A Most Enjoyable History of a Most Remarkable Bank

Published in Real Clear Markets.

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 do 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)

Citibank

Chase Manhattan

Manufacturers Hanover

Morgan Guaranty

Chemical Bank

Bankers Trust

Continental Illinois

First National Bank of Chicago

Security Pacific

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?*

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.

*The answer is Chemical Bank, although it has changed its name to JPMorgan.