Citigroup is ‘too big to fail.’Its predecessor was once responsible enough to weather a panic.

By James Freeman and Vern McKinley | 1455 words

August 4, 2018, Wall Street Journal

Citigroup hired Sanjiv Das as CEO of its mortgage unit in July 2008, right as the financial crisis was beginning to flare. People asked him why he accepted the assignment. He might have wondered the same thing as he rode a taxi to Citigroup’s headquarters for his first day on the job.

The cabdriver was a fellow Indian immigrant. Mr. Das began to describe his new role at the bank. “Just my luck,” the driver interjected. “I have some keys I need to give you.” The cabbie, according to Mr. Das, then produced two house keys and handed them over. “Your guys sold me the loans to flip these houses,” he said. With the market in free fall, he was unable to sell, and since he could not possibly afford to pay the mortgages, he would simply hand the properties back to Citi.

Mr. Das was incredulous that his new employer had given two mortgages to this cheerful speculator. But the story got worse. The driver explained that he had three more mortgages from Citi’s rivals. Perhaps he also hoped to return the keys to their CEOs as he ferried executives around Manhattan.

Promiscuous mortgage issuance was just one of the colossal errors made by Citi’s leaders in the runup to the Great Recession. But in November 2008, President Bush refused to let the bank suffer the consequences. “Just don’t let Citi fail,”he told Treasury Secretary Hank Paulson.

Mr. Paulson tells this story in his memoir. But similar events have unfolded time and again in the century since the federal government began standing behind Citi. The bank’s rescuers have included politicians and regulators of both parties. Many didn’t believe that Citi deserved bailouts and doubted it could be reformed. Some weren’t even sure the rescues were necessary. What they all had in common was that they couldn’t manage to say no.

A few months after Mr. Bush’s Oval Office directive, Citigroup’s then-CEO, Vikram Pandit, was asking regulators for yet another bailout. According to a Journal report at the time, Mr. Pandit pleaded, “Don’t give up on us.”

The government never does. For obvious reasons, Citi’s serial bailouts can infuriate taxpayers. But the public and the press may not fully appreciate that the Washington-Wall Street bailout culture can be destructive even for the institutions it is supposed to benefit. Our study of Citi’s history, starting with its founding as City Bank of New York in 1812, reveals that the bank was in many ways healthier and more stable during the century when it was independent than during its century of support from the federal government.

During this era of serial bailouts, Citi has often been presented as a victim of events beyond its control: a financial panic, economic disruption overseas, a perfect storm of credit expansion, private greed and public incompetence. Yet in the old days, Citi not only didn’t fall victim to business cycles or financial crises, it thrived when others faltered. It became a banking giant because it had the strength to seize opportunities—and new customers—in periods of panic.

As for the benefits of bailouts, which are, after all, undertaken in the name of saving the economy, it is impossible to prove that the nation’s financial system couldn’t live without Citi or the other giants. A sober look back at the panic of 2008 turns up new reasons to question the favored status of the banks labeled “too big to fail.” Can anyone name a Citi service that other companies couldn’t provide? Doesn’t the U.S. pay a price in lost innovation by keeping deeply flawed incumbents atop the financial heap?

The history of instability and government support at Citi is not a story Washington wants to tell—or help others tell. Reporters have run into a stone wall trying to obtain key information about 2008. We’ve had as much trouble trying to pry records from the Federal Reserve about government assistance to Citi in the 1920s. That may partly explain the relative lack of coverage of Citi’s serial crises, even as various books have covered the failure of a much smaller institution, Lehman Brothers, which never received a bailout.

The lack of attention to Citi is especially odd given the frantic response in 2008 to its impending doom. “If Citi isn’t systemic,” Mr. Paulson writes that he told another official, “I don’t know what is.” Citigroup received the most generous government help of any bank during the crisis, with capital injections of $45 billion as well as hundreds of billions of asset guarantees, debt guarantees and other assistance.

The Citi story simply does not fit Washington’s explanation of the 2008 crisis. Financial regulators and the Wall Street megabanks they oversee like to say the problem was concentrated in the so-called shadow banking system. This is the gray area occupied by nonbank financial institutions—including Bear Stearns, Lehman and AIG—outside the more-heavily regulated commercial-banking sector. The 2010 Dodd-Frank Act was sold as a way to give regulators important new powers to oversee such large, risky firms.

But Citigroup, a federally regulated bank holding company containing a federally insured bank, was already subject to the full range of supervisory authorities. Perhaps most embarrassing of all to the regulators, Citi was specifically overseen by the Federal Reserve Bank of New York and its chief, Timothy Geithner, a principal architect of financial-crisis policies during both the Bush and Obama administrations. Mr. Geithner served as Mr. Obama’s Treasury secretary. His successor Jack Lew was a former Citi executive. Don’t count on him to expose the full dimensions of this disaster.

The alternative model is a system in which failure is allowed and taxpayers aren’t made to rescue reckless financiers. Moses Taylor is perhaps the greatest American businessman most people have never heard of. When he became a director of City Bank in June 1837, the U.S. was in the midst of a financial panic. Unlike his predecessors on the board—or his successors who steered the modern Citigroup in 2008—he had anticipated and prepared for a crash. Believing that poor judgment by both bankers and government officials had created a speculative bubble, he had maintained a significant cash reserve at his own merchant house. It endured through the panic and the years-long economic downturn that followed. He became president of City in 1856.

Taylor summed up his approach to business and banking with one phrase: “ready money.” Compared with modern megabanks, Taylor’s bank was both more highly capitalized and more liquid. He ensured that a lot more money was owed to City than it owed others, and he kept a lot of cash on hand in case of trouble. As an additional layer of protection, he sought out stable deposits: clients unlikely to make sudden huge withdrawals.

James Stillman became City’s president in 1891, and transformed it into the largest bank in the U.S. His scrutiny of loans was exacting. “His all-seeing eye raked the portfolio,” journalist John Winkler wrote in 1934. “Notes long due were collected, bad debts wiped off or (more often) amortized, further credits were refused firms bearing honored names if even so much as a smudge were on their credit record, devilishly embarrassing personal questions had to be answered before the new president would consider a loan.”

Stillman’s City Bank was sometimes the one rescuing the federal government, rather than the other way around. In 1894 Stillman satisfied the Treasury’s urgent need for gold by rallying investors to a bond offering in which the subscribers paid with the precious metal.

Meanwhile City was also helping Washington get out of a disastrous infrastructure project. The Union Pacific Railway entered receivership in 1893. A battle of banks ensued over plans to recapitalize it, and much of the debate centered on how to treat the government’s $45 million of claims. City Bank provided money and management to help keep the trains running and begin a turnaround. Stillman was placed on a committee of five responsible for overseeing the bankruptcy, and his bank earned fees and shares in the revived railroad. It also acted in part as an agent of the U.S. government.

City profited from the deal, and so did taxpayers. The government received $58 million in settlement from the revived railroad. Modern shareholders and taxpayers could only dream of a Citigroup CEO examining the bank’s investments with such an energetic and skeptical eye—never mind bailing out the government.

Mr. Freeman, an assistant editorial page editor at the Journal, writes the Best of the Web column for Mr. McKinley is a visiting scholar at the George Washington University Law School, consultant and attorney. They are the authors of “Borrowed Time: Two Centuries of Booms, Busts, and Bailouts at Citi,” forthcoming from HarperCollins on Aug. 7.■