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Introduction: Paul Kupiec, Resident Scholar, AEI
In 1910, Frank Vanderlip, President of National City Bank, attended a secret meeting in Jekyll Island Georgia where, along with Henry Davidson of J.P Morgan, Paul Warburg of Kuhn, Loeb and Company, and Senator Nelson Aldrich of Rhode Island, he drafted a plan for a new US central bank. That plan would subsequently become the Federal Reserve Act of 1913.
The Wall Street bankers’ contribution to the design of the Federal Reserve System remained secret for years because the proposal would never have been passed into law if the public knew that the plan was drafted by the leaders of the biggest banks on Wall Street.
Just a few years prior, Frank Vanderlip was serving as an assistant secretary of the US Treasury. He was plucked from this job by Citibank’s then President, James Stillman, to acculturate and ultimately succeed Stillman as president of National City.
Fast forward 89 years.
Its 1999, and Secretary of the Treasury Robert Rubin is spearheading the passage of the Gramm Leach Bliley (GLB) Act through the US Congress. The bill repeals the 1933 Glass-Steagall prohibition against combining banking, securities underwriting and brokerage in a single entity. Rubin’s efforts succeed. The bill passes the Senate on May 6 and the House on July 1. It creates a new class of legal firm– a Financial Holding company—that is supervised by the Federal Reserve Board. These new legal entities can own a full suite of financial services businesses. The new law allows the 1998 mega-merger between Citibank and the Travelers Group to go forward without any of the financial business divestitures that would have been necessary if Glass-Steagall restrictions had not been repealed by Congress.
On July 2, 1999, the day after the House passed GLB, Robert Rubin leaves government service. Later that year, he joins Citigroup as a board member and a position concerned with “strategic managerial and operational matters of the Company, but … no line responsibilities”. The Wall Street Journal characterized Robert Rubin’s Citigroup’s responsibilities as “murky”.
By the time Rubin leaves Citigroup in 2009, the company has racked up huge losses in the subprime financial crisis. For his time at Citigroup, Mr. Rubin, having had no specific operational responsibilities, collects over $100 million in compensation.
Within the decade another former senior Clinton administration official is recruited by CitiGroup. Jack Lew joined Citi as senior official in charge alternative investments (a.k.a. hedge funds) and Citi’s offshore special purpose entities—activities that played key roles in generating losses in subprime mortgage crisis.
Jack Lew’s time at Citi was short—he left CitiGroup in 2009 to join the incoming Obama administration, first as a State Department Official, then as Director of the Office of Management and Budget, and subsequently as White House chief of staff.
When he left Citi, he received a large severance bonus for taking a senior job in government. Lew’s $940,000 severance bonus was paid at the same time Citi was receiving billions of dollars in U.S. taxpayer support. Although Lew served as Chief Operating Officer of the very division that the government charged with hiding $39 billion of subprime debt off balance sheet in Structured Investment Vehicles (SIVs), in February 2013, Jack Lew was confirmed by the Senate 71-26 as Barrack Obama’s second Secretary of the Treasury.
These are just a few examples where the history of Citibank is inextricably intertwined with domestic politics and legislation that shaped the US banking system. But Citi’s influence does not stop at the US border—Citi was a pioneer in international banking.
At different points in its history, Citi’s growth strategy was focused on expanding its international operations. Its international focus after WWII began under Walter Wristin. After Wristin became head of Citi’s overseas division, Citi officially adopted a new strategy, paraphrased as follows:
Citi goal is not to be merely a bank, but a financial services company that can perform every useful financial service, anywhere in the world, permitted by law, which can be expected to generate a profit for Citibank.
It turns out that many of Wristin’s favored international investments, especially those involving debt issued by less developed countries, while technically legal, ultimately generated losses that were criminal in magnitude.
Should they make Borrowed Time into a movie, the Citibank story will not be film noir. Citi has many bright spots in its rich history–like the time Citi saved the federal government with a desperately need loan, or the time it deliver the gold when other banks could not. Citi was a leader in credit cards, and the idea that a one-stop financial supermarket was the best way to provide consumers the services they needed.
Our author and guest tonight, James Freeman, will undoubtedly recount many more stories that highlight the influence of Citibank and its leaders on the development of domestic and international banking practices over the nearly 200 years of Citibank history. James Freeman and his co-author, Vern McKinley, have done a superb job, and I am sure you will want a copy of Borrowed Time for your library.
