As the banker who led debt talks on everything from the Latin crisis of the 1980s to the Asian crisis of the 1990s, Citigroup’s William Rhodes has plenty of tales to tell. Take his visit to Managua, Nicaragua, in 1980, when he attended the Sandinista regime’s first-anniversary fiesta while negotiating the country’s debt. Another guest, Fidel Castro, requested a meeting and, over cigars, told Rhodes he regretted reneging on rather than rescheduling Cuba’s debts. He also bet the banker a box of his best Cohibas that Rhodes wouldn’t be able to persuade Daniel Ortega to reschedule.
Rhodes did eventually wring a deal out of the Sandinista leader. In a 1986 Institutional Investor profile, “The Field Marshal of the Debt Crisis,” Rhodes mentioned his bet with Castro and his disappointment that Fidel never paid up. A few weeks later the Cuban ambassador to the United Nations showed up at the banker’s door — with a box of cigars.
Rhodes, who stepped down as senior vice chairman of the bank last year, relates more tales from his 57-year Citi career in a new book, ‘Banker to the World: Leadership Lessons from the Front Lines of Global Finance.’ Here he discusses his debt-filled life with II International Editor Tom Buerkle.
II: What about your background prepared you best for your career?
Rhodes: Getting around Latin America working as a merchant seaman [after] my freshman and sophomore years at Brown was a real help to me because it did a couple of things. First of all, the language. I was able to work on my Spanish, and first became acquainted with Portuguese because there were all sorts of strikes in Brazilian ports. Also, working with the people on that ship. You’ve got a college student working with these hard-core seamen — Danes, Norwegians, Swedes. And that’s what got me the job when I interviewed at Citi. The personnel people I guess didn’t like some of these stories, but I talked with George Moore, who was then running the international division and later became our chairman and CEO, and George said, “Look, Rhodes, if you had enough guts and push and gumption to get out there and work as a merchant seaman to get to know Latin America, that means two things. One, you really want to work internationally and particularly in Latin America. The second thing is you’re a worker.” And he said, “In this institution, we’ve got a lot of talkers but what we need is a lot of workers, so you’re hired, and I don’t give a damn what they said in personnel.”
II: Which crisis of the many you worked on was the most difficult, and why?
Rhodes: All of them were difficult. The one that really was the most important was in 1982. At IMF-World Bank meetings in Toronto, the world looked like it was tipping over. Paul Volcker had to take real tough measures to slay the dragon of inflation, interest rates were over 20 percent, and add to this the blow-up with the whole recycling of petrodollars. Paul stood right in there on the leadership side, not only with central banks but with governments, and Jacques de Larosière happened to be the right man in the right place at the International Monetary Fund. I was fortunate enough to be right in the center of this on the banking side on that initial crisis in Mexico, which is followed immediately by Argentina, Brazil — virtually everybody in Latin America. And then it spilled over to the Philippines, and there were already problems in Eastern Europe and Africa. It was the first systemic crisis of the modern era. The Baker Plan bought some time but it didn’t resolve the problem. Then Nick Brady came in and he said, “Look, we’ve got to securitize this stuff because it’s being done anyway.” And that basically gave these countries a way out.
II: What lessons from the Latin debt crisis should the U.S. and European countries draw?
Rhodes: First of all, there’s no cookie-cutter approach. Every country is different. So you’ve got to adapt. That’s one of the things that they still have to understand at the EU. And the Fund has to understand that, too. Second, the one common denominator in all of these crises is contagion. I think contagion moves more rapidly today than it did in the Latin American or the Asian financial crisis. I mean, the markets move in nanoseconds. Paul Volcker said to me early on, “Bill, in these types of crisis, the clock is always running against you, and the longer you take to face up to the problem, the worse the losses and difficulties are going to be.”
Another lesson that Greece is learning now is that reform measures that are implemented by a government have got to be perceived by the people as national, and that there’s some road to economic growth at the end of all these tough austerity measures. Kemal Derviş did this in 2001 with his Turkish program. When we did the Brady deal together, Fernando Henrique Cardoso was able to sell the program as being the way out for Brazil. And as soon as we signed the deal, he announced the Real Plan that killed inflation and stabilized the economy. It’s tough to implement these programs, very tough.
II: Do you think Washington is playing with fire with the deficit and the debt?
