Crisis management

Felix Salmon

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

Then we suddenly had Bear Stearns in March. People thought once that bail-out was complete, the worst was over. I remember attending meetings where some of the seniors of major investment banks were saying, ‘The worst is over in the credit markets because the investment banks and brokerage houses were given access to the Fed window.’ And that’s what you also heard in Washington. I was hearing all sorts of comments of reaching the ninth inning of a nine-inning baseball game. And all this was being said in spite of the credit markets still being unsettled and the housing markets continuing their decline into what amounts to the worst housing crisis since the Great Depression.

FS But isn’t it the case that the US was growing at quite a healthy clip all the way through the first half of this year?
WR When people refer to last quarter’s 3.3 per cent growth, now ratcheted down to 2.8 per cent, they ask, ‘How could that have happened with the scenario you’re describing?’ The answer is that the dollar was extremely weak during that quarter and the credit market impact hadn’t really hit both emerging-market and developed countries as it has today. So the market was still good for our exports. In addition, the stimulus package was in full force, which had a major positive impact on the consumer. That’s now run out.

The combination of lack of confidence – even fear – in the credit markets, combined with fear about the economy in the US along with many European economies and Japan has created the worst economic crisis I’ve seen in my 50-year banking career.

FS You’ve seen a lot of crises in your time. What lessons do you draw from this one?
WR Financial institutions need to do a much better job of risk management and corporate governance. The regulators have to do a better job on the regulatory oversight. You’ve got to look at both the buy-side and the sell-side of the market. In many cases the sell-side was pushing paper that they probably shouldn’t have, but at the same time, the buy-side wasn’t properly analysing the investments being taken on to their balance sheet. So it cuts both ways.

On the regulatory side, what we don’t need is a lot of over-regulation which is what we may be headed for – what we need is smart regulation that is properly enforced.

Where the ratings agencies are going to come out of all of this is not clear. I think there was an over-reliance by individual institutions on rating agencies. I also think in some cases there was an over-reliance by the regulators on ratings agencies.