Tag Archives: banking

New Citigroup CEO Has Strong Ties to Chile’s Luksic Group

Goodbye to all that? With Andronico Luksic Craig looking on, Jane Fraser makes her exit from the May 2019 press event marking the repayment of the Banco de Chile’s subordinated debt.

Jane Fraser, who was named last week to succeed Michael Corbat as CEO of Citigroup, has longstanding business ties to one of Chile’s most powerful business conglomerates, the Luksic Group.

Antofagasta Plc, the company with plans to mine copper and nickel on the edge of the Boundary Waters, is among the conglomerate’s principal holdings — which is why I thought it would be instructive to start looking at the Fraser-Luksic connection as Citigroup prepares for its leadership transition.

It’s unclear just how much exposure Fraser has had to the mining side of the sprawling Luksic business empire. Citibank’s dealings with the Luksic Group over the years appear to be primarily through Quiñenco SA, the financial holding company through which the group controls its investments. It is clear, however, that Fraser enjoys a fairly close business relationship with Andronico Luksic Craig.

Fraser’s relationship with Andronico Luksic Craig and the Luksic Group developed as she came up through Citigroup’s Latin American leadership ranks. After a four-year stint from 2009-2013 as CEO of Citi Private Bank, which serves the bank’s wealthiest customers, the Luksic family possibly among them, Fraser was CEO of Citigroup Latin America from 2015-2018. During that period, she also served as Vice-Chairman of the Board of Banco de Chile, co-chair with Andronico Luksic Craig.

The role came with the job. In 2007, Citigroup and Luksic-controlled Quiñenco SA established a partnership that gave Citi a 32.9 percent stake in LQ Inversiones Financieras, the Quiñenco subsidiary that has held a controlling stake in Banco de Chile since 2002. (This was, not coincidentally, the year Andronico Luksic Abaroa handed the reins to his sons Andronico and Guillermo.) The Luksic Group grew rapidly after its move into banking, growing in value from $1.9 billion to $15.6 billion over a ten year period, according to a 2017 London Mining Network report, and “profits were increasingly linked to financial capital and speculation.” Citi took part in that spectacular growth, and in 2010 increased its stake in LQIF to 50 percent.

The partnership with Citigroup also helped the bank through the final stages of its recovery from the financial crises of 1982-3, culminating in the repayment of the bank’s subordinated debt in May of 2019. A “dark chapter” of the Pinochet period had come to a close, thirty years after Pinochet fell from power. The event must have had special significance for Luksic, whose family had decamped to London after the 1973 military coup and only returned to Chilean investment circles with the onset of the financial crisis and recession of the 1980s. Settling the debt of the Banco de Chile must have felt like an act of historical redemption.

In the press conference organized for the occasion, Fraser appeared in the Paseo Ahumada side by side with Luksic and Mario Marcel, the president of Chile’s central bank.

Fraser is now set to become one of Wall Street’s most powerful bankers. Asked to comment on her promotion, Luksic was effusive in his praise, calling Fraser a “pioneering woman” and a “tremendous leader” who will make “an enormous contribution not only to Citigroup, but to the entire financial industry.”

It is still too early to say what, if anything, her move north might mean for Luksic’s business fortunes or the Chilean mining company’s North American ambitions.

More On My Social Entrepreneurship Twitter for @SocialEdge

It was an offhand remark, made in reply to a twitter from the Skoll World Forum. What we now call “social entrepreneurship”, I wrote in reply to @socialedge, should eventually just be business as usual.

If it hadn’t been an offhand remark, I might have put it differently. But that’s how conversations usually get started, online and off — a casually dropped remark raises more questions than one bargained for; interlocutors offer their own rough approximations, and (with luck) the thing goes forward, not necessarily toward resolution, but broadening its scope, picking up other questions, and inviting more people to participate. And since I’m not at the Skoll World Forum, where I could have this conversation in person, or with many people, I thought I would try to put together a few thoughts about what my remark was supposed to mean, what it could, or must, mean.

First, a little context. My exchange with @socialedge grew out of his coverage of a big theme at this year’s Skoll World Forum, on the teaching of social entrepreneurship. “‘Social entrepreneurship,” he wrote, “should be an adjective that describes entire business schools, not a department within them.”

It would be hard to take issue with the point, even if you are bothered by the fact that social entrepreneurship is not an adjective, even if you hold no brief for social entrepreneurs.

The current economic crisis has generated its own crisis of faith in, and within, the business schools, and MBA programs in particular. Business Week recently held a debate on the question whether “Business schools are largely responsible for the U.S. financial crisis”; and though that was meant to be a provocative statement, it’s actually quite guarded and misses the point altogether, because it confines the scope of the crisis to finance, when we are obviously witnessing a social and political crisis that arises from, or emerges in the form of, a financial crisis.

