By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, March 11, 2009
When Citicorp and Travelers Group agreed on a historic merger in 1998, the heads of the two companies placed a courtesy call to inform the Treasury Department. Then they held a news conference to suggest that Congress change the law to allow their union. Congress soon complied.
It was a signature moment for a bank that has long taken big risks with the conviction that it is irreplaceable. Over the past century, Citigroup has repeatedly launched new strategies to make money, then stumbled and lost money, forcing the government to restore its health.
The 1998 merger, an attempt to create a one-stop shop for financial projects, ultimately faltered.
Citigroup, with the help of tens of billions of dollars in government aid, is now dismantling itself, leaving behind a company that will resemble the old Citicorp, a bank focused on serving multinational corporations.
The company sits beneath the Treasury's thumb, its actions scrutinized by an angry Congress. Its market value, more than $140 billion at the time of the merger, is well below $10 billion.
Ben S. Bernanke, chairman of the Federal Reserve, reiterated yesterday that large banks like Citigroup will receive all necessary public support to survive. Treasury Secretary Timothy F. Geithner repeated the point yesterday on Charlie Rose's television interview show but refused to say that a failure was impossible. Still, the government in recent days has increasingly moved toward a position of guaranteeing the survival of certain private companies, including Citigroup.
Citigroup yesterday released a memo by its chief executive, Vikram Pandit, that said it was profitable during the first two months of 2009, its best performance since summer 2007. The stock price rose.
"Over time, the markets will recognize the many strengths of Citi," Pandit wrote.
The company was just another New York bank until the last decade of the 19th century, when a new chief executive, James Stillman, began to win the business of an emerging class of giant corporations. Those firms were concentrating the control of American industry -- and eventually global industry -- on the island of Manhattan. Citigroup would prosper as their partner. A pattern was set. The city's business community and the bank would push further than their rivals, and prosper more, and every so often they would stumble badly. "It became a great bank because they were innovators," said Richard Sylla, an economics professor at New York University who specializes in the history of financial institutions. "They were early to become a great corporate bank, they were early to get overseas, they were early to get into the investment banking business, they were early to get into consumer lending."
The company led American banks overseas in 1914, laying the groundwork for its later dominance. It also established a branch in Moscow weeks before Lenin came to power. It established branches in China -- and lost those, as well. And it lost vast sums lending to Cuban sugar plantations.
The company responded then, as it would half a century later, by turning to the American consumer.
In the 1920s, a new chief executive named Charles Mitchell pushed the company into the business of selling stock to the middle class. Other banks also were starting to sell stock, but Mitchell, known as "Sunshine Charlie," was better at it. The company served as a massive pipeline between Wall Street and investors, and Sunshine Charlie kept driving his sales force right up until the market collapsed.
The company sold $156 million in shares in Anaconda, a copper company, in 1929. Those shares had lost 95 percent of their value by 1933.
It also sold $650 million of its own shares in 1929. Those shares lost 85 percent of their value over the same period.
After the crash, the government extended critical support to banks, including Citi, then known as National City Bank. Congress also passed a law separating retail banks from Wall Street firms. One of the authors, Sen. Carter Glass of Virginia, cited Mitchell's excesses as an inspiration.
"Mitchell more than any 50 men is responsible for this stock crash," Glass said.
The intervening years began quietly. The chastened bank limited new lending for more than a decade, investing heavily in government debt during World War II.
But banks exist to make loans, and, in the years after the war, the bank was bursting with the wealth of New York. A new chief executive, Walter Wriston, would lead a new push into foreign markets. One of Wriston's early successes was providing the financing for Aristotle Onassis to create his fleet of oil tankers.
But the years of vast profitability would end in massive losses. Citigroup had loaned millions of dollars to developing nations, without particular regard for the likelihood of repayment. For years, the bank avoided a reckoning by making additional loans and deferring unpaid balances. But in 1982, Mexico defaulted on its debt.
Wriston responded by declaring that "a country does not go bankrupt."
But neither does a country necessarily repay its debts.
Citicorp and other banks faced massive losses, and the U.S. government stepped in to intervene, slowly nursing Mexico and the banks back toward health.
In the aftermath, Citigroup again broadened its relationship with U.S. consumers.
Wriston's successor was his longtime lieutenant, John S. Reed, who had built his reputation by pushing to open some of the first ATMs and to offer some of the first credit cards. That focus eventually led Reed to merge the company with Sanford I. Weill's Travelers Group, a financial conglomerate that sold insurance, stocks and a wide range of financial products.
That would require Congress, at Citigroup's prodding, to undo the Depression-era law, written by Glass in response to the bank's excesses, separating retail and Wall Street banks.
Reed and Weill called Treasury Secretary Robert E. Rubin to tell him about the deal, which was the largest corporate merger in U.S. history at the time.
Weill said in an interview at the time that the combination would "position this company to be a leader for decades to come."