BY MARTIN HUTCHINSON

If history is any guide to the future, Citigroup will be in the middle of whatever financial crisis Wall Street manages to cook up next. Or so say James Freeman and Vern McKinley in “Borrowed Time: Two Centuries of Booms, Busts, and Bailouts at Citi,” a new book examining the $180 billion bank’s troubled past. The institution bailed out in 2008 has suffered repeated failures of over-aggression and lack of foresight, while Uncle Sam’s open wallet has blocked meaningful reform.

In its early days, Citi was a politically connected bank with poor lending practices controlled by a management team with alcohol problems. The bank came close to failure in the Panic of 1837, but was bailed out by John Jacob Astor, the beaver-pelt mogul who installed a capable top executive. For the next 72 years, Citi was capably run and grew to be the nation’s largest bank, albeit with only one branch, taking on deposits in “panics” because of its perceived solidity.

Readers of “Borrowed Time” can play an amusing parlor game identifying the most misguided of those who led Citi in its problematic second century. Frank Vanderlip, the originator of many of Citi’s long-term problems, tops the list. Like several of his successors, Vanderlip was not professionally a banker – he was a journalist and U.S. Treasury official. He focused his tenure by doing much to create the half-baked Federal Reserve system rather than a single central bank, which would have decimated Citi’s correspondent-banking business.

Vanderlip then decided that a period of catastrophic world war was ideal for a single-branch bank, with no internationally experienced staff, to embark on building a global network of over 100 branches, half of them in Cuba. That combined with a push into domestic brokerage to cause Citi to require a $144 million bailout from the New York Fed in 1920 and to continue recording its Cuban sugar loans and holdings as current throughout the 1920s.

President Roosevelt partly blamed Vanderlip’s successor, “Good time Charlie” Mitchell, for the Great Depression. This was only a little harsh; he was just a high-powered salesman who got carried away. In building loan volume, Mitchell didn’t bother to ensure that the credits were economically useful. Brokers’ loans, used for stock speculation, comprised 65 percent of the bank’s total loans in March 1929. The result was the collapse of Citi’s brokerage affiliate, Mitchell’s ouster and a government bailout with $50 million of preferred stock.

Having suffered two near-death experiences in a decade, Citi was at least conservative for a generation. The next bailout came courtesy of Walter “countries don’t go bust” Wriston in 1982, when Citi, heavily over-leveraged, lost well over 100 percent of its capital in loans to Mexico, Brazil and Argentina. This time, the regulators’ response was to provide liquidity and pretend the loans were solid, which worked until the end of the decade, when the Latin American bad loans were joined by dud real-estate loans (including a heavy exposure to developer Donald Trump). Citi was described as “technically insolvent” by the House Commerce Committee chairman in 1991 but was privately rescued by an injection of preferred stock from Saudi Prince Alwaleed bin Talal.

The authors describe in detail Citi’s successful attempt to re-integrate commercial and investment banking with its Salomon Brothers merger in 1998, followed 10 years later by the collapse of its balance sheet once again, this time with problems appearing in domestic mortgages, investment-banking products and international banking. Citi was bailed out again, with the total exposure from various government loan funds reaching an astounding $517 billion in January 2009.

Freeman and McKinley strongly suggest Citi should not have been bailed out, but do not address how another bank failure in 2008 even larger than that of Lehman Brothers would have bolstered global investor confidence. However, a third alternative to Lehman-style bankruptcy existed: the nationalization of the bank, with shareholders being wiped out, followed by rapid liquidation and asset sales, while paying creditors in full. That rough justice might have restored more confidence in the U.S. financial system than a government bailout.

It surely would have wiped out a bank culture that had repeatedly brought losses and bankruptcy, and would have forced its perpetrators to find new employment. Eliminating a bank with Citi’s long track record of failure would also arguably have removed moral hazard from the banking system. “Borrowed Time” argues that Citi – having been left mostly intact after 2008 – will be at the heart of whatever future financial crisis awaits. History makes that a good bet.

First published Aug. 24, 2018

Image: REUTERS/Brendan McDermid