Advanced Risk Issues
“Seeing Around Corners”
Summary and Conclusions
Why were We Here?
Istanbul
March, 2007
Citi CIB
Advanced Risk Issues
Revenue Growth and
Risk Management in a
Complex Global Bank
The Economist – Survey of International
Banking – May, 2006
 Banks the world over are scrambling to become
larger…
 But at some point diseconomies of scale will also
start creeping in, with management finding it harder
to summarize everything that is going on in the bank
 This includes the neglect of concealed risks and the
failure of internal controls
 This problem afflicted Citigroup in 2002 – 2005 when
it was rocked by a string of compliance problems
 Risk management, the rock on which any
contemporary bank rests, scarcely existed as a
profession outside the insurance industry until the
1970’s
Moody’s 2005 Securities Industry Outlook
 “For all global trading and market-making firms, highly-
skilled risk management - broadly defined - is an
absolute necessity for the business model.
 “A robust corporate culture remains critical for
balancing short-term competitive pressures and the
long-term interests of a franchise.
 In a hotly competitive arena, fraught with litigation and
regulatory risk, an investment bank needs a collective
sense of right and wrong.
Advanced Risk Issues
The Market’s View of Risk Management
 “The financial innovations that have made risk
transfer and hedging possible have increased the
complexity of risk management, both financial and
operational.”
 “If a bank can establish risk management as a core
competency, I think that’s something the market
would value.”
 “No model,, and no software package, no matter how
sophisticated, can ever replace the skills of a
trained, experienced and conscientious risk
manager”
Advanced Risk Issues
The Market’s View of Risk Management
 “NAB’s internal control systems failed at every level to
detect the irregular currency options trading. As long
as the business unit turned a profit, other
shortcomings could be overlooked.”
 “Barings – There may be a temptation to view this
debacle as being caused by just one individual – the
“rogue trader” – but in reality the fiasco should be
attributed to the underlying structure of the firm, and
particularly to the lack of internal checks and
balances.”
 Private leveraged funds have become an important source of
protection to regulated institutions by being large sellers of
credit insurance in the rapidly growing market for credit default
swaps
 These changes in market participants have occurred in
conjunction with a dramatic acceleration in number and type of
derivative instruments.
 These developments have likely had the important impact of
allowing for a more efficient distribution and more effective
management of risk.
 All of these changes should move the market in the direction of
fostering the efficient allocation of credit and capital formation,
and thus enhancing the economy’s real growth potential.
 Stress testing and scenario analysis have become central to
the process of risk management
Federal Reserve Written Agreement
July, 2003
 “NOW, THEREFORE, Citigroup and the Reserve
Bank hereby agree as follows:…….within 60 days of
this Agreement, Citigroup shall submit to the
Reserve Bank an acceptable written legal and
reputational risk management program applicable to
Citigroup and its subsidiaries.
Fed Ties the Hands of Citigroup
No Major Acquisitions Allowed Until Its
