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CITIGROUP BOSS BLAMES DEBT CRISIS ON BANK MISJUDGMENT – They ‘got the subprime market wrong, crises will happen again’

Posted by Gilmour Poincaree on November 13, 2008

Posted to the web on: 13 November 2008

by Renée Bonorchis

Financial Services Editor

THE chairman of the world’s most powerful bank, Winfried Bischoff of Citigroup, said this week the first rumblings of the global financial crisis were caused by the banks when they misjudged risk and got into the subprime market.

It was a bold statement from a banker in the light of the fact that investors have been looking for someone to blame, with regulators and ratings agencies also coming in for a beating.

But Bischoff was candid about the fact that when confidence was on the up, misjudgments were made by the managers of banks regarding the concentration of risk.

In an exclusive interview with Business Day, Bischoff said banks had to “admit they got it wrong”.

“It was the banks who did it,” he said.

There was no guarantee that crises could be avoided in the future, despite all manner of regulation.

“It will happen again. It may be something else next time. It is impossible to insulate a sector from all disasters,” Bischoff said.

This came just as Mervyn King, governor of the Bank of England, described the meltdown as the biggest banking crisis since the First World War.

King said the UK was already in a recession, which would continue next year.

He said Britain’s central bank had acted to cut rates so sharply “because the facts had changed”.

During his briefing yesterday, King was asked some tough questions, including whether or not he should keep his job, but he rejected criticism that the crisis had caught the bank unawares.

Bischoff expected it would take at least a couple of quarters of positive performance from the banks for confidence to return and that any new regulation for the global banking sector would demand banks carried more capital as a buffer against risk.

“I think we will get back to banking where lending money and supporting the trading activities of your clients will be more of the focus,” Bischoff said.

By going back to basics, banks would be less profitable and return on capital would fall while the spotlight was put on executive remuneration, but it would “still be a good industry to work in”. King said that a new international agreement on regulating the world financial system was important for a long-term resolution of the crisis, and he was hopeful that the meeting of world leaders in Washington at the weekend would be a good start on a “process of reform” that would take some months.

The governor said the objective should be to ensure that countries with capital surpluses, such as China, also had an obligation to take action to correct financial imbalances.

Despite the global turmoil, Citigroup was paying attention to its African operations where profit was growing.

The US-based bank was keen to expand its work in Africa, but Zdenek Turek, CE of the Africa division, said that while the bank would keep on supporting its existing clients, it was not going to expand geographically, and was very selective about acquiring new clients.

“We’re all looking far harder at our costs,” Bischoff said. “Credit itself is not contracting very much, but it’s not expanding.”

He believed it was unlikely that there would be any more big banking failures now that governments around the world had stepped in.

Bischoff himself was involved in many of the weekend meetings with the US Federal Reserve when various banks across the US had to be “supported financially”, as he puts it.

At the height of the crisis in September, Bischoff made sure he was back in New York every Friday night when the emergency meetings and “frenetic weekends” inevitably began. On those weekends, solutions had to be found despite the varying agendas of the big banks in the meetings.

Given the difficulties faced by the financial system on the Sunday Lehman Brothers went under and the banks were sitting with Lehman’s lawyers trying to get its gross position down to a net position, Bischoff said he hoped that sometime soon there would be a clearing house for derivatives contracts.

Bischoff thought South African banks were solid and well capitalised but he was not in the market to purchase any of them.

SA’s participation in the G-20 was a great credit to the country.

“SA punches above its weight. It’s a serious player,” he said.

CLICK HERE FOR THE ORIGINAL ARTICLE

PUBLISHED BY ‘BUSINESS DAY’ (South Africa)

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