05/04/2010 05:12 am ET | Updated May 25, 2011

Is Vikram Pandit in Favor of Real Reform?

Testifying today before the TARP Congressional Oversight Panel, Citigroup CEO Vikram Pandit took pains to strike the right notes. Near the beginning of his prepared testimony, he said, "First, however, I want to thank our Government for providing Citi with TARP funds. For Citi, as for many other institutions, this investment built a bridge over the crisis to a sound footing on the other side, and it came from the American people." Saying "thank you" may not satisfy many people, but it is a step in the right direction.

More importantly, Pandit said that Citigroup is on the side of the angels -- in this case, the side of real financial reform:

Citi supports prudent and effective reform of the financial regulatory system. America - and our trading partners - need smart, common-sense government regulation to reduce the risk of more bank failures, mortgage foreclosures, lost GDP and taxpayer bailouts. Citi embraces effective, efficient and fair regulation as an essential element in continued economic stability.

When it comes to the substance, though, I'm not sure how much Pandit had to say that was new, although he took care to say it in the nicest way possible.

Here's his first major point on regulatory reform:

With regard to financial institution reform, we at Citi believe that banks should operate as banks, focused completely on serving their clients. Our internal reforms have been totally consistent with these principles, and we have publicly endorsed the general direction of financial regulatory reform under consideration by Congress. A systemic regulator with an overall view of the financial system and the ability to impose enhanced capital requirements and other prudential regulation is critical. I also strongly support the creation of an effective resolution authority that can resolve large, complex institutions in an orderly way.

(Emphasis added.) Apart from the clause I underlined, the rest would not have been surprising coming out of the mouth of either Jamie Dimon or Lloyd Blankfein. The big banks have been mouthing the words "systemic regulator," "prudential regulation," and "effective resolution authority" for months now. They have nothing to fear from them.

Now, the "banks should operate as banks" line seems a tiny bit promising. That sounds like a reference to the "Volcker Rule," saying that banks should get out of proprietary trading, hedge funds, and private equity. One could be cynical and say that Citi had little to lose, since they weren't very good at any of those things anyway.

But it's probably more appropriate to be cynical in a different kind of way, like Felix Salmon, who pointed out that Citi is getting rid of one private equity unit while keeping a different buyout operation and a VC firm. As Salmon said, "Essentially, all this boils down to 'if you happen to be in Vikram's good books this week, he'll want to keep you, otherwise he'll decide to sell you'. That's not a strategy, it's a monarchy." Seen in that light, Vikram's claim that "Our internal reforms have been totally consistent with these principles" seems a bit much.

This is Pandit's second point:

Regarding market reform, we support regulations that promote transparency, particularly in the derivatives markets, with the use of standardization and clearinghouses. It is also important that regulation is coordinated globally and applied uniformly to all participants in the financial sector. We need a level playing field on which market participants can compete, subject to uniform standards that protect investors and the marketplace as a whole.

Blah blah blah blah blah. There's nothing here.

Here's the third point:

With regard to consumer market reform, a key lesson of the financial crisis is that what starts as an issue that affects consumers can become an issue for the entire financial system. Recent experience reinforces the truism that what is best for consumers is also best for the financial system and the economy. I strongly believe that consumer protection can and should be strengthened at the federal regulatory level. While a number of architectural frameworks could work to strengthen consumer protection, I believe any consumer authority should be centered on five principles: (1) There should be enhanced authority in place with a focused responsibility for the well-being of consumers; (2) there should be uniform national standards that apply to all market participants who provide financial products to consumers and a level playing field, irrespective of the entity; (3) there should be transparency in disclosure so that product disclosures are simple, readable, and understandable; (4) there should be a link to the safety and soundness regulator; and (5) issues of market structure and collective action should be examined by the consumer regulator.

(Numbers (1)-(5) added.) (1) is pure boilerplate. (2) is code for "nonbank lenders need to be regulated so they don't have a competitive advantage over us regulated banks." I agree, but Pandit is saying this because it's in his self-interest. (3) is boilerplate. (4) is disturbing. This sounds like code for "don't let Elizabeth Warren do anything to my bank without having to get the approval of Ben Bernanke and John Dugan." (5) ... I don't know what (5) means. Is he saying that the consumer protection agency should have antitrust powers? That would be good. Or by saying "market structure and collective action" is he saying that the consumer protection agency should not have the power to take action against individual banks? That would be very, very bad. Unfortunately, I suspect he's saying the latter, since the goal of the banks is to (at most) let the CFPA write rules that are then enforced (or not enforced) by their good old buddies, the prudential regulators.

So to sum up, the answer to the question in the title is: no. At least, there's not much here to make us believe that Pandit wants real reform. Of course, the real test would be to find out what he's paying his lobbyists to say behind closed doors. Now that would be interesting.

And this would be consistent with his introduction:

"The errors, mistakes and business practices that precipitated these macroeconomic events have been much discussed: housing policies that led to increased subprime lending in the residential real estate market; an explosion in new subprime mortgage products premised on the assumption of stable and, indeed, ever-increasing residential real estate prices based on decades of precedent; the Federal Reserve's policy of maintaining historically low interest rates in the post-9/11 period; the growth in demand for securitized and structured credit products by investors of all types in all sectors with widely varying risk appetites and abilities to absorb risk; the lack of transparency in certain financial markets, including derivatives markets; and a regulatory system that did not keep pace with the ever-increasing sophistication, complexity and interrelatedness of the financial markets, to name just a few."

So, in Pandit's view, the crisis and recession were caused by: government housing policies; "subprime mortgage products" that fell out of the sky; the Federal Reserve; investors; "lack of transparency"; and the regulatory system. Do you see large banks anywhere on that list? I didn't think so. At the end of the day, it boils down to this: it wasn't my fault.

I started this post hoping to find something nice to say about Vikram Pandit. I couldn't find anything.