WASHINGTON — Just over a year after the height of the financial crisis, Citigroup Inc. is a fundamentally different company than it was when it needed billions to stave off a collapse.
That, at least, was the message from Vikram Pandit, the company's chief executive, and Herbert Allison, Treasury assistant secretary for financial stability, who testified Thursday in front of the Congressional Oversight Panel.
Pandit said Citi has reduced its risk and improved its economic condition, including shedding businesses and returning to its core banking model. Allison, meanwhile, insisted that Citi does not enjoy any guarantee from the government, despite the fact that taxpayers own a 27% stake after rushing to save the firm in November 2008. But panelists, including Chairman Elizabeth Warren, were not convinced.
"Citi continues to pose significant systemic risk," Warren said. "In fact, Citi is often posed as the poster child of 'too big to fail.' "
Of the two witnesses, Pandit fared better during the three-hour hearing.
No one on the five-member panel bought Allison's assertions that Citi or any other large firm did not enjoy some kind of backing from the government.
"There is no 'too big to fail' guarantee on the part of the U.S. government," Allison said.
The comment angered and baffled the panelists.
"I do not understand why it is that the United States government cannot admit what everyone in the world knows," said Damon Silvers, a member of the panel.
Allison also refused to answer several other questions, deferring to regulators on inquiries about Citi's current condition and declining to even address the extent of the company's problems at the time of the bailout.
"It's not our policy to comment on whether any institution presents a systemic risk or on its particular health," Allison said. "I may also say that because we're a large shareholder in Citi at this time, as you pointed out, we can't make comments on the prospects of Citigroup."
J. Mark McWatters, accused Allison of taking "the financial equivalent of the Fifth Amendment."
Pandit, meanwhile, earned plaudits for insisting that Citi had changed, arguing that the company would not need more government funds and directly answering panelists questions, even if they did not always accept the responses.
"I think you've given clear answers but I don't think you've given credible ones," Silvers said.
Among other things that panelists objected to was an assertion from Pandit that it was not Citi's fault it needed $45 billion in Troubled Asset Relief Program funds and $301 billion in loan guarantees. It received an initial $25 billion investment in October 2008 along with several other banks, but was given $20 billion more the following month.
Pandit blamed a declining stock price and short sellers for the bailouts, saying the stock created the perception the company was going under. "It was not about the capital we had, not about the funding we had at that time," Pandit said. "But with the stock price where it was — and, by the way, a lot of that was driven by short sellers. And short-sellers started selling stock, the stock started going down and when that gets to that point, perceptions become reality."
Warren found his argument hard to accept. "So this is not that Citi was special, just Citi had back luck?" she asked.
"I don't mind being special," Pandit responded. "And I think we were in the sense that we came … into this market with assets on which we took a lot of losses. In this particular case, the market dynamics were really important. And that caused us to get to this point."
Still, Pandit did emphasize the changes Citi has made in the year since that time, saying it is less risky.
"Perhaps the most important strategic action we have taken is to mandate a return to the basics of banking as a core of our business," he said. "As a result, we have sold more than 30 businesses and substantially scaled back proprietary trading. Citi is a better bank today, but for Citi, being better is not good enough."
Pandit repeatedly emphasized that the bank was returning to core banking and shedding proprietary trading businesses, which he said were no longer necessary. The more simplistic model is a shift from the path sought when Citicorp combined with Travelers Group in 1998 and pressed for legislation to make the move legal.
"The environment is different," Pandit said. "That was an interesting model, but did not add sufficient value to our clients and did not necessarily create, therefore, sufficient value to our shareholders. But the biggest part of the value came from the core businesses we had, which was the banks, which is why we made the change."
Though Pandit did not explicitly endorse the so-called Volcker Rule, which would ban proprietary trading and restrict investment in hedge and private equity funds, he sounded positive.
"As as a company, we've sold a lot of proprietary trading businesses, we've sold a lot of hedge funds, we've sold a lot of the private-equity funds," he said. "I do think that banks should be banks. So now, you know, we're moving in that direction."
Pandit also used the hearing to support certain aspects of regulatory reform. He called for a systemic-risk regulator, enhanced government resolution authority and better consumer protections (though he did not necessarily endorse a separate consumer agency).
"Let's address 'too big to fail' once and for all through the creation of a system-risk regulator and a resolution authority, by making sure banks are banks, focused on clients," he said.
He also called for more transparency in the derivatives markets and said their needs to be a "strong consumer authority that is part of the regulatory system to promote greater transparency, sound practices, growth and stability."
Paul Atkins, a Republican member of the panel, accused Pandit of simply pandering to its largest shareholder, the government.
"Congress, of course, is considering several bills that could reshape the regulatory landscape significantly," Atkins said. "I'm concerned that Citigroup is allowing itself to become a politicized entity. It's difficult to avoid the impression that one of the motivations is for the company to curry favor with the hand that feeds it. Whether it be cram down, systemic-risk regulator, resolution authority or whatever, my fear is that Citigroup is currying favor with its largest shareholder at the expense of the enterprise and all shareholders."
But Pandit defended his views, saying it was just a coincidence they aligned with the administration.
"This is a tough position for me, because if I say what I believe and it happens to be in line with what somebody else believes in the administration it looks like, hey, you know, I'm doing this because the Treasury's a 27% shareholder. That's a no-win situation for somebody like me," he said.