It’s been a hell of a cycle-recession, stock market volatility, terrorism, the wave of headlines. Do you feel like the cycle’s turning?
I think things are definitely getting better. We’ve all read what we’ve seen in the paper, where GDP in the United States last quarter grew at better than 7 percent. That sounds like a growth rate for an emerging market, not a developed country, with productivity continuing to be the driver-up 6 percent in the past quarter. I think we’re seeing the benefit of the tax cuts and the change in the tax on dividends, which I think is going to change corporate behavior, and is a big thing towards more corporate governance and empowering the owner and the shareholder.
Tell us how the dividend change wil l affect corporate behavior.
I think the change in the dividend is going to encourage a lot of companies to pay more of their earnings out to the shareholder in dividends and give the shareholder a choice of whether they want, through a dividend reinvestment, to invest that money back in that company, invest it in some other company, or spend it. That’s different from the decade of the 90’s, when the wisdom was to use the earnings to buy back company stock, which encouraged giving out more and more options, which ended up through a great bull market being very expensive to buy back.
I think with our movement toward expensing options, which our company started at the beginning of this past year, is going to discourage the amount of options that are granted over time. It’s going to make companies look at what their real expenses are. And I think that to do away mostly with the double taxation of dividends and have dividends taxed at a 15 percent rate is going to encourage people to buy companies that are sharing their benefits with the shareholders.
What is the biggest lesson that Citigroup learned through this down cycle?
I think one lesson that we’ve all learned, and our company has certainly learned it in spades, is that reputational risk are every bit as important if not more important than credit risk and market risk. We understand that sometimes it’s very important to look at what you do and say, “Jeez, while this may be legal, how would this look if it was on the front page of the paper three years from now?” Would you want to do that? And in some cases walk away from business today because that might affect your reputation, which is going to affect your ability to do business in a big way in the future.
I think that we won’t have a problem following Sarbanes-Oxley. It came in for a reason, and I think that the companies that follow the best rules and the best procedures 10 years from now will be the ones that do the best. And those that don’t have rules and take the shortcuts may not be around.
Has our financial system sort of self-cleansed itself by now? Are people going to believe the numbers they read from the corporate earnings and trust in the financial system?
I wish the answer to that was yes. I think that with the bubble economy we’ve had in the decade of the 1990’s, a lot of issues surfaced that really seemed inappropriate. I think the regulators moved on that in a pretty responsive way. And I think that the response from business overall, reacting to things in structured finance and the conflicts between research analysts and investment bankers, has been well-documented. A lot of changes have taken place. Corporate governance has changed dramatically in the boardroom. So I think that things really have been done to make people feel more comfortable about things.
But now we have these whole issues surfacing on mutual funds. And I think that, too, has to run its course. So I don’t think we’re quite through it all yet. But we will . This country always been a place where people have felt comfortable with regulation, with the rule of law. That’s why it’s been a very attractive country for foreigners to invest. And I would hope that this country continues being a very attractive place for foreigners to invest in because we have to bring back somewhere between $500 and $600 billion a year of trade-im balance back in the form of foreign investments. The question is going to be how expensive will that end up being?
Do you think from bad comes good? We’ve heard you say that-“From bad comes good.”
Well, you ask me the question in the morning, and I wake up every morning as an optimist. I don’t always go to bed every night as an optimistic, but the next morning I’m an optimist again.
I hope you’re right that we’re near the end of this. I think a lot of things have been surfaced. I think that those people that are in regulated businesses-and most of us are in regulated business-should really look at the regulator as an additional asset in working together with them, so that you can run a business better. I think that’s an important lesson to learn.
But what I’ve always said is that from problems come opportunities. And that one shouldn’t be afraid of change, but look at change as creating an opportunity for your company and looking at problems and say, “How can we look at these issues and come out stronger and benefit by it” rather than putting your head in the sand. So, I would agree with that.
Let’s talk for a minute about the financial sector. Do you think that there’s going to be further consolidation there?
I think the exciting thing about this world is that I don’t think there’s ever going to really be stability. There was a major change in the world after the collapse of the Berlin Wall, and the growth of globalization and world trade. Hopefully that continues. I think it’s a way that emerging countries can really participate in the good things of this world. And things can happen in those countries where you see the emergence of middle classes, which create opportunities for everybody.
So, I think we’re going to continue to live in a world where goods and services are going to be produced in a quality way, in a place that can do it as the lowest cost producer. I think we should recognize that this is what’s going to happen. If you are not the lowest cost producer, you should think about what you have to do. I think that’s going to lead to continued consolidation, not just in the financial industry, but in most industries within the borders of countries, as well as across borders, to create global companies. We live, really, in a global environment.
