SPIEGEL: Mr. Weill, the US Secretary of the Treasury, Henry Paulson, told German politicians he feels scared when he looks at the hedge fund industry. The G7 finance ministers discussed controls for the first time this weekend. Do you share his concerns?
The New York Stock Exchange trades 1.5 billion shares a day.
SPIEGEL: What would effective regulations look like?
Weill: A regulator with an idea of what's happening in the whole market and not just in a part of the market. These regulators would know the counterparties, they would know what kinds of concentrations exist, so that they have an opportunity before a problem would surface to do something about it rather than reacting after the fact.
SPIEGEL: What exactly are the risks posed by the hedge fund industry?
Weill: There is a lot of leverage in the business which means they don't just use the money they have but borrow money, so they use multiples of their own capital. The risk is what the size of the positions are and what happens in those positions if all of a sudden something outside impacts on the market to change it or if the liquidity begins to dry out. That changes the ability to get in and out of markets.
SPIEGEL: Politicians can only guess about the true sums of money that are in the hands of fund managers. Do you have any idea how much money hedge funds have at their disposal?
Weill: No, that is where the problem is. How much are they investing into what? How much do they borrow? It's a problem not to know these things.
SPIEGEL: Speculators themselves say that everything has gone well so far. What is your response?
Weill: Do you remember Amaranth? This hedge fund had an enormous bet on the difference between what energy would be worth -- the premium of what people would pay for energy in the wintertime versus what they pay for it at other times of the year. And the bet went against them. They lost $6 billion in a very short period of time and had to be liquidated.
SPIEGEL: That was an isolated case. Are there systemic risks in the hedge fund industry? Do you think there is a danger of a contamination of the entire financial market?
Weill: On every street in New York there's systemic risk. Somebody can drive too fast and go through a red light. What you want to do is hope you have the systems in place that people don't go through red lights.
SPIEGEL: Do you fear a snowball effect? Couldn't the problems of some big hedge funds upset the entire economy?
Weill: The one time I was worried about a snowball effect was 1998 when LTCM crashed...
SPIEGEL: ... Long-Term Capital Management, a hedge fund whose collapse almost provoked a global financial crisis...
SPIEGEL: What was so dangerous at this time?
Weill: It was a scary period, which was exacerbated by Russia defaulting on the ruble. And it was a year after the problems surfaced with the Asian crisis. Nobody wanted to find out whether they should be worried or not. So we all cooperated. The banks put in $3.6 billion of their own money. This way, in a process, which lasted three years, LTCM could be liquidated on an orderly basis. And we ended up making a small single digit return, and the risk went away.
SPIEGEL: And what lessons did you learn from that experience?
Weill: Nobody had a feeling of what the whole hedge fund industry looked like. People thought they were safe by having a lot of diverse investments in hedge funds so that, if one thing went bad, something else would be there to pay that off. I told our people I didn’t want to do business with any hedge funds that we had relationships with unless we had the ability to have the transparency to see what the whole thing was. I mean, it’s simple: If you’re going to lend money to a company, you want to know what that company is about.
SPIEGEL: Germany’s chancellor Angela Merkel is currently head of the European Union and the G8. She is pushing for better investor protection and more transparency. What needs to be done?
Weill: Hedge funds have to open their books to regulators. At Citigroup we had 60 or 70 people from the US Treasury basically running an office in our building going through our records every day of the year. I found what they did very, very helpful. Sometimes I would even ask them to scare me so I could scare some of the people that worked for us.
SPIEGEL: Should the same apply to hedge funds today?
Weill: Yes. But you wouldn’t be helped a lot if one regulator is seeing hedge funds and another regulator is seeing investment banks and a third one is seeing banks, and there’s no place where it all comes together. They all do business with each other. What we need is one regulator who oversees all the positions and hopefully can understand in advance what’s going on, where there’s too much concentration in some markets and what the implications could be. It’s much better to head off a problem before it happens than fix it after it happens.
Weill: The smart ones do, they are not against disclosure.
SPIEGEL: There’s a very simple explanation for the industry’s fight against more transparency: greed.
Weill: But that’s not limited to this business. If one looks at the nature of a person two of the things that affect people are fear and greed. They are different sides of the same coin.
SPIEGEL: Was greed the main motivation throughout your own career?
Weill: No, certainly not. If you are referring to greed in terms of money, money should be secondary, that’s what I thought from the beginning, when I founded my first company in 1960. I wanted to build a great business, a great firm that leads the industry, employs a lot of people and commands respect. I always felt that if a person worked on building something and was successful in it, the money would come.
SPIEGEL: In your case that accrued you a fortune worth $1.5 billion.