Problems Are Fixed
THE WALL STREET JOURNAL
Page “C1”
March 18, 2005
The Federal Reserve barred Citigroup Inc. from major
acquisitions until the company fixes regulatory
problems that have gotten the financial-services
giant in trouble around the world, raising the stakes
for Chief Executive Charles Prince in his drive to
overhaul the bank's ethics.
"CLAWS AND FANGS"
Business Week
October 4, 2004
"The constraint on Citi's growth is not its market size,
nor its capital," says Bernstein's Mason. "It may well
be that Citi can't achieve its growth ambitions
because it cannot safeguard itself properly from
regulatory and reputation risk."
Moody's Investors Service upgrades the ratings of Citibank N.A. to
Aaa for long-term deposits and to A for financial strength
September 26, 2006
 The firm has made progress on strengthening culture and
improving controls, and has not suffered a major control
problem since having to close its Japanese private bank.
 However , management must continue to solidify cultural
change, notwithstanding shareholder pressure for earnings
growth
 Moody's assessed the effectiveness of risk controls,
measurement and information infrastructure as well as the
firm's risk governance and culture.
“Credit Matters Today”
March 5, 2007
 Strong earnings generation from an extraordinarily
diverse set of businesses allows Citigroup Inc. (Citi;
AA/Stable/A-1+) to cover some of the high risks that
it incurs.
 Citi has also achieved a substantial change in its
control environment in the aftermath of a wave of
heavy litigation expenses and criticism of its
business practices from regulators around the
world.
Citigroup Risk Management Priorities
Dave Bushnell - 2005
 The need to balance effectively between risk and
reward
 The real key to superior performance is to effectively
manage risk, not try to eliminate it
 “No” is an unacceptable answer when evaluating the
commitment of resources to a new project (deal).
“No, because…” and “Yes, if…” are much better
answers
 Changes in management’s appetite for and approach
to the management of risk in recent years have been
focused on operational risk, not market or credit risk
 As long as management is making the right specific
(local) risk related decisions, global risk is a
manageable task
Citigroup Risk Management Priorities
Dave Bushnell - 2005
 Risk has come to be seen increasingly as a
profession…at the same time the firm is trying to rotate
people from the businesses in an out of the risk
function
 Citi personnel have to date simply not been equipped
for what Citi is today, and for how different their
responsibilities are in terms of safeguarding the firm’s
reputation
Citigroup Risk Management Priorities
Jessica Palmer – January, 2006
 Suitability will be an ever-important issue going
forward
 Hedge Funds moving into Asia and we may not have
proper margin monitoring system in place. Get ready
for growth or don't participate
 Derivatives: new initiative by lawyers to say banks
were "aiding and abetting" helping client to hide
issues which may have been illegal. Client claims he
didn't understand the deal and the blame falls totally
on the bank that structured the transaction.
 ……or "you structured a deal that I really didn't
understand or realize I was breaking the law when
we transacted it, so it's your fault not mine."
Citigroup Risk Management Priorities
Bebe Duke – January, 2007

