What a difference a year makes. On Aug. 2, Citigroup Treasurer Eric Aboaf led a $3 billion offering of senior unsecured debt in the form of $2.25 billion in 10-year bonds at 5.375% and a $750 million reopening of Citi's outstanding 4.75% notes. The offering was about three times oversubscribed, with a book approaching $8 billion. It was a far cry from just over a year ago in April 2009 when Aboaf stepped into the role of the bank's treasurer in the midst of the credit crisis.
Now Aboaf is ready to talk about the defining moments of crisis treasury management and how Citi has transformed its balance sheet, liquidity and funding profile.
To Aboaf, the turning point came just one month into his new role as treasurer, when he sat down with Citi's investment bankers in May 2009 and told them that he wanted to issue debt. They were incredulous and told him it couldn't be done. Citi's stock was trading between $3 and $4 a share, well off the 2006 peak of $56.41. And the bank, which had accepted $45 billion in TARP funds from the federal government, was one of the most scrutinized financial institutions in the world. Yet its treasurer wanted to sail into the still-troubled debt markets and borrow on Citi's own credit, without a government guarantee.
Aboaf was not willing to concede the point. He was sure there was some price at which investors would buy Citi debt. The investment bankers argued that the price would be so high that the bank wouldn't pay it. But Aboaf prevailed.
"Part of what you do in a credit crisis is pay up when you need the funding and don't look back," he says now. "We paid 8.5% for $2 billion of 10-year senior notes at a time when the coupon on the 10-year U.S. Treasury benchmark was 3.125%. Yes, it was expensive, but it meant that we were back. We put our stakes in the ground and signaled that we were ready to move ahead. It was an exciting time, and morale went up when we successfully completed the offering."
The two debt issues, in May 2009 and August 2010, bookend a balance-sheet makeover that may actually have gone too far. "I see Citi now as overcapitalized, with excess cash on its balance sheet," says Jeffery Harte, managing director of equity research at Sandler O'Neill & Partners, a New York City-based investment bank. "They now have more capital and more liquidity than they need. The interesting question is what they will do with it."
But too much of a good thing has brought Citi back into respectability if not favor with the investment community. "The market is starting to like them again, which opens doors to a variety of liquidity options," Harte notes. "From the worst of the crisis, the market saw Citi lay out an articulate and consistent strategy for what it would do, what it would sell, how it would reshape its balance sheet. And then the market saw them follow through on it. That gave the market confidence and made them easier to follow."
Now Citi can fund itself with cash from operations and asset sales, and let debt roll off. And it could use some of its cash for share buybacks to bring down the "massive" number of shares outstanding as a result of the government's conversion of preferred stock into common, Harte speculates.
According to equity research published by Goldman Sachs last February, "The first phase of Citigroup's restructuring is now complete with capital and liquidity levels higher than at its peers." The report argues that near term, Citi's earnings power will remain weak and the government's stake will limit the stock's upside. But the Goldman report concludes that on the basis of tangible net equity plus after-tax reserves, "Citigroup has gone from the most thinly capitalized bank at the trough of the cycle to the highest ratio among large banks."
For Citi's treasury, the experience of navigating the crisis was emotionally intense. "The peaks were pretty high, and the valleys were pretty low," Aboaf recalls. "We had times when funding was difficult, no matter what we tried. We launched well-conceived initiatives and had to wait for them to gain traction. We discovered that we lacked the tools for some of the things we wanted to do. There were times when we were ready but the markets were not.
"But bit by bit we reduced the size of the balance sheet by shedding the right assets, and bit by bit we were able to increase deposit funding," he adds. "And it was wonderful when we tried things and saw them work. Finally being able to access the bond market was one of the high points."
Morale stayed reasonably high throughout the struggle. "We were too busy to get discouraged," Aboaf says. And even though Citi's future was uncertain, few key people left. "Not a lot of people want to leave paying jobs during a crisis of those proportions," he notes. "And boredom certainly was not a problem."
When the liquidity crisis came on like an avalanche, Citi recognized it needed to move quickly. Still the largest bank in the world by some measures, including global footprint, Citi had to find ways to stay solvent and then transform itself into a distinctly different bank. The government assistance bought time, but Citi's treasury was decentralized, reflecting its legacy business strategy. That had to change.
"Historically, parts of treasury reported to various business units and various geographies," Aboaf says. "We had just a small operation at the Corporate Center. To manage through the crisis, we had to centralize knowledge, decision-making and control.
"So we unified the treasury organization across all businesses and regions, with one reporting hierarchy and one chain of accountability," he says. "We also moved quickly to put in place clearer reporting and tools around our liquidity position so that we could better understand the exposures we faced and the resources we had to work with." Quarterly reports became monthly; monthly became weekly; weekly became daily. "A lot of reporting around cash flows was done every day," he says.
Seeing reality in near real time was essential, but Citi also needed what Aboaf calls "headlights" to see where it was going in the financial murk. Developing forecasts became a top priority. "We ran our liquidity according to 30- to 90-day forecasts, which we updated daily," he recalls. "We needed to look ahead to what would need to be funded and when, and to what resources would become available and when.
"We built those forecasting tools in the heat of the crisis. Now we're starting to automate and embed them in our systems as we continue to reshape our balance sheet," Aboaf says.
Treasury's responsibilities increased dramatically. "We were asked to own the balance sheet, to be responsible for its size and shape, and to direct the process of transforming it into something smaller, with less risk and more rational pricing incentives," Aboaf says. "That meant we owned the whole liability side of the balance sheet and were responsible for funding it across all of our businesses in all of our geographies, using all available funding mechanisms, including deposits, debt and equity.