Weill: I always made sure myself and the top people in the company were encouraged to think long term, not what’s going to happen in this quarter. At Citigroup and its predecessor companies we had to keep our stock and could not sell it. We were all forced to hold a piece of paper instead of owning a Ferrari. And fortunately we did very well; during my tenure as chairman and CEO, our stock grew about 2,600 percent.
SPIEGEL: You made $35 a week when you started as a runner on Wall Street. How has the industry changed over the years? Is there more gambling today than in the early days of your career?
Weill: Sure there is. The markets are much bigger and there is much more liquidity and much more money. When I started in 1955, the average trading day on the New York Stock Exchange was 1.4 million shares a day. Today it’s more than 1.5 billion shares a day. Obviously much more happened. We’ve also gone global. Countries all over the world have embraced our model of stock exchanges and capital markets and raising money, encouraging or teaching people how to borrow money, to use credit cards and so on. We’ve moved so that in 2006 two of the fastest growing countries in the world were communist 15 years ago. There was no part of thinking about the capital markets and going public.
SPIEGEL: The rise of China involves a lot of risks too. Exports from the Far East have pushed the US trade deficit to record levels. Aren’t you worried about the global imbalances?
Weill: Longer term I think our trade deficit is something to consider. In the meantime, the US is a good place for people to invest. The returns on investment are higher than in a lot of other countries in the world. All the money that’s going out around the world is really being recycled here.
SPIEGEL: Nevertheless, China has become the biggest creditor to the US and has accumulated $600 billion. Doesn't that bother you?
Weill: You have to see the entire picture. China’s surplus with the United States is a very big number, but its surplus with the rest of the world is not a very big number. China has really helped turn around Japan after their languishing for 12 or 13 years. Beijing is buying commodities and other products from many countries. I think what we are doing is helping a lot.
SPIEGEL: Do you think the United States can live with this huge trade deficit over the next decade?
Weill: I don’t know how long. I think we can live with it for quite a while.
SPIEGEL: What are you going to do if the dollar gets even weaker?
Weill: When the euro started in 1999 it was at 1.17 to the dollar. Today the euro is 1.29 to the dollar. So your currency went up roughly 1 percent a year in value. That's not a major thing, right? Our country is the biggest economy in the world. Just go back a year, the US was growing faster than any of the other developed countries.
SPIEGEL: You’ll probably talk differently the morning after the dollar has gone into tailspin due to those global imbalances.
Weill: You know, Warren Buffet made a big bet publicly on the dollar crisis. Bill Clinton’s Secretary of the Treasury, Robert Rubin, talks about it often.
SPIEGEL: You think they are all wrong?
Weill: They’ve been wrong so far. I’m not smart enough to know when there’s going to be a dollar crisis, whether it’s in five years from now or in 10. But when you’re perfectly positioned for it happening now, you’re going to be broke before it ever happens.
SPIEGEL: Your income at Citigroup was $30 million a year plus stock options. Were you worth it?
Weill: Well, let me say the shareholders of Citigroup enjoyed during my tenure the best returns of any company in the financial business. Our shares performed better than General Electric’s or even Warren Buffet’s Berkshire Hathaway. Our shareholders were happy.
SPIEGEL: At the other end of the income scale a nurse, for example, makes maybe a few hundred dollars a week. That’s why even in the most capitalistic society of the world, there’s now a debate about inequalities and injustice.
Weill: You can get me to agree with you on one position: There is too big a difference between the low end and the high end of the spectrum. You are not improving the life of the low end of the spectrum if you just smash down the other end. What you want to do is improve the bottom, which brings us to education. If we do that right, then there will be much more opportunity for many people. In the companies that I worked for, even in my early days, even people in the back office became millionaires, their kids went to college, because they all owned the stock and they all believed we were building something together. However, on the other end of the spectrum is Enron and everybody went broke. That’s a bad kind of story.
SPIEGEL: From rags to riches: Do you think people have the same opportunities nowadays as you had when you started out from humble beginnings in Brooklyn?
Weill: When I started I thought: We don’t have the same kind of chance in the 50’s and 60’s that people did at the turn of the century when J.P. Morgan and Andrew Carnegie made their money. There weren’t even income taxes. And here, you know, I’m a struggling kid. At one point in time the taxes in the US on earned income I think got up to 91 percent, the taxes on capital transactions were 49 percent. And I said it could never happen. And look what happened.
SPIEGEL: And today?
Weill: Globalization gives this a chance to happen again. What we are talking about is the need for efficiency, to be the low-cost producer of quality products, to have goods and services be manufactured or created and sold all over the world so we become one big global family so that people can think, whether they are living in Pakistan or in Turkey or the United States or Germany, that they are going to have an opportunity in this lifetime to create something for themselves in this kind of environment.
© SPIEGEL ONLINE 2007
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