Rhodes: There’s no doubt that this is what’s going on. We’ve had the reserve currency of the world, so we always believe that we don’t have a timing problem, but at the end of the day, the world is changing, and we do. I think the S&P warning was a shot across the bow. The good thing is that we’ve now got everyone talking about it. Who would have thought six, seven months ago you’d have Republicans, Democrats and the administration all saying we have to do something? I think that we’re turning a corner now because everyone realizes we’ve got to do something.
The other thing which is key here in the U.S. is you’ve got to get the private sector involved up front because the private sector in most cases is a big holder of debt. And the private sector is going to press because the private sector puts up the money for these members of Congress and the Presidency, and I think they’re very concerned about this issue and they’re going to press on it.
II: Do you think we’re witnessing a permanent shift in power now away from the U.S. and the developed West towards the emerging markets?
Rhodes: What you’re seeing is first of all the rise of China, something the likes of which we haven’t seen before. China’s deep into inflation now, it’s not problem free, but there’s no doubt the rise of China has made a difference in the world. We’re also seeing the rise of India, Brazil, etc. I think the emerging markets are going to play a much bigger role than we’ve seen since the 18th Century. Remember, if you go back to the early parts of the 18th Century, the Port of Canton and various ports in India were some of the major drivers of international trade. And you’re starting to see this again.
The one thing I’d say about the U.S., I think the world tends to underestimate the resilience of the U.S. and the U.S. economy. Remember what everyone thought after the Vietnam days, Watergate, etc? They thought our period was through. I say we have a tremendous resilience in this country, and I think we’re starting to see it with this discussion of the debt. And it’s going to involve everyone — public sector, private sector — because people are becoming aware.
II: Who would you regard as your toughest adversary in all of your years of negotiation?
Rhodes: I always tried to look on whomever I was sitting across the table from not so much as an adversary but as someone that needed a solution just like I did. At the end of the day, what we were trying to do in the debt restructuring was get the country back to the markets on a viable basis. To gain people’s trust, you’ve got to be straightforward and honest with them. You’ve got to be willing to listen. You’ve got to let everyone feel that they’ve got a shot, and you’re not trying to force something down somebody’s throat.
II: You spent more than half a century at one single institution. How did you last so long at Citi?
Rhodes: I guess I found the international side so fascinating. And I was very lucky to have a number of very good mentors, including Walter Wriston and George Moore. Then you build up a loyalty. We had something equivalent to the foreign legion, which was our international corps. I never thought when I entered the door I was going to spend my whole career there. I was really just looking for a job. I was pretty outspoken my whole career. There were a number of occasions when I was about ready to toss it in because that’s just part of my character and personality. That’s one of the things that actually helped me with my fellow bankers and with the countries I dealt with because they knew at times that I did have these disagreements with my own institution, and I was forced to take my colleagues on from time to time. I had to remind them that at the end of the day, if these countries got out of the woods, even though it meant taking some sort of haircut for our own institution, in the long run that was in our own interest. I guess they decided to tolerate me because I was able to produce for them.
II: What kind of lessons should the banks draw from the recent financial crisis, and do you think they have drawn the right lessons?
Rhodes: I felt this crisis, the great recession, was coming. Most bankers worldwide didn’t see it that way. And I think the lesson that should be taken by everyone is there’s nothing more important than good risk management at any individual institution. Because the basic responsibility lies with the institution — not with the regulators, not with the rating agencies. The individual institution has to make sure that they have a proper risk management operation, and that the head of risk management has access to the board and reports directly to the CEO.
II: Most institutions have made that kind of change. Has the culture in the industry really changed?
Rhodes: Only time will tell. When the board and John Reed asked me to take over the risk job in 1991 at Citi, we had this problem of low-doc, no-doc on mortgage loans, and the same stuff came back again with the subprime crisis. I would certainly hope that institutions have learned this time that again and again we see this thing. Rather than blaming regulators and rating agencies, which is easy to do, one has to look at the individual institution and say what did we do wrong, how can we correct it, and how can we manage to maintain this over time?
II: Will Citi ever get back to the top of the heap?
Rhodes: I certainly believe so. I think that we have a unique franchise in the emerging markets. I don’t think anyone can equal it. And I think today we’re seeing this shift that you mentioned. We’re going to see the rise of these emerging economies. The world is moving east in many ways.
