Citigroup Chief Executive Vikram Pandit said Monday that MF Global's woes point to a need for an expanded focus on the shadow banking system and broader transparency for derivatives.
"I'm probably not going to be popular for saying it, but I think almost all derivatives, as many as you can physically get to, should be on clearinghouses and should be on exchanges," Pandit said at the annual meeting of the Securities Industry and Financial Markets Association (SIFMA) in New York.
When asked by moderator Charlie Rose, contributing correspondent of "60 Minutes" and anchor of the "Charlie Rose Program," which regulatory agency should assume that responsibility, Pandit said it is his personal belief that the responsibility has to stop at the Federal Reserve.
"We still have to work through what all of that looks like, but there are going to be events of this sort," Pandit said of the ongoing regulatory reform and MF Global. "To me, the question is really about more, what does it take to create safety and soundness in the financial system?"
Part of making the financial system stronger should be better representing risk to investors, Pandit said. When two firms put out financial reports indicating they have the same risk, he said, it is impossible that that is true. Because of that, Citigroup has advocated for a benchmark portfolio that would force firms to do a stress test both on their portfolios and the benchmark, or a portfolio of assets that would be normal for what most firms would own.
With that test, investors could better compare a firm's treatment of risk to other firms, and provide a better sense of how they evaluate the risk of their own assets. "If we can get to that [risk disclosure], I think you will find behavior will change in these firms," Pandit said. "They'll be afraid of that disclosure. What is the investor going to say?"
Citigroup's sale of 40% of its assets in recent years, including businesses like Smith Barney and most recently Primerica, separated the firm from "great businesses" that were not part of the firm's core mission, according to Pandit. The firm also decided three years ago to get out of the European consumer business. Today, in France and Belgium combined, Citigroup's total exposure in financial institutions in sovereign is $2 billion on a $2 trillion balance sheet.
"We're managing our business very, very tightly" when it comes to Europe, Pandit said, by making sure the balance sheet is safe while also continuing to support existing customers.
As new securities regulation continues to unravel in the U.S., the key to success will be finding the right balance, Pandit said. Dodd-Frank has the potential to help limit the amount of risk consumers take on, he said, while Citigroup was "as supportive of the Volcker Rule as anybody else around the world."
Pandit said he disagrees with swaps push out regulation, which will require banks to place swaps into a separate affiliate or decline federal assistance. "For the life of me I can't figure out why that makes any sense for anybody except for lawyers," Pandit said.
Still, he said, the markets have improved since the financial crisis in 2008.
"I do think it is fundamentally different today than it was back then," Pandit said of the continuing recovery. "If you go back and think about what brought all of this on, it was leverage, and we're still living through the impact of leverage."
