Shares in Citigroup dropped to $3.77 last Friday. Down from $50 a year back.
When I joined Citibank in the early nineties it was the most successful bank in the world. It had built the first truly global retail banking brand. The majority of their profits came from their successful franchise in emerging markets. They leveraged technology better than any other financial institution at the time. They could process all transactions 24x7 in real time, while their competitors still had to close for end of day processing. Their ATMs were years ahead with astounding ergonomics. The electronic banking services were innovative in its simplicity, just like the iPod or Google’s home page. New services were designed to make it easy to move money anywhere around the world. Innovation was focused on helping people to manage their money as efficiently as possible. The culture of the bank was global. The CEO (John Reed) had grown up in Argentina, one of the vice chairmen was from Holland (Onno Ruding), the other from India (Victor Menezes). Having an accent was actually an advantage. This was one of the first financial services companies with their back office in India, credit card operations in Singapore and headquarters in NY.
In the last years Citigroup stopped expanding their branches in the US and being innovative in their services to retail clients. Like their peers, they put the best brains on the creation of new financial services instruments. They based these products on sophisticated models, so complex that they defied human judgment of their inner workings. The intent was to spread risk; instead it was hidden in the bowels of an intricate web of derivatives, credit swaps and other esoteric instruments. While the regular, boring business of deposit taking is subject to regulation and insurances, these markets evolved unchecked and rapidly ran away from the models. This was hurried on by greed of the players, from consumers deluded into easy money for the ever-increasing value of the homes to the twenty-somethings getting six-figure bonuses for trading billions of dollars a day in asset backed securities. In this case the happy trinity of innovation, deregulation and globalization turned out to be the source of collapse.
“Innovation can be a dangerous game,” says Andrew W. Lo, an economist and professor of finance at the Sloan School of Management of the Massachusetts Institute of Technology. “The technology got ahead of our ability to use it in responsible ways.” When Enron and WorldCom got really innovative with their accounting they hastened the demise of these companies and with it the public trust in corporate America. Nassim Talib, a former trader, presciently wrote a couple of years back: “Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans (unpredictable events [JT]). ..Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard.”
This doesn’t mean that globalization, open markets and innovation should be looked at with disdain. On the contrary, they remain the key ingredients for economic growth. Financial markets require a guided hand. Innovation should be focused on the creation of new products and services for the increased well being of the consumer. People, ideas and products should be able to flow effortless across borders.
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Its great to read your Blog Jeroen...
ReplyDeleteCitibank needs to innovate again. This might mean it has to "park" all if its IT services on the side (read: let some other services supplier run these) and start building a new infrastructure from the ground up. Look what ING does - just great; you can still have the brick, just make sure the staff (tellers, call centers, CRMs) use the same solutions.
ReplyDeleteUnfortunately much talent was also shedded (left or laid off) over the last 10 years, so there's this empty shell filled with comfortably-numb managers. I'm sure a lot of these can be rattled out of their stupor and begin to innovate again.
-Rene
Having an accent was actually an advantage, that is what I should start your article with, it draws attention as it is imaginative. The short sentences with which you start contaqin too much information. Start with a slow intro, something personal, a joke.
ReplyDeleteAnother question I retain after reading is: What caused the collapse, whas it innovation by itself, do you mean to state that the law of diminishing advantage came into play? It doesn't really seem to be clarified. Lots of infomration, very compressed, to an outsider like me, but not really clarifying. Hope you can use this feedback!
Interesting, but not very easy to read. Take more words, put your personal story and experiences in.
ReplyDeleteReminds of two of my gurus: Warren Buffett who talks about cirlce of competence, stays away from high technology firms and declared derivatives as financial weapons of mass destruction.
ReplyDeleteAnd Jim Collins who in Good to Great talks about the Hedgehog concept the three circles of passion, competence and economics and had this to say about Wells Fargo's transtion from Good to Great (Collins Business 2001):
"For example, before Wells Fargo understood its Hedgehog Concept, its leaders had tried to make it a global bank: It operated like a mini-Citicorp—and a mediocre one at that.
Then the Wells Fargo team asked itself, “What can we potentially do better than any other company?” The brutal fact was that Wells Fargo would never be the best global bank in the world—and so the leadership team pulled the plug on the vast majority of the bank’s international operations. When the team asked the question about the bank’s economic engine, Wells Fargo’s leaders confronted a second brutal fact: In a deregulated world, commercial banking would be a commodity. The essential economic driver would no longer be profit per loan, but profit per employee. The bank switched its operations to become a pioneering leader in electronic banking and to open utilitarian branches run by small crews of superb people. Profit per employee skyrocketed. Finally, when it came to passion, members of the Wells Fargo team all agreed: The mindless waste and self-awarded perks of traditional banking culture were revolting. They proudly saw themselves as stoic Spartans in an industry that had been dominated by the wasteful, elitist culture of banking. The Wells Fargo team eventually translated the three circles into a simple, crystalline Hedgehog Concept: Run a bank like a business, with a focus on the western United States, and consistently increase profit per employee. “Run it like a business” and “run it like you own it” became mantras; simplicity and focus made all the difference. With fanatical adherence to that simple idea, Wells Fargo made the leap from good results to superior results. "
Perhaps its time for Citi to ask these or similar questions.
Coincidentally, Warren Buffett has had a large holding in Wells Fargo since 1990.
As for Citi, having an accent was definitely an advantage, and global and diversity from international aspects was definitely appreciated. Looking back Citi before it was acquired by Travellers, Citi was an innovator in using technology in its retail banking and was way ahead of its time, e.g. touch screen ATM's with international capabilities, homebanking before even internet took off, outsourcing software development and operations to India beore it became popular, etc. The motto was Citi never sleeps in a 24x7 global "follow the sun" paradigm for its banking operations for antytime, anywhere, any place model. I personally think that Citi sold out on the aspiration dream of 1 billion customers which was the buzz in 1997-1998 when John Reed was CEO, and to realize the dream the merger with Traveller Group, which created the clash of the two Titan in corporate cultures. Citi was definitely a more global brand and although the name and brand was kept, many of the true bankers who had spent time both in US and abroad and had a good reality check in building the franchise in banking, were pushed out one by one including Reed himself as the CO-CEO, for Sandy Weil to build the new empire through aggressive acquisitions. Somehow, the spirit of innovation was squashed, and far as technology goes, a Citi CIO said in townhall recently, there used to be a time when you had better hardware/software at work than at home, and now it is the opposite.
ReplyDelete