(FORTUNE Magazine) - To be a chief financial officer in this era of global markets, rising interest rates, and superpowerful investors is tough for sure. To be CFO of the world's largest financial institution, which is heavily exposed to all those forces - that's tough by a factor of ten.

The holder of that big job is Citigroup's Sallie Krawcheck, whose ascent is already legendary on Wall Street though she's just 41. Her career, while brief, has prepared her well for the challenges facing today's CFOs at a wide range of companies.

Citigroup's CFO, Sallie Krawcheck

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Krawcheck started out on the other side of the Wall Street relationship, grilling CFOs as a research analyst evaluating the shares of financial institutions. Consistently top ranked, she rose to become CEO of the Sanford C. Bernstein research boutique.

Because Bernstein is purely a research firm - no underwriting or investment banking - it came through the scandals of the bull market with its reputation pristine, and Krawcheck became known as Wall Street's Mrs. Clean. She even landed on the cover of FORTUNE under the headline "In Search of the Last Honest Analyst."

When formerCitigroup (Research) chief Sandy Weill wanted to clean up his tarnished Salomon Smith Barney (home of infamous telecom analyst Jack Grubman), he hired Krawcheck to be its CEO. She ran that business for two years before becoming Citigroup's CFO in November 2004.

The job includes representing Citigroup publicly - and talking tirelessly to research analysts. Krawcheck recently sat down with FORTUNE senior editor at large Geoffrey Colvin before an invited audience at the Time Warner Center in Manhattan.

They discussed, among other things, the honesty of today's Wall Street research, why Citi's stock has gone nowhere the past two years, what she's learned about leadership in her rapid rise, and the value of a really tough seventh grade.

Back when you were an analyst, you had a joke that went, How do you know when management is lying? Answer: Their lips are moving. Is the joke still funny?

Sort of funny. It's a good reminder, which I give my children, to be careful what you say because it will follow you. But it was given as advice to analysts, and I would still give it. Each of us in management is at a company because we believe in the company. So I said, Don't listen to management...do your broad research and take that point of view.

You spent most of your career in research. How good is Wall Street research today?

I think there's way too much that's reporting what happened. And it's not saying what's going to happen. Research has come a good way, but there's more to do.

Is today's research honest?

I think it is. It doesn't hurt that we've had the Wall Street scandals. I think the issue for research is not honesty and independence; I think the issue is being forward-looking.

It's required under Sarbanes-Oxley and the global research settlement that the compensation of analysts be unconnected to investment banking. But the analysts know what the interests of the firm are. Even without anything being said, might they not perceive that there's still an incentive to do the research that caused all the trouble?

Well, it's true. I saw a survey years ago - but it hasn't changed - saying the most important factor when a corporation is choosing an investment bank is the research analyst and the research. And as a CFO, I can understand that. But you can look at the greater percentage of sell recommendations on the Street right now - you can look at these objective measures and say yes, the research analysts are more independent. It's in their interests and the economic interests of Wall Street for the research to be independent.

In the scandals of the past few years a lot of CFOs have turned out to be not too good. Are the incentives different today from what they used to be?

It's very easy to see how a CFO can be tempted. I've seen it. It is much easier to deliver good news to the Street rather than bad news. As a CFO one has to have the strength of character, the thickness of skin, to be able to deliver bad news as easy as good news.

We've taken a lot of steps to remove as much of the temptation as we can. A lot of decisions have to be made by the CFO and the CEO. Things like our loss reserves, our incentive compensation accruals, our legal accruals [have been] pulled back from the end of the fourth quarter. So even if I think, "Boy, I'm fine missing consensus," we've pulled those decisions back before we know what those numbers are going to be, so we make the right decision for the company.

I think a lot of it has to be done at the top. I have to let my CEO know every step of the way when I talk to him that it's okay to deliver bad news. We want bad news. Numbers don't lie. See what the numbers tell you, and you have to be just as comfortable delivering bad news as good.

Which is why I'm glad I was an analyst. I always knew that if my stock tips were going to work...I should be uncomfortable. It was probably not the right place to be if everybody said, "Way to go, good recommendation." As an analyst, I was very comfortable being uncomfortable, and as a CFO I have to be comfortable being uncomfortable. I have to be fine with delivering bad news.

When you say "comfortable being uncomfortable" as an analyst, do you mean making calls that weren't in the mainstream?

That's correct. One had to make contrarian calls. There were calls I made that had people saying, "You're nuts, you're nuts." [CNBC's] Jim Cramer on TV said I was not that smart. You just have to say, Okay, that's fine.

Back in the '90s?

Back in the '90s. At a point in time I didn't respect his opinion.

What do you think of his current show?

I don't watch a lot of TV.

With the Enron trial underway, I'm wondering about your view as a CFO. If a CFO were doing something egregiously illegal, would it be reasonable to think that the CEO wouldn't know?

I think that would be a CEO who's not asking the right questions. Is it theoretically possible? Absolutely. But there are reasons that my office is steps away from [Citigroup CEO Charles Prince's] office. There's a reason that I see him more than I do my family members. We are in and out of each other's offices all day, and what I consider a big part of my job is delivering bad news. I deliver bad news to Chuck all the time, and I have to say this, he's outstanding - he takes it, he absorbs it.