Commentary by Bert Ely, Ely and Company
Let me begin by encouraging you to buy, and better yet, read Borrowed Time. Not only is it a very useful study of the history of Citigroup and the banking world in which it and its competitors have operated but as banking books go, it is very readable and filled with interesting insights.
My brief remarks will focus on important points the book makes – intentionally or otherwise – and then I will discuss what I see as the book’s major drawback – how to prevent future busts and subsequent bailouts of large financial firms such as Citi.
The book’s numerous anecdotes about Citi CEOs and other personages, such as Donald Trump and former Treasury Secretary Tim Geithner, provide important insights into the bank’s twists and turns through it long history while adding vivid color to what otherwise might have been a boring tale. Several anecdotes are even mildly salacious – for example, that of James A. Stillman, who in nepotistic fashion became Citi’s president in June 1919, succeeding his late father, the bank’s long-time chairman.
Like other banks, Citi was slogging through the severe post-World War I recession, yet Stillman took time from his banking responsibilities to file for divorce from his wife, known as “Fifi,” claiming that his youngest son “was actually the result of an affair Mrs. Stillman had conducted with a Canadian outdoorsman, often referred to an as ‘Indian guide.’” Mrs. Stillman argued, in return, that “her husband had secretly fathered a child with a former Broadway dancer.” A more recent CEO, as the book reports, “divorced his first wife, with whom he had four children, and married a flight attendant from Citi’s corporate jet.”
What interesting lives Citi CEOs have led.
The book, in recounting, the bank’s various dealings with Donald Trump and his father, Fred, reinforced my long-held perception that the younger Trump was a lousy businessman, if not an outright con man. The authors did note, though, that “Donald Trump was just one of the distressed borrowers the bank was trying to help make great again.” Perhaps Citi succeeded too well.
Turning to the story of Citi itself, through its long history – the bank was chartered in 1812 – it has been buffeted by the country’s numerous wars, recessions, the Great Depression, and the recent Great Recession yet as the book documents, Citi has had a very mixed quality of CEOs and other senior executives over the years. Citi’s near failures, and subsequent bailouts, are therefore hardly a surprise, but why has it had so many leadership challenges, and failures, over 200-plus years?
The authors give a hint why, when they note that “most of the members of Citi’s board in 2003 were from fields outside of banking and finance, so the guidance they could offer had its limits” in selecting senior executives. I suspect this shortcoming at the board level existed long before 2003.
More specifically, my sense is that Citi’s directors over the years have been far too deferential to the outgoing CEO in permitting him to anoint his successor.
One recent example cited in the book – in 2003 Sandy Weill backed as his successor “his longtime legal expert Chuck Prince.” Prince was not an experienced banker and he lasted only until November 2007, the eve of the great financial crisis. Perhaps the greatest leadership tragedy at Citi occurred when Weill fired his “longtime lieutenant,” Jamie Dimon, just weeks after Citicorp merged with Weill’s Traveler’s Group in October of 1998.
As the authors note, the business relationship between the two men “went south” after Dimon “chose not to promote Weill’s daughter at the pace that she and her father believed she deserved.” This was yet another instance when nepotism trumped talent, at great cost to Citi, and to the economy.
Given Dimon’s later success at managing JPMorgan Chase, one can easily imagine how different Citi’s history would have been over the last two decades had he succeeded Weill as CEO. Perhaps, then, this book might never have been written and we wouldn’t be here today.
The issue of the selection and oversight of bank leadership by bank boards of directors has become an increasingly critical issue in the banking industry in recent years, as seen most notably at Wells Fargo.
Unresolved as a public-policy issue today is where to find a sufficient number of highly qualified directors of banks and other large financial institutions. Perhaps too much reliance is being placed on the boards of financial firms, and not on their CEOs, to steer those firms away from financial shoals.
As everyone knows, banking is a highly regulated business, so understandably the book gives considerable attention to the structure of the U.S. banking business and the effect of monetary policy on Citi.
From its beginnings, American banking was characterized by severe branching restrictions, with banks largely barred from having any branches or just a handful. Consequently, until recent decades the United States had thousands of small banks, almost all with no branches or just a few, which forced banks to engage in correspondent banking, with small and even medium-size banks placing substantial deposits with large money-center banks, such as Citi. That business was very profitable for Citi, but it was a source of systemic instability in the banking business.