Suitability is the key risk issue

Market products are critical for revenue
growth
–
- commodities
–
- credit derivatives
–
- "bespoke" interest rate derivatives and
"exotics"

Need to raise awareness that the only way to
make money is to how to get to the yes.

Client First Initiative
Advanced Risk Issues
Sunday, 4 March – Participants’ Concerns
 Citi’s Capital and Capital
Models ROEC / RORC
 Risk Accounting and Models
 Regulatory – MIFID
 Basel II
 Risk Aversion
 Risk “Lite” / Relaxed Credit
Process
 CDS – Fiduciary and Ops Risk
 Hedge Funds
 Complacency
 Opportunity Cost
 Political Risk
 Global Portfolio
 Citi “Swings”
 Liquidity
 Globalization of Markets
 SME Risk
 Compliance
 Business vs Independent Risk
 Systems
– Balance
Advanced Risk Issues
Course Overview
Basic Credit Risk Analysis
– Industry Structure and Company Risk Analysis
– Balancing Business Risk and Financial Risk (Key
Success Factor Exercise)
– Identifying Winners and Losers.
– Early Warning Signs / Problem Recognition
– Avon Pharmaceutical Case
Advanced Risk Issues
Course Overview
Assessing management ability, business strategy, and
controls - and the issue of “who’s fault is it?”
– Management Competence and Business Strategy
(Corning Case)
– Business Controls (Citibank Dublin Case)
Advanced Risk Issues
Course Overview
Deal Structure and Risk
- Poland A2 Motorway Case
Converging Risk Issues – Credit Risk, Market Risk, Country
Risk, Derivatives Risk
How Does Citi “do risk”?
– Underwriting risk and conflict management
– Market risk / Convergence Risk
– Global portfolio management
– Operational risk
– Country risk
Advanced Risk Issues
Presentations to Illustrate “How Citi Manages
Risk”
 CIB Risk Management – Colin Church
 Global Portfolio Management – Bill Hartmann
 Market Risk / Convergence Risk – Dominic Wallace
 Operational Risk – Jaidev Iyer
 Country Risk - Doug Smee
 Banking in Turkey and EMEA – Steve Bideshi
 Problem Recognition / Early Warning Signs - Austin Erwin
 Derivatives Risk – Patrick Pancoast
 Conflict Management / Franchise Risk – Rashmini Yogaratnam
Advanced Risk Issues
Quotes of the Week
 Anything that could possibly happen has already happened to us
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– Jaidev Iyer
Active portfolio management, which has been discussed for years, in
now an industry-wide activity
– Bill Hartmann
Is it marked to market or marked to guess?
– Patrick Pancoast
Don’t mix high business risk with high financial risk
– Arnie Ziegel
History tells us that we are creating tomorrow’s problems today
– Bill Hartmann
If you every hear the word “miracle”, it’s time to sell
– Doug Smee
We are all able to put the client first more readily
– Rashmini Yogaratnam
Advanced Risk Issues
Quotes of the Week
 If you’re a sophisticated fixed income investor, you care about
what happens to your investment in the event of a default
– Bill Hartmann
 If the numbers you see are scaring you, then you should be
really scared about the numbers you don’t see
– Doug Smee
 It is not possible to do a rigorous statistical stress test. We
underestimate the probability of very large events
– Dominic Wallace
 There are three types of client objectives: Non-selective risk
reduction, opportunistic risk adjustment, image enhancement
– Patrick Pancoast
 It’s not just KYC, think about who you’re selling to…
– Rashmini Yogaratnam
Advanced Risk Issues
Quotes of the Week
 Many or most major business problems or losses are the result of a
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flawed business strategy
– Arnie Ziegel, Jaidev Iyer
How do you deal with transparency issues in a country like Russia?
– Steve Badeshi
How many lawsuits are there every year against Citigroup by
employees?
– Jaidev Iyer
The concept of “originate and distribute” is now beginning to be
reflected in our portfolio loss performance statistics
– Austin Erwin
We can still grow the business even if we face an economic downturn
– Steve Badeshi
Risk is holistic
– Colin Church
The secondary loan market is a market by appointment
– Bill Hartmann
Advanced Risk Issues
Quotes of the Week
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Companies go bankrupt because they 1) run out of cash, 2) fear that they’ll run
out of cash, or 3) their suppliers of liquidity fear that they’ll run out of cash
– Arnie Ziegel
Citigroup has the ability to take risk greater than any other financial institution
in the world
– Colin Church
Whose fault is it? You gave me the money / let me do it / told me to do the
trade
– Arnie Ziegel
The Unknown, Unknowns
– Dominic Wallace
This is not so much about the management of risk, but the management of a
business in a risk adjusted manner
– Jaidev Iyer
We’re held to a different standard
– Rashmini Yogaratnam
No longer should we love assets!
– Steve Bideshi
Advanced Risk Issues
Quotes of the Week

Bankers and Clients often rationalize away the signs of weakness
– Austin Erwin

The longer nothing happens here, the trap just keeps getting tighter and tighter
– Colin Church

Investors look at us like a giant warehouse
– Bill Hartmann

The known unknowns, unknown unknowns
– Dominic Wallace

We very rarely turn down deals outright, we try to figure out how to get them
done
– Rashmini Yogaratnam

By identifying early we both protect the balance sheet and create opportunities
– Austin Erwin

The market is willing to pay for diversification
– Bill Hartmann

We do too much too late, after doing too little too early
–
Doug Smee
Advanced Risk Issues
Quotes of the Week

Credit Risk Managers tend to be client experts, while market risk managers tend to be
product experts
–
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Anything that is unsustainable will end. The longer it takes to end, the bigger the crash will
be when it happens.
–
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Dominic Wallace
It’s not just about risk management anymore, it’s about capital management
–