That is a point too often overlooked, even now: this is a political and social crisis as well as a financial crisis.

That it took a crisis of this proportion for Business Week and other business media to question the jargon-ridden theoretical twaddle and pseudo-scientific bombast that in many quarters passes for business education is astounding. It’s tempting to agree with Henry Mintzberg, Professor of Management Studies at McGill, who says that MBA programs teach only arrogance, and recommends that we “close them all down, period!” By and large, though, most people writing and talking about this subject are just hoping for a better way to go about things. And obviously the teaching of social entrepreneurship can help to re-orient business education, take it to the field, broaden its scope, and make it about something other, something more, than mere financials. (So, for that matter, can teaching history, languages, and philosophy; but that’s a subject for another day.)

This gets us closer to the heart of the issue, because the trouble is that “mere financials” are never really mere financials, and they are best understood from perspectives that business schools currently don’t, by and large, provide. Social entrepreneurs have a fresh perspective on this issue; and integrating that perspective throughout the business curriculum would require students and faculty to revisit, and re-think, the relationship between financial instruments and the human ends they serve, or business and society, in very broad terms. Teach social entrepreneurship and you teach not just concepts but context and contextual thinking.

It’s always good, in any conversation as well as any educational endeavor, to go back to basics. How business creates wealth; by what means, and to what end; what counts as wealth – these are all questions that social entrepreneurs must confront, in one way or another; and they confront them not as theoretical constructs or “case studies,” but as practical problems on which the success of their enterprise depends and which require an immediate and real-world solution.

Of course, our current problems extend far beyond the four walls of the classroom, and in the real world these basic questions have acquired a new urgency. And that, I suppose, is what prompted my offhand remark in the first place. Anyone who thinks that we are going to recover from this crisis and then return business to business as usual is suicidal, a sociopath, or not very bright.

Some on the right in America are ranting about socialism, or making dire forecasts about the United States turning into old Europe; but even they don’t have the faith or strength to advocate a return to the way we were.

Things are not going to return to normal. We are now entering “the new normal,” as Ian Davis puts it in the most recent issue of McKinsey Quarterly; and though Davis confines himself to a few boardroom bromides – capital outflows to Asia, less leverage, more government intrusion – he manages to hint that the old model of how business gets done, what business is, what business does, has run its course. It’s spent. The old normal has exhausted its social capital.

It won’t be enough for businesses to jump on the “social” bandwagon and preach “social responsibility” (too often a byword for lax regulation); and it’s a bad idea to demand that businesses effect “social change.” The past six months of Ponzi schemes, bank failures and bankruptcies, market dives, bailouts and rising unemployment numbers have proven, once and for all, that doing business always effects social change, and that social change is not a good in and of itself.

We now have a unique opportunity – or an urgent imperative — to rewrite the social charter of business and finance. Of course that’s not going to happen through some great constitutional convention held by some international body like the World Economic Forum (or the Skoll World Forum) or even through the backroom dealings of Tim Geithner, Ben Bernanke, and a group of their closest friends. Good policy can help, but real change is going to come about through entrepreneurial adaptations to new norms, trial and error, through a process of discovery, risk and failure.

And maybe that’s where the social entrepreneurs come in. Social entrepreneurial activity is now generating new ideas of wealth and how to create it, new kinds of credit and transactions and new business models, the likes of which the Fortune 500, with their industrial legacy, could never come up with. Why not, then, imagine that social entrepreneurial activity will eventually generate alternative models, or at least some useful guidelines, for how to scale, up or down, how to do mergers and acquisitions, where to make investments and to what end, how to effect meaningful, and sustainable organizational change, even how to have conversations about strategy or set governance?

And why not? Social entrepreneurs already remind us of what we should have known all along: that every enterprise has social consequences, intended and unintended, every business must raise social capital as well as investment capital, and every entrepreneur is a social agent, even if he’s got an MBA.

A Second Question for Brad DeLong

Yesterday The Economist opened an online debate on Keynesian principles by asking two economists, Brad DeLong and Luigi Zingales, to take up the proposition, We are all Keynesians now.

The debate allowed comments from readers, and many of the comments pointed out that the nous-sommes-tous proposition itself was badly phrased. But there was wisdom in the house’s folly, and it turned out that putting things in this broad way actually helped get the debate off to a promising start: both DeLong and Zingales had to spend some time in the first round trying to figure out what the proposition meant, or could mean.

DeLong was charged with holding up the “pro” side of the question. His intellectual honesty wouldn’t allow him to defend the proposition outright; so instead he took the tack that he wished it were true that we were all Keynesians, or that we all should be.