Contrast that structure with Canada, with its handful of banks, each with hundreds of branches stretching from sea to sea, or at least across a major segment of the country. Canada, of course, has had a much more stable, and safer, banking system.
Consequently, when considering the “two centuries of booms, busts, and bailouts at Citi,” the book’s subtitle, one cannot ignore how the United States’ flawed banking structure and monetary system negatively impacted Citi, as well as most other banks during times of economic distress. The federal government’s hands are far from clean!
Within this structural context, the authors review the manner in which Citi has been regulated and supervised, specifically by the Comptroller of the Currency (OCC) and the Federal Reserve. Not surprisingly, they are not very complimentary of that supervision, specifically for not moving as fast and as aggressively as they should have during Citi’s several brushes with failure. If anything, the authors were too kind to Citi’s regulators.
The book’s final chapter, Save Citigroup at All Costs, presents a critical assessment of actions the federal government took in 2008 and thereafter to keep the financial system functioning, including providing substantial support of Citi, albeit at great risk to taxpayers. I believe the authors were too dismissive, though, of the costs and negative economic and political consequences of suddenly liquidating or dismembering a large, weak bank.
The authors state that “[p]reventing such moments from occurring was, of course, the job of the Federal Reserve and the [OCC] . . . [b]ut on-site examinations and off-site surveillance by teams of regulators had not succeeded in averting disaster.” The authors then observe that “[u]nfortunately, those seeking a safer regulatory system are regularly disappointed.”
Yes, that is true, but what would a safe regulatory system look like? Are Dodd-Frank’s failure-resolution provisions the answer? The authors do not say. Perhaps the authors will address this existential challenge in a subsequent book – someone needs to!
In closing, Borrowed Time is well-worth the time spent reading it, and contemplating the story it tells. Buy this book, and read it!
Commentary by Alex J. Pollock, distinguished senior fellow at the R Street Institute
This is a colorful book, full of great stories and forceful (if not always admirable) personalities, who deserve to be remembered. It gives us repeated lessons of how banking is a business always intertwined with the government, demonstrated in the long history of Citibank, a very important, very big, often quite creative, and sometimes very troubled bank. It reminds us of the theory of Charles Calomiris that every banking system should be thought of as a deal between the bankers and the politicians.
According to then-Treasury Secretary Henry Paulson’s instructive memoir of our most recent financial crisis, on November 19, 2008:
“Just one week after I had delivered a speech meant to reassure the markets, I headed to the Oval Office to tell the president that yet another major U.S. financial institution, Citigroup, was teetering on the brink of failure.
‘I thought the programs we put in place had stabilized the banks,’ he said, visibly shocked.
‘I did, too, Mr. President.’”
This exchange led to the instructions from the President which appear on page 1 of Borrowed Time:
“Don’t let Citi fail.”
At this point, as the book tells us, “The Office of the Comptroller of the Currency and Citigroup guessed that Citibank would be unable to pay obligations or meet expected deposit outflows over the ensuing week. Citigroup’s own internal analysis projected that ‘the firm will be insolvent by Wednesday, November 26.”
“As ever,” the authors add, “the latest crisis in the banking sector caught many regulators by surprise.”
Now, if Citibank had failed and defaulted on its obligations, what would have happened? Nobody wanted to find out. Then-New York Federal Reserve President Tim Geithner forecast that it would be a “catastrophe,” the book relates, and quotes the then-head of the Federal Deposit Insurance Corporation (FDIC), Sheila Bair: “We were all fearful.”
In their place would you, ladies and gentlemen, have been fearful, too?
Yes, you would have been.
Would you have decided on a bailout of Citibank, as they did?
Yes, you would have.
The FDIC had a special and very pointed reason to be fearful: a failure of Citibank would have busted the FDIC, too—this government insurance fund would itself have needed a taxpayer bailout. As we learn from the book: “The FDIC staff did a seat-of-the-pants calculation and estimated the agency’s potential exposure to Citibank to be in the range of $60 billion to $120 billion. Even at the low end of that estimated range, losses would ‘exhaust the $34 billion or so in the [Deposit Insurance Fund].’”
So the FDIC would have been broke—just like the Federal Savings and Loan Insurance Corporation was twenty years before. In short, the bailout of Citibank was an indirect bailout of the FDIC. This insightful lesson is not made explicit in the book, but is a clear conclusion to draw from its account.