Doug Smee
Chuck Prince doesn’t want Tom Maheras to lose more than $100 million on a bad day.
–
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Dominic Wallace
Do not try to rationalize away increasing danger signals – instead, try to find out why.
–
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Doug Smee
The people who should be saying no are saying yes, and the people who should be saying
yes are saying no
–
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Dominic Wallace
Bill Hartmann
We love you, we love you, we love you……….. we hate you
–
Bill Hartmann
Advanced Risk Issues
Themes from the week…..
 Credit Risk is becoming a Traded Product
 Effective Risk Management is a tool for business
growth
 The banking industry model is changing from
“originate and hold” to “originate and distribute the
asset or the risk”
 Most deals involve one or more elements of
Operational Risk, Franchise Risk, Market Risk and
Credit Risk – the boundaries are evaporating, risks are
converging
 Suitability and Appropriateness are increasingly
becoming major risk factors
Advanced Risk Issues
Themes from the week…..
 Growing complexity of the business is accelerating
and inevitable
 Reputation risk and Franchise risk are inherent in
almost every business activity of Citigroup
 Every aspect of our business has potential of
creating a loss due to an execution problem in the
system
 Good planning and risk identification can minimize
the over-reaction to a risk event and the potential
impairment of the value of a particular franchise
Advanced Risk Issues
Themes from the week…..
 Don’t add Financial Risk where there is high Business
Risk - industry and business risk drives a company’s
capital structure
 Choose clients carefully
 Many business problems arise from inadequate,
inappropriate, or ill managed strategies
 Citigroup is held to a higher standard, and not expected
to “aid or abet” improper or inappropriate loans,
investments, trades, etc.
Advanced Risk Issues -Themes from the
week…..
 Active portfolio management mitigates portfolio risk
 Citi has multiple constituents when considering risk
– issuers, investors, regulators, rating agencies
 Skepticism is an inherent part of risk assessment
 Why do smart bankers sometimes do things that, in
retrospect, just don’t make sense?
Advanced Risk Issues
Bankers and Risk Management
 Bankers Manage Client Relationships in order to provide
insight, early warning, and preferred positioning
 Bankers are Advocates – For Issuers and Investors
 Bankers must be Client Advisors rather than Responders
 Bankers must be Skeptics (Seeing Around Corners)
 Bankers are Responsible to Multiple Constituencies:
– shareholders
– clients
– regulators
– Investors
Why Were We Here?
● Excellent risk management creates shareholder
value and can be a major driver of high quality
revenue growth
● Excellent risk management for revenue growth
requires:
● “Seeing around corners” - finding risk where
we didn’t know or think it existed, and the
convergence of types of risks
● Skepticism to balance risk with the need to
generate revenue growth
● Identifying potential flaws of business
strategies – internal and clients
● A framework for choosing clients very carefully
● Understanding the increasing complexity of
products
Why Were We Here?
Excellent risk management for revenue growth
requires:
● Understanding the reputation and franchise
implications of business decisions
● Understanding that we will never see all risks,
so we
– Structure away from risk
– Choose clients carefully
– Pursue active portfolio management
– Create and maintain a superb control culture
and business culture
– Create and maintain systems for monitoring
risk
Why Were We Here?
 To review how Citigroup is managing risk, including
active portfolio management and reputation /
franchise risk
 Growth demands MORE risk and MORE reward, and
it’s up to you to get the balance right
 We can grow and still “stick to the fundamentals”,
often using new means of distributing risk
 To remind you that excellent bankers don’t hesitate
to say “I’m sorry, but I just don’t understand….”
 To recognize that we’re held to a higher standard,
not just because Citi is big, but because Citi is the
leader……………
Advanced Risk Issues 2007
Seeing Around Corners
Revenue Growth and Risk Management
in a
Complex Global Bank
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