Citi's Relentless Quest for Growth
History of Innovation Has Led Bank to Milestones, Missteps

By Annys Shin
Washington Post Staff Writer
Tuesday, November 25, 2008

The story of Citigroup is very much the story of American banking over the past century.

It owes much of its success -- as well as missteps -- to its emphasis on size and innovation and a penchant for going around or getting rid of regulations in its way.

If there was a business that was earning money for competitors, be it making loans to developing countries or selling stocks to individual investors, Citi wanted to be bigger and better than it. That attitude led it to pioneer ATMs and to become a major player in the credit card business. It also landed Citibank in the midst of every major financial crisis over the past century, including the stock market crash of 1929, the Latin American debt crisis of the 1980s and the current financial meltdown.

"A banker would have admired it in the 1990s as forward-looking. It used to have a reputation as an aggressive bank looking for new profit centers. That changed to more reckless," said Charles R. Geisst, the author of a history of Wall Street. Today, it's "an institution that is no longer in control of its own destiny."

Citi traces its roots to City Bank of New York, a merchant bank chartered in 1812. It later changed its name to National City Bank and by 1894 was the largest bank in the country.

During the bull market of the 1920s, National City became a leading seller of securities to individual investors, even though state banking laws prohibited commercial banks from getting into the investment banking business. National City and others got around that prohibition by opening subsidiaries. In his book "Wall Street: A History," Geisst describes how National City Chairman Charles Mitchell "personally rode herd" on his salesmen, exhorting them to make sales. He would even take salesmen to lunch at the top of skyscrapers and muse aloud about how many people walking below had yet to buy their securities.

Geisst and other historians see parallels between Citi's predicament today and what happened to National City.

When the stock market crash of 1929 hit, National City's stock value plummeted, and the federal government rescued it with a capital infusion of tens of millions of dollars, said Richard Sylla, an economic and financial historian at New York University.

Lawmakers blamed Mitchell and National City's aggressive sales techniques for the stock bubble and resulting crash. In February 1933, Mitchell was summoned to Washington to appear before the Senate Committee on Banking and Currency, which was investigating the causes of the crash. There he was grilled by Ferdinand Pecora, a former prosecutor and chief counsel for the committee. Under oath, Mitchell admitted to evading taxes and unloading worthless bonds on unsuspecting investors. He was ousted from National City, and Congress passed the Glass-Steagall Act, which among other things prohibited commercial banks from getting into the insurance business.

National City emerged from the Depression and World War II and in 1955 changed its name to First National City Bank of New York. By the late 1960s, it had set its sights on conquering global finance. It was one of the first U.S. banks to set up shop overseas at the turn of the century. But it was Walter Wriston, the firm's chairman from 1970 to 1984, who would eventually extend its reach to more than 100 countries. To reflect that global footprint, it changed its name in 1976 to Citibank.

Looser enforcement of banking laws would eventually allow Citi to expand into other forms of banking. And when regulations got in the way, Wriston, like Mitchell before him, found ways around them.

At the time, national banking regulations kept Citi out of the market for commercial paper -- a form of debt sold by companies to help meet short-term credit needs. Citi figured out that those restrictions applied only to multi-bank holding companies and set up Citicorp as a single-bank holding company, with Citibank as its subsidiary.

In the 1980s, Citi and other banks ran into trouble over loans made to developing countries in Latin America on the assumption that sovereign nations don't go bankrupt. Citi and other banks faced billions of dollars in potential losses when Mexico became insolvent in 1982. The government stepped in with the Brady Plan to help sell Latin American nations' debt and have the banks write off some of it.

Citi needed help again during the recession of the early 1990s. It accumulated $10 billion in bad loans, many related to leveraged buyouts or commercial real estate. Its stock price fell, and rumors of bankruptcy began to circulate. The Federal Reserve came to the rescue with several interest rate cuts.

To weather future crises better, Citi executives believed the company needed to become even larger and more diversified, a true one-stop financial services firm where consumers could go for checking, brokerage and insurance services.

In 1998, Citicorp chief executive John Reed and Sanford Weill, then chief executive of Travelers Insurance, agreed to combine the two companies into what the Financial Times called "a merger that redefines world finance."

For the merger to succeed, Glass-Steagall would have to be repealed, an idea that in the intervening decades had gained support among academics and, most importantly, from Fed chief Alan Greenspan. Citi spent millions of dollars lobbying for the change, and Congress passed the Gramm-Leach-Bliley Act in 1999.

The newly formed Citigroup and its investors took comfort in its scale. But signs eventually emerged that Citi was too big to manage well.

"Their business model -- a complete financial services firm -- is nothing but trouble," said Jerry Markham, author of "A Financial History of the United States." "There is always some unit having a crisis."

In 2002, it spun off Travelers because the insurer was dragging down its stock price.

In 2003, it fired four brokers and paid a $400 million fine after a mutual fund investigation by Eliot L. Spitzer, then New York's attorney general, and federal authorities.

In 2004, it recorded billions in charges against earnings to cover settlements and potential loan losses related to its dealings with WorldCom and Enron, including accusations that its analysts issued favorable reports to help land Enron's investment banking business and that it helped the Houston energy trader hide losses.

That year, Citi chief executive Charles Prince also had to fly to Japan and bow before public officials, who yanked Citi's banking license after its private bank there failed to warn customers about investment risks.

In 2007, an Italian court indicted seven former London bond traders with Citi's Salomon Brothers subsidiary over a 2004 episode in which they disrupted European government bond markets in a plot they dubbed "Dr. Evil."

As write-downs because of losses on subprime loans began to mount last year, Citigroup announced on Nov. 4, 2007, that Prince would step down.

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