The crux of his argument, at least as I read it, involved a refutation of Say’s Law. Those who have misgivings about government spending, or who argue that spending (from the government or any other quarter) cannot spur economic growth, create jobs or raise production are appealing, whether they know it or not, to Say’s Law. That law holds — wrongly, says DeLong — that demand is created by supply, not vice-versa. If government spends (to create demand), increased supply (which brings job and production figures up) will not necessarily follow; indeed, say the proponents of Say’s Law, the private sector or consumers may cut back on spending. Supply will stagnate.

For DeLong, Say’s Law is patently false. “In general,” writes DeLong, “spending works to spur the economy, and the government’s money when spent is as good as anybody else’s.” To back up this assertion, he adduces two examples: the first, oddly, is the creation of the housing bubble from 2003-2006, made possible by capital inflows from Asia and easy money from the Fed; the second is the creation of the dot-com bubble from 1996-2000, “when the assembled investors of America discovered the internet and in response businesses spent money like water on computers and telephones.”

While there’s no doubt that IT spend was a driver of growth at the end of the last century, I would question whether bubbles are really the best example of growth, or whether either the housing or dot-com bubble disproves Say’s Law once and for all, as DeLong seems to suggest.

There is, after all, a difference between actually creating demand and simulating demand — isn’t there? And more importantly there is a difference between sustainable growth and growth that turns out to be illusory — a mere bubble. Isn’t there?

Zingales brought the whole issue more clearly into focus when he argued that Keynesian economic policy cannot be the solution to the current crisis; to assume that you can fix the current crisis by simulating (or, DeLong would say, creating) demand is to misunderstand our trouble: “The current crisis is not a demand crisis,” wrote Zingale, “it is a trust crisis.”

In a comment, I asked DeLong to take up the point, and to say a few words about how the current wave of government spending might help to restore trust and confidence.
He posted his reply

We have a banking trust crisis. Fixing that requires fixing the banking system. Keynesian deficit spending policies don’t help fix that crisis.

But the banking trust crisis–which has been rolling forward for eighteen months now–has in the past six months generated another crisis: a collapse of spending and collapse of employment crisis.

Keynesian deficit-spending policies can help keep this second crisis from growing much worse. Indeed, they are about the only thing that can.

First, a clarification, or an admission that I might have misread the remark that prompted my question in the first place. I am not an economist, so I take words like “trust” in the way most ordinary people do, according to the meanings they have in everyday conversation. So I didn’t understand, from the outset, that Zingales was confining himself to “banking trust,” the trust that allows credit to flow; I assumed that the breakdown of the banking system had eroded trust in a more fundamental and pervasive way. Indeed, that’s been my understanding since this whole mess started, and it seems I brought those broader concerns about trust to my reading of Zingales.

But let’s confine ourselves for the moment to the banking trust crisis. DeLong admits that Keynesian deficit-spending policies won’t — or “don’t” — fix “the banking trust crisis”; so the answer to my question seems to be: the current wave of government spending will do nothing to restore trust and confidence. But Keynesian policies will help prop up spending and employment, DeLong adds, which are collapsing due to, or in the wake of, the banking trust crisis.

This may seem a bit like trying to make repairs to a house built on quicksand, which is why, I suppose, DeLong prefaces his remark about Keynesian policies by noting that we have to fix “the banking system” in order to restore banking trust. Apparently the Keynesians are going to leave us on our own to perform that Herculean feat, while they take care of the spending.

My fear is that the Keynesians will go for the quick fix, because that is what Keynesians and policy-makers of every stripe do. But still, I wonder whether DeLong wishes to leave open the possibility that addressing the spending and employment collapse will help restore “trust” in some broader sense? And if so, how might that play out in real world terms? Would he at least admit that you can’t create demand without restoring trust? How, for that matter, can we talk about demand without talking about trust? Isn’t trust an essential component of demand? If not, then what, exactly, is demand?

For non-economists at least, demand and trust are not mere ideas, abstractions or models. Perhaps some deeper and broader appreciation of the workings of trust in our lives — in our jobs, in our everyday associations — would strengthen the Keynesian position DeLong espouses; or reveal the insufficiency of Keynesianism that DeLong seems on the verge of admitting.

Then again, maybe this is really just all about my misreading of the word “trust.” As I say, I read it broadly; and I consider it essential to the workings of the free market and a free society. So my concern is not just with the flow of capital but with a loss of social capital.

We can’t confine “trust” to the banking system, or build a firewall between the “trust” that makes the banking system work, on the one hand, and the broader social trust on which we rely in our economic life (what Yeats called “getting and spending”) on the other. Doing so may only blind us to the true nature of our current problems — which, I’d argue, aren’t just worries over our economic problems, but which are more deeply rooted in a widespread anxiety and uncertainty about what American life promises and offers.

As Dale Launer, another Economist reader, put it, we’re “spooked.”