"That meant a huge swing from short-term to long-term borrowing," he points out. "Commercial paper outstanding fell from approximately $60 billion to $10 billion, for example. It meant greater reliance on deposits as the debt markets tightened. It meant 'fortifying the balance sheet.'"
On the other side of the balance sheet, it meant reshaping assets by "working closely with the businesses and the finance team to optimize our asset size and to put the right pricing incentives around the right asset classes to take greater control of the assets we would book," Aboaf says. An illiquid loan costs Citi more than a liquid trading asset or a government bond, he points out. "We adopted prices that would reflect our true funding costs and developed better coordination with our businesses as we worked to reduce and optimize our assets."
Restructuring a large global organization isn't easy. But having served as CFO of both Citi's Institutional Clients Group and its North America Consumer Bank, Aboaf had the relationships and expertise needed to mobilize colleagues across the company. "Partnerships across business lines and geographies were essential to drive change quickly and efficiently. I met with colleagues one on one--in their offices, not mine--tapping relationships I had built in previous roles."
For example, clarifying the instructions on balance-sheet sales was critical. "We sold off a lot of loans and securities, but we were also willing to sell at a modest loss," Aboaf says. "In banking, we can sell down to 92 cents on the dollar (which is an 8% loss) but maintain our capital ratios because we also remove the risk from our balance sheet. That is not business as usual, so executives would call and ask, 'Do you really want me to book this loss?' We would talk it through, go through the economics, and then pull the trigger together. That's not a conversation that you can do at a junior level or on e-mail."
Treasury organization and job descriptions also changed quickly to fit the new mission. "We needed seasoned treasury managers who were good in a crisis," Aboaf says. "Because of our global operations, we had people in parts of the world who had previously navigated crises. We pulled them into central responsibilities where they were incredibly helpful."
Aboaf brought business and finance people into treasury roles and also shifted responsibilities among existing staff. "We didn't increase the size of the treasury staff significantly, but we gained a lot in quality and experience. We had to be more productive." That meant good crisis management. It also meant long hours. "We didn't have many free weekends during the worst of the crisis," he says.
Aboaf is watching how the Securities and Exchange Commission and the rating agencies resolve issues related to ratings for asset-backed debt that firms like Citi use to securitize credit-card receivables. Corporate debt is not affected by the dispute, and Aboaf says some resolution regarding securitized offerings is expected in the next few months. In the meantime, he adds, "we can use deposits to fund our bank card outstandings. Like any good treasury, we have a variety of funding alternatives and can adjust funding based on market conditions and what is available."
Now that Citi has transitioned from crisis mode, treasury's top priorities are embedding its new tools and processes in an efficient, automated infrastructure and continuing the balance-sheet makeover that will make Citi a safer, more profitable bank, Aboaf says. "We're continuing to reshape the balance sheet, country by country, vehicle by vehicle, to make it strong, robust and profitable. We've made good progress so far. It's stable with significant liquidity; however, assets still need to be optimized and continue to be reduced."
Technology will be very important to Aboaf's success. "We need a complete data road map and reporting format. All of the pieces are at some stage of development and implementation, but we're not finished. We have the right tools, targets, policies, procedures and reporting, but we need to finish implementing them into our infrastructure so that we can run the company more efficiently. That takes time." Data-based technology components are generally off-the-shelf applications Citi is buying; forecasting and simulation applications are customized ones it is building itself, he reports.
Aboaf won't speculate about what might have happened to Citi without government assistance, but he praises the government for the way it handled the market intervention. "They very effectively navigated a crisis that was new to all of us. The equity infusions and liquidity that the government provided were incredibly important to stabilizing the financial system and the economy. What they did was effective."
It also was much less expensive to taxpayers than it seemed at the time, he insists. "The taxpayers are making a substantial profit on their investment in Citigroup," he says, noting Citi's repayment of $20 billion in TARP money and the $10.5 billion in total gross proceeds Treasury has made on its sale of Citi stock warrants as of July 23.
Now, partly as a result of the experience of Citi and other banks, the United States has a new financial reform law that directly attacks bank risk and taxpayer exposure to banks that are too big to fail. "We were for the reform legislation. We think it is necessary," Aboaf says. "We support many of its provisions. We think it will bring meaningful reform to the industry."
The Volcker rule regarding proprietary trading isn't expected to have a dramatic impact on Citi. "Most of our business is customer-facing," Aboaf notes. "Most of our derivatives business will be able to stay in the bank, although a small piece of it might not be eligible. We generally did not allow our debit cardholders to overdraft their accounts with their debit cards, and on debit charge interchange, debit purchase is not a significant business for us. It will be interesting to see how the central clearing or exchange trading of derivatives plays out, but we support the principles of transparency. "
Although he walks every day past bookstores selling breathtaking accounts of the financial crisis, Aboaf is sticking to fiction. "I spent enough time living it," he says. "I'm not interested in reading books about it."
Before he joined Citi in 2003, Aboaf, 46, was co-head of the U.S. Financial Services practice at consulting firm Bain & Co., where he dealt with turnaround assignments.
"I saw firsthand what it takes to change direction and engineer a turnaround, the pieces you need to put in place to transform a company," he says. "I had a real interest in how to create and manage change, which helped, but nothing could really prepare you for what we went through in 2008 and 2009."
During the crisis and since then, Aboaf has drawn on other treasurers he knows for ideas and encouragement, he says. "There's now a real brotherhood of battle-tested treasurers who help each other out."