Going back in history to 147 years before these events of 2008, we find the situation interestingly reversed. In 1861, at the beginning of the Civil War, City Bank—at that point spelled with a sensible “y” and not the marketing “i” of much later times—was helping save the government, as the U.S. Treasury scrambled to raise money for the army.
We learn from the book that Moses Taylor, then the head of City Bank, “played a leading role in gathering private and municipal funds to equip and sustain Union troops and also in managing the issuance of federal debt to pay for the war.”
In the summer of 1861, “Secretary of the Treasury Salmon Chase visited a group of New York bankers and told them he needed $50 million ‘at once.’ The bankers huddled, and the Tylor, speaking for the group, announced, ‘Mr. Secretary, we have decided to subscribe for fifty millions of the United States government’s securities that you offer, and to place the amount at your disposal immediately.’”
We can imagine how relieved and happy that must have made the Treasury Secretary.
As the Civil War dragged on and became vastly more expensive, one of the ways to finance it was the creation of the national banking system to monetize the government debt. City Bank then became a national bank, as it still is.
However, the limitations of the national bank charter made it hard to be in the securities business. How City Bank got around this in the boom of the 1920s makes interesting reading, including how it actively financed the stock market bubble of the decade.
Then came, of course, the collapse and the disaster of the 1930s, and that brought government investment in the preferred stock of City Bank by the Reconstruction Finance Corporation. “The debate is over whether City really needed Washington’s money,” the book tells us, “or was persuaded to participate in a broader program intended to show that the government was shoring up the nation’s banking system.” It continues, “Just as in 2008”—note how financial ideas as well as events repeat themselves—“federal officials in the 1930s wanted healthy banks to accept government investment so that the weak banks that really needed it would not be stigmatized.” But which category was City Bank in?
The authors conclude that “it seems likely that City really did need the money.”
Citibank was and is a very international bank. This has its advantages, but also its problems. In the 1930s, City was in trouble from its international loans to, as the book relates, Chile, Cuba, Hungary, Greece and most importantly, Germany.
Germany had boomed in the 1920s and was the second largest economy in the world. It had financed its boom with heavy international borrowing, especially from the United States. By the 1930s, it was obvious that this had not been a good idea from the lenders’ point of view.
In the natural course of events, the costly 1930s experience became “ancient history,” and in the 1970s, Citi (now spelled with an “i”) was the vanguard of a great charge into international lending, in which a lot of other banks followed.
The leader and chief proponent of the charge was Walter Wriston, Citi’s CEO and the most innovative and best known banker of his day. Says the book: “Wriston’s most remarkable achievement at Citibank was persuading Washington that lending money to governments in developing countries was nearly risk-free.”
But the government was already cheering for these loans. “There had for years been a tendency among many government officials to look with favor on loans to less-developed countries [LDCs].”
About these loans, Wriston notoriously said, “They’re the best loans I have. Sovereign nations don’t go bankrupt.”
No, they don’t. But they do default on their loans—and quite often, historically speaking. And default many foreign governments did, starting in 1982.
At that point, the Chairman of the Federal Reserve was the famous Paul Volcker. As the book discusses, his solution to the possibility the U.S. banking system had become insolvent was to mandate that the LDC loans not be called the bad loans they were, that no loan losses would be booked against them, and that the banks would indeed have to make new loans to keep the Ponzi scheme going. In other words, the solution was to cook the books.
With this big gamble, as it turned out, things did keep going. When LDC loans were finally charged off in the late 1980s, there was a new boom on: financing commercial real estate. This boom in turn collapsed in the early 1990s. We might say there is a theme and variations involved.
In 1981, just before the Wriston-led charge into LDC debt went over the cliff, the biggest ten banks in the United States, in order, were:
Bank of America (the one in San Francisco, long since sold)
First National Bank of Chicago
Consider this: of the ten, only two still exist as independent companies. Eight of the ten are gone. To people not in the financial trade, or even to younger ones in it, these once-important names are probably unknown. As a song written by one of my old banking friends goes:
“You were a big bank,
Blink and now you’re gone!”
But Citibank, the subject of the eventful history related by Borrowed Time, is not gone—it is still here.
Which is the only other survivor of the former top ten? Maybe you would like to guess? (The answer is Chemical Bank, although it has changed its name to JPMorgan.)
In short, if you have a taste for the adventures and evolving ideas, the ups and downs, the growth and reverses, and the innovations and blunders of banking over the years, you will enjoy this history of a most remarkable institution.
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