morgenthau, a US  public prosecutor who - in the 90s - pursued the        scandal around the collapse of BCIC, a Middle-   Eastern bank funded by the Abu Dhabi  Emir.  The report states, "Sheik Zayed called to inform the  State Department that, if  Mr. Morgenthau indicted anyone in the royal family over the scandal, he would pull his  billions out of the U.S." Can Citi's board of directors actually call the shots?
  • Even if independence of the board were possible, is this how we want capitalism to  work, that key  investors are separated from governance? How does this jell with the  argument for private equity funds  who use their stakes to drive organisational change?

About national interests

  • Does the Federal Reserve Bank have one more reason to feel nervous? Just a few weeks  ago, Chairman Ben Bernanke told the US Congress that he supports a code-of-conduct f or Sovereign Wealth Funds (SWFs) to promote transparency and accountability.  Very  little is known about ADIA - its website (www.adia.ae) is an electronic fortknox.  Will  the  Fed demand more disclosure, given that Citibank is a "too big to fail" institution linked  to systemic financial stability?
  • What's the likely political backlash, especially in an election year? The Dubai Port Trust  investment in several US ports was shot down by the US Congress, after criticism that  national interests were being sold out. Can this issue also mushroom into a political one? How will an Indian CEO answer these?
  • What are national interests anyway? Is Citibank really a US bank any more? How would we measure this – origin of deposits, domicile of shareholders, source of revenues?

About global markets and governments

  • What does the growth of SWFs mean for global financial governance? National regulators  are increasingly finding themselves hobbled by transnational flows, like using mosquito  nets to protect against the flu. The voices for a global regulatory regime are getting  louder.  But can this really work, given that political power – and hence true decision - making leverage - is created and harnessed only within national boundaries?
  • What is happening to the relationship between market economies and democracy? Over   the past two decades, the trend seemed inevitable – or at least was projected as such  that one would drive the other, and the sum of the two was good for things like liberty  and freedom. Francis Fukuyama wrote in  "The end of history" of the "universalisation of   Western liberal democracy as the final form of government." This hypothesis may come   under fire.  The UAE falls far short of acceptable global standards in democracy - it   doesn't even have adult franchise for its citizens. And yet it runs an investment fund  that gives it access to the crown jewels of the capitalist system, at the heart of the  mature  democracies of the world. Are we seeing a new order emerge?

 Citibank was often ahead of the pack in the banking industry. This time around, its actions are unleashing a torrent of questions that go well beyond the sector. It's too early to be talking of answers. Seems like this dish is going to be on the menu for some time to come.


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