How to Reform Wall Street Before It's Too Late: Ex-Citi Culture Czar

The former culture czar of Citigroup is sounding an alarm to reform the financial services industry, many of whose members consider it “a dangerous beast that must be contained or euthanized if we are to avoid repeated crises,” argues Christopher Varelas, now co-founder and managing partner of Riverwood Capital, in an interview with ThinkAdvisor.

Ironically, that fear stems largely from major changes in the industry over the last 30 years praised as wholly positive but that ultimately became “a manifestation of both good and bad forces, both beneficial and destructive,” Varelas contends.

In his candid book, “How Money Became Dangerous: The Inside Story of Our Turbulent Relationship With Modern Finance,” co-authored by Dan Stone (Ecco-HarperCollins — November 2019), Varelas, who held posts at Salomon Bros. and Bank of America before Citi, calls for changing the status quo from an obsessive focus on scale, scope and efficiency to “the human side.”

Speed and efficiency have replaced thoughtful analysis and decision-making, pressuring the industry to act quickly, he argues.

Varelas started out at Bank of America as a loan officer; later, The New York Times named him one of the 100 most important dealmakers.

His book explores long-term trends and developing bubbles, all of which material can likely help financial advisors make more informed decisions. On its pages also reside some juicy stories about famed Wall Street folks with whom he has crossed paths, including Sandy Weill (former Citi CEO), Michael Carr (now with Goldman Sachs) and David Wittig (formerly with Salomon and a convicted fraudster).

Varelas, 56, who in 2006 co-founded private equity firm Riverwood, investing in technology startups, spent two decades on Wall Street. He ran Salomon Bros./Citi’s global technology, media and telecom investment banking; was head of Citi’s National Investment Bank and held the job of culture czar (he explains that in the interview).

ThinkAdvisor recently spoke with Varelas, who was on the phone from his office in Menlo Park, California. He maintains that industry reforms must be made, such as firms’ instituting a products and services review process based on client suitability, along with the imperative to address ever-rising levels of debt, both consumer and government.

Here are highlights of our interview:

THINKADVISOR: You write that, because of changes to  financial services over the last 30 years, “Many of us now feel the industry is pitted against us. We are wary, if not afraid, of the … system …” you write. Some feel the industry is “a dangerous beast that must be … euthanized if we are to avoid repeated crises.” Is that your thinking personally?

CHRISTOPHER VARELAS: I don’t feel it’s that extreme. But the industry is so focused on scale, scope and efficiency that it loses the human side. Since the financial crisis, we’ve been in such a defensive posture that the industry isn’t really thinking prospectively about the future. It’s much more about minimizing loss, blame and exposure than trying to figure out the best way forward.

“We will not survive the status quo. It’s imperative that we act,” you write. Please explain.

While complexity continues to increase, connectivity and accountability have decreased. We have a system that increasingly makes promises and commitments for the future without understanding how we’re going to [keep them]. We just keep adding to our debt burden, and debt levels keep going up. Pension obligations keep going up. Yet we aren’t addressing how we’re going to meet all those obligations.

“Speed, efficiency and precision have supplanted thoughtful, careful analysis in all areas of finance, including [those] best served by analytic reflection,” you say. How so?

Speed and efficiency are good, but they also pressure you to act more quickly. We used to say, “Here’s the challenge. What should we do? Should we invest in this company, or should we acquire it?” Now we just ask, “What’s my time horizon? When will my decision no longer be impactful to what it means to the stock price?”

You write that use of the computer spreadsheet has resulted in “the erosion of analytic integrity and loss of character” — that with this tool, came “a Pandora’s box of new challenges.” What’s an example?

Before the introduction of the computer spreadsheet, you had to know your borrower — your customer. But on a computer spreadsheet, there’s no column for character. I’m not arguing to go back to the time before the computer spreadsheet. However, [this tool] has led to secondary and tertiary effects that [are troubling].