Are we going to see a Citibank-Deutsche Bank-Bank of China combination? What would you call that?
When that happens, I’ll call you up and let you name it.
How do you get growth? This is one of our central themes. It seems like a variety of CEOs have come to their jobs in the last two or three years-it’s been a very defensive period. Now the cry is going up, “Let’s grow.” How do you do it?
Well, take a look at Citigroup since the merger of Traveler’s and Citicorp. In that period of time, we were just coming out of the Asian crisis in 1997, Russia defaulted on its debt and we had the problems with Long Term Capital. Then we had the terrorist attack and we had the biggest frauds in the history of the United States in Enron and WorldCom. We laid enough fiber optic cable to cover the whole ocean bottom. A lot of us were worried where the fish would swim-there was just so much of that happening. Then we saw the problems in Argentina. Then we had the issue in Iraq. One would wonder how could a company in that environment-if you were reading this 100 years from now, ever do well?
And yet in that five-year period, our revenues have grown about 12 percent a year compounded, and our profits have grown 25 percent a year compounded. So, I think you have to always be looking for opportunities in the world. Be a risk taker, have an environment that encourages employees to be entrepreneurial and make decisions. And let them, know that when they make a mistake, it’s not the end of the world-as long as they surface that mistake and let it be corrected. Recognize when new products are created, when something makes sense-and you don’t always have to be the inventor-but to be a fast follower is pretty good. And sometimes be the inventor.
But always looking for how you can really grow your business. What works in this country may work in another country. For us, what has helped us really be successful is to have people who are really the best in creating the different products, and have the local talent on the ground in the country that really knows what’s going on in those countries. And blend the both of them together so that we get the best of the manufacturing side going together with the best of the local distribution side.
Do you think you have a manufacturing component of what you do?
Well, I would look at bank products and credit cards-I would call them manufacturing.
Interesting. And you think that the real impetus for growth doesn’t come necessarily from you personally, but it comes from below. You push the growth mandate down to the people below you, several levels below, and encourage them to go for growth?
Well, all the people in our company have some part of their compensation in company stock, so that we’re all partners and we’re all shareholders. The top 150 people in the company have about 25 percent of their compensation at least in company stock. And they have to keep 75 percent of that stock as long as they are in senior management until they retire. So they are really owners for the long term, and they always think about what is not just good for this quarter, but what’s going to be good for three years from now and five years from now. That’s the period of time that they’re going to be holding that stock-or ten years from now.
Those compensation schemes have huge power in shaping people’s behavior, obviously, don’t they?
They sure do. In our company, we force people ,including myself, to be a lot wealthier than we ever thought we’d ever be, because we couldn’t sell. If we had the right to sell I would’ve sold it all along, and so would most everybody else.
So you’re now about $88 billion a year in sales, including net interest. What percentage of that is U.S. versus non-U.S.?
About 63 percent is United States, and about 37 percent outside the U.S.
Where do you see that going in the next five years? Do you think international is going to be a significant growth engine for you?
If we have peace in the world and we really make progress in killing off these terrorists, I think there’s no question that the growth in a lot of these emerging markets is going to be a much higher rate than the growth in the United States. One should never sell the United States short, because this is a great growth market. It’s a country that welcomes immigrants all the time, and therefore is always reinventing itself and is a good place to invest. But when you look at Asia or other parts of the world, that’s where more growth is going to be.
Let’s talk about China for a minute. You bought a piece of a bank in Shanghai. And you’re trying to get into renminbi- based lending and other activities in China. Do you think the Chinese are really going to open up and let you in?
Based on their agreement with the World Trade Organization, in five years foreign banks would have the right to be in renminbi lending and foreign exchange with domestic people. They wanted that five years to fix up their banking system.
It’s very primitive compared to ours.
Well, a lot of it has been government-directed. And those results have never been very good no matter where that takes place. So, it’s two years into that, there’s three years to go. I think one would expect that the Chinese would make progress in straightening out their banking system. They’ve certainly made incredible progress over the last 25-plus years in growing that economy, without letting the country rally get out of control.
What we did with the Shanghai Pudong Bank was to buy a small share with an ability to own substantially more. But also as part of that, we created a joint venture, where we have 50 percent, to create a credit card business in China and and utilize our expertise as the largest credit card company in the world.
I see they just now have authorized the car loans for the first time. You can now borrow money to buy a car. I know that General Motors is very happy about that. So, those kinds of instruments are all beginning to open up for you, too.
Well, let me just say that our company has never had a lot of success lending to things that have wheels. It’s sort of a joke, but it’s sort of true.
