Citibank Board Lunch – Failure of Capitalism

I went to lunch this week with a Board member of Citibank, (also a former Dean of Stanford Business School).

My co-founder Andrew (you’ll hear about him often here, he’s the second smartest guy I’ve ever worked with {first is Jon Meeks who is at TA Associates, but he’s a nut}) and I went over to Stanford and we had a little private tour of the new campus.  Pretty spectacular.  We had a nice lunch in the outdoor cafeteria with Chuck Holloway, who is a Board member at my company, and Dean Joss.

Stanford Business School

Photo Provided By Stanford University

Here’s an architectural mock-up; it’s much cooler in person.  Apparently Phil Knight, Nike Founder, donated about $100 million of the $350 price tag to get it built.  Thanks Phil!  The campus rocks.

One thing we chatted about was the fun rivalry between Stanford and Harvard; apparently now that the campus is completed, Stanford gets almost 70% (I think i remembered that stat corrrectly, but don’t quote me) of the students who get into both schools.  Since I love to compete, this makes my day.

After settling in we got to talking about Citibank and the struggles the bank has had since 2008.  The reality, which is tough for me to ruminate on (as a practicing libertarian bent capitalist), is that the financial collapse, and Lehman bankruptcy that ultimately required the Federal government to come in and nationalize AIG as well as intervene in markets to stabilize world economies, was just flat out a failure of western-style capitalism.

The lack of transparency around what was being jammed down consumers throats (that consumers were willingly signing up for), and that loan originators, underwriters, securitization desks and investors had an insatiable appetite for, created a very precarious environment.  When you lit the party up with a match that represented misaligned incentives (more, more, more was the incentive… and no one, not anyone, at ratings agencies, investment firms, bond desks, origination desks, the US Treasury, Fed {yep Greenspan!}, banks and certainly not commissioned loan officers had an incentive to manage exposure, risk or the stability of the world financial system that created true systemic risk).  Citibank

Obviously, it blew up.  I struggle with whether this means that the dominant economic and political system of the past several centuries failed and is now on the decline.  Don’t know.  I do know that Citibank is a damn mess and unless they can take all the crap and firewall is into an entity that cannot hurt the rest of the healthy bank (like carving out and then selling Citifinancial and re-branding it with a new ‘fresh’ name like OneFinancial {oh wait, they did that}) they are going to be suffocating under the weight of the actions of the last decade.

 

Will Citi ever be destined for greatness again?  I think it’s unlikely.  They’ve lost their way. They now have a very bad balance sheet and they’ve lost the entrepreneurial spirit that Sandy Weil personally created by force of will.

I hope that they took some of those profits from the peak and wrote a check to Stanford for that beautiful campus though.

Thanks for lunch Bob, and thanks for a very stimulating conversation!

 

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