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Crisis management

Felix Salmon

Tuesday, 28th October 2008

Felix Salmon talks to New York’s most senior commercial banker, Citibank chairman Bill Rhodes, about the origins of the current crisis – and profiles two other major players, Jamie Dimon of JPMorgan Chase and Ken Lewis of Bank of America

A Citibanker since 1957, few bankers have racked up more air miles than Bill Rhodes over the course of their careers, and probably none have done so in the cause of resolving so many crises, from Jamaica to Nicaragua to Korea to Uruguay, with many in between. His name is especially associated with the resolution of massive Third World debt problems in the early Eighties.

But Rhodes freely admits that he’s never seen a crisis as big or as dangerous as the one we’re in now.

FS How did we get to this place?
WR Confidence disappeared and was replaced by fear, all of which was exacerbated by the policymakers’ incremental approach to problem resolution – we’re letting one company go, but not letting the next one. The decrease in market confidence was seen in the interbank lending market. When liquidity started to become scarce, the lack of confidence grew worse. Liquidity, capital, and then deposits have become king, all in that order. First you need to have liquidity. Then you need capital. Investment banks suddenly realised that they needed to have a deposit base and that they couldn’t go to the markets easily and cost-efficiently to raise funds.

FS You say that policymakers exacerbated the problems. Were they too complacent?
WR We’ve had two false dawns here. The first one was the period around November, because the initial hit to the system in August was assuaged by the tremendous amount of liquidity that the Fed, the European Central Bank and others put in the system. But in spite of those actions, we never got the confidence back in the interbank market and among counterparties. We got into December and January, and the problems started to become more apparent. The cost of LIBOR and the monoline insurance company problems were indicators that the problems in the markets hadn’t been resolved.

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