Citigroup stock has gone nowhere the past two years, yet the market is up over 15%. What's the problem?

The problem in a nutshell is that last year we did not deliver earnings growth. I believe very strongly that we've been doing the right things at Citigroup. I believe we've been allocating our capital more efficiently, more stringently, more aggressively.

We sold off businesses that were not better as part of Citigroup: the asset management business and the life insurance and annuity business. We've tackled the ethics issues absolutely head on. We have embarked on an investment program that will take advantage of the globality of Citigroup to aggressively grow overseas.

What kind of opportunity is China for you?

China, I think, is what we call a longer term opportunity. As we look at investment opportunities, there are opportunities that will pay off today, and those that will pay off in five years, and those that, when my daughter is CFO of Citigroup, or my granddaughter, they'll say, "Hey, Mommy, glad you did that."

Citigroup lends people billions of dollars through credit cards, mortgages, and other loans. Personal debt in the U.S. is off the charts, and the personal savings rate has gone negative. Is this incredible debt binge eventually going to be bad news for Citi, and is it going to be bad news for America?

Clearly, more debt is bad. But servicing that debt isn't costing consumers too much because interest rates have gone down. People were quite worried about some of these exotic mortgage loans for lower-income customers - we try to stay out of that market.

On a macro basis, I think consumers are acting pretty rationally. On credit cards, payment rates are close to all-time highs. And consumers are transitioning their borrowing into home equity loans, going from a higher cost loan to a lower-cost loan. They're paying us back. The consumer doesn't seem stretched. I wouldn't bet against U.S. consumers. They're pretty rational folks.

But rates are going up from here, not down. And the value of the homes people need to secure those loans is probably going to stop rising and may decline. Are people going to find themselves in serious trouble?

It could be. Not to say it won't happen, but we haven't had a synchronous U.S. housing market decline in as long as anyone can remember. If you have everything go wrong at once, certainly the U.S. consumer would be in trouble. But again, we worry more about irrational loans being made to customers who might not understand them. Those are the types of loans we would make only to sophisticated customers ... who could understand them.

About your career. You graduated from the University of North Carolina, then worked at Salomon Brothers for a few years, then got your MBA at Columbia. You've said that everyone makes one false step coming out of business school. What was yours?

I tried to get a job in marketing, which didn't work, so I went right back into investment banking. As a young investment banker I became very happily and joyfully pregnant. But rather than doing what I would advise doing, what any young lady would do - working out the hours, figuring out if you're going to go to another department - I quit. Full-out quit.

It took me about two weeks to realize that I didn't mean to quit. I tried to interview and go back on Wall Street when I was very pregnant. That didn't work. The great thing about it is that during that year off, I figured out I wanted to be a research analyst.

So, two lessons from the experience. One, if I hadn't taken the time to think about it, I wouldn't have found the right path. And two, you can try to kill a career, but if you're persistent to get back in, there may not be any such thing as career suicide.

So you eventually became a research analyst at Sanford C. Bernstein, which is largely a solitary job, and went from that to being head of research and then CEO. What was the most important element in making that change?

To be a successful analyst, you have to have a healthy ego. You have to embrace the spotlight and say, It's okay for me to be out there and make mistakes. The job of managing the business was very different - a lot of people stumble during the transition because you have to move from "It's all about me" to "It's all about you." And that was a very conscious decision that I had to make.

But I have to tell you that aside from that one issue, being a research analyst is terrific preparation for being a manager. You have to make a lot of decisions, and every day the market tells you whether you're right or wrong. You do it publicly.

The first time I made a mistake in print...I started to blame my research director, and then I realized, No, this was my mistake. It's a very good rhythm to get used to, because when you're transitioning into management, trying to make strategic decisions, you're used to making your own decisions.

You are at Bernstein, and your assistant says Sandy Weill is on the phone, this guy you had made angry because of what you said when you were covering his company. Now he wants to offer you the job of running Smith Barney. Were you prepared for it?

No. Although I always hate the stories people tell - that when he called, I said, "Oh, no, Sandy, not me!" I didn't say that. I thought he was going to offer me the job of research chief, and I was going to say no. At Bernstein I had the greatest research perch on the Street at the time. But working at Smith Barney, given the organization and the challenges, was irresistible.

So other career advice I give to folks is that if you have a stretch assignment, just take it.

You are talked about as a possible future CEO of Citigroup, and Chuck Prince has said that. Is it a job that appeals to you?

I have never plotted my career. And I have to tell you this, if I think about it now, I can't work one minute longer or one minute harder. The CFO job completes me. And I tell you the truth, I think that Chuck is doing an excellent job as CEO.

Few women have risen to high posts on Wall Street. It's an aggressively male environment. Is it an advantage or a disadvantage to be a woman in that world?

I think it's an advantage. I grew up in Charleston, a very genteel, very Southern city, a gorgeous city. I will say there's something about going to an all-girls school in Charleston that's tougher than Wall Street. You don't know what it's like. I had the glasses, the braces, the corrective shoes. I was half-Jewish, half-WASPy. I couldn't have been further outcast. There was nothing they could do to me at Salomon Brothers in the '80s that was worse than the seventh grade.

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