One of the things that mystifies me is-we spend a lot of time talking about the China market, but Japan is five or ten times more money sitting in Japan. There’s like $11 trillion in liquid wealth there. Are you bypassing Japan to concentrate on China, or are you playing both markets?
No, we have much more invested in Japan than we do in China. We have a big credit card business, a big banking business there, a very fast growing private bank there. We have a big corporate investment banking joint venture with Nikko Securities that we started there 5 and a half years ago, and a corporate lending business. So, Japan is a country that we make well over a billion dollars. We have a big consumer lending business there.
How did you do that? Japan is a market that really has defied a lot of American CEOs. Some have said to me, “Bill, it wouold cost me $500 million to get started in Japan, and they play by different sets of rules, and it’s just not worth my time.” What’s your response?
Obviously, there are different roles. Citibank first went to Japan in 1902, so we would have a 101-year head start on what you’re talking about. We’ve grown our businesses there gradually over a long time. In the securities business, we felt we would do better with a Japanese partner than doing it ourselves. So we made an investment of a little over 20 percent ownership of Nikko Cordial Securities. And as part of that, we created a 50-50 joint venture between Salomon Smith Barney and Nikko in the investment banking capital markets business. So that we would have a company that was Japanese in Japan, and yet have the ability to reach out to the capital markets all over the world.
Getting that cultural balance is important.
I personally think that (Prime Minister) Koizumi is an incredibly strong person. He just got reelected, he has a majority in the Diet. And I would hope that over the next three years that he will be able to lead his party into making the structural changes that will get Japan moving again, which I think would be very good for Asia.
What other markets out there have your attention? Korea, India, any other standouts?
Well, I think India is a good opportunity. India has the benefits of its history with England and it sort of has a good rule of law. It also has the problems of its history with England and has a big bureaucracy.
But we have a company there that’s in the software business that’s doing very, very well, that we started about seven or eight years ago.
You’ve outsourced or you’ve taken some of your own software writing to India?
We have done it ourselves there, and then took that, built it into a business and are doing that for other companies now.
What about in Europe?
I think Europe has to restructure. When companies think about expanding, they’re going to expand in an environment where if they make a mistake they can contract. And they’re not going to expand so much in an environment where if they make a mistake they’re stuck forever.
Because of labor laws?
The labor laws are very, very tough. Germany is some 30-some odd percent of the whole Euro economy, and it’s sort of been mired with no growth I am hopeful that with (Chancellor) Schroeder now in Germany that his plans of restructuring some tax benefits and making some of the labor laws easier will work. The unions in East Germany are losing that battle to go for a 35-hour week, when they have 35 percent unemployment. That maybe that will mark the beginning of a change, which I think is very, very important for Germany. The country that’s growing the fastest is Spain.
Where do you come down on Russia? Do you think that it’s an opportunity for you, or is it moving in the wrong direction?
I think Putin has been a big surprise to a lot of people, following Yeltsin. He’s opened up a lot of things. I think Russia is an interesting place. They have incredible resources, very bright people and good educational systems. But they Obviously have no long history of the rule of law, which is the negative, but it’s something that they’re working on. I think Russia is something that one should be looking at from a cautious point of view. We’ve been expanding our retail business in Russia. We have a pretty big corporate business in Russia, and it’s a very, very interesting country long term.
Sandy, one question I meant to ask you. When you were at American Express, and I was there as well-we were trying to build the one-stopï¿½ï¿½Didn’t we have fun?
Yeah. It was the mid-80’s, the Bonfire of the Vanities period. The idea was to create a one-stop financial supermarket, and there we had, of course, Shearson, and IDS, and Fireman’s Fund Insurance, and travel related services. The bank had all these different pieces of the puzzle, that never really coalesced into the division that was articulated back then.
Today at Citigroup you have many of those pieces you’ve been able to build in. Maybe not all of them, but you’ve been able to build a much more integrated financial company than we could 20 years ago. What’s the difference?
I think that the most important thing to create the synergies and get different parts of the business to work togetheris, A, have all the people be shareholders in the same company, as I said before. You know, our people own the same stock-they don’t own a stock in the brokerage business, or the banking business, or the lending business. And I think, most important, having those people wanting to grow the bottom line, wanting to grow the top line, and liking each other. And I think the biggest difference between American Express and this company is that here everybody’s encouraged to work together.
The incentive structure is key.
It’s very much designed toward working together, and let’s see how the life company can do business with the brokerage company or the bank. And then secondarily will we think about who’s going to get credit for what. Whereas in American Express we never got beyond the credit discussion, so nothing happened.