Dedication For Nona, Ruben, Catherine, Victoria, Will, Neal, Jane, and Jack Contents Cover Title Page Dedication Introduction 1: A Bank for the Treasury Secretary 2: When Failure Was Allowed (Because Government Wasn’t Big Enough to Help) 3: City of Instability 4: Astor to the Rescue 5: Taylor’s Bank in an Age of Panics 6: The Rockefeller Bank 7: A Political “Big Shot” 8: A City Banker Helps Create the Fed 9: “Our Friendly Monster” Goes Global 10: “Sunshine Charlie” Doubles Down on Sugar 11: Mitchell and the Mania 12: Did City Bank Cause the Crash? 13: Bank for the United States 14: Walter Wriston and the Culture of Risk 15: Not That Big, but Too Big to Fail? 16: When Countries Fail 17: The Banker Who “Never Made a Loan” 18: Just Another Perfect Storm 19: Creating the Next Crisis 20: The Man Who Knew Too Little 21: “Save Citigroup at All Costs” Epilogue Acknowledgments Notes Index About the Authors Copyright About the Publisher Introduction “Don’t let it fail,” said President George W Bush It was a cold and cloudy day in Washington on November 19, 2008 But the climate was even worse in New York’s financial markets, where investors were increasingly betting that one of the world’s best-known companies wasn’t going to make it Shares of Citigroup, a $2 trillion financial behemoth, plunged 23 percent that day, and were down a full 88 percent since May 2007 An American president who had seemed to understand the value of competition wasn’t willing to let a Wall Street giant lose “Just don’t let Citi fail,” he told Treasury Secretary Hank Paulson Mr Paulson tells this story in his memoir of the financial crisis But it’s a story that has 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 A striking number of them didn’t believe that Citi deserved its bailouts and doubted whether it could be reformed after taxpayers helped it back from the financial ledge Some even doubted whether the rescues were necessary But what they all had in common was that they just couldn’t manage to say no A few short months after President Bush’s Oval Office directive to save the bank, Citigroup CEO Vikram Pandit was back in front of regulators seeking yet another bailout “Don’t give up on us,” he pleaded with a senior federal official The government never does For obvious reasons, Citi’s serial bailouts can be infuriating to taxpayers But what may not be fully appreciated by the public or the press is how destructive the bailout culture connecting Wall Street and Washington can be for the economy and even for the institutions that directly benefit from it This last point may seem a stretch, given that the company we now call Citigroup is more than two hundred years old and remains one of the largest financial institutions in the world But our study of Citi’s two centuries reveals that the bank was in many ways healthier and more stable during the century when it was independent than it has been during the roughly one hundred years in which it has been helped and guided by the federal government During the bank’s era of serial bailouts, Citi has often been presented as the victim of events beyond its control—a broader financial panic, unforeseen economic disruptions overseas, or perhaps a perfect storm of credit expansion, private greed, and public incompetence But through much of its history, Citi not only didn’t fall victim to business cycles or financial crises, it actually thrived when others faltered It became a banking giant precisely because it had the strength to seize opportunities —and new customers—in periods of panic As for the economic benefits of bailouts, which are after all undertaken in the name of saving the economy, to this day it remains impossible to prove that the nation’s financial system couldn’t live without Citi or the other financial giants On the contrary, a sober look back at the financial panic of 2008, informed by eyewitness accounts, turns up new reasons to question the favored status of the banks labeled too big to fail Can anyone name a single Citi service that couldn’t be provided by other companies? And what price are we paying in terms of lost economic growth and innovation by keeping deeply flawed incumbents atop the financial world? These questions, and in fact any kind of thorough inquiry about Citi, are most unwelcome to the nation’s regulatory establishment We’ve lately had as much trouble trying to pry records about government assistance to Citi in the 1920s out of the Federal Reserve as many reporters did trying to obtain key information about 2008 The history of instability and government support at Citi is not a story Washington wants to tell—or help others tell This may be why not a single book has focused on Citi and its serial crises, even as multiple books have covered smaller institutions that received far less federal help The fact that Citi has not received comparable attention may seem especially odd, given the frantic response of its rescuers to its impending doom in late 2008 Treasury Secretary Paulson declared that Citi must not be allowed to fail because, in his view, “If Citi isn’t systemic, I don’t know what is.” Citigroup received the most generous government assistance of any bank during the crisis, with capital injections of $45 billion as well as hundreds of billions of dollars of additional help in the form of commercial paper sales, asset guarantees, debt guarantees, and liquidity assistance The story of Citi simply does not fit Washington’s explanation of the crisis Financial regulators and the Wall Street megabanks they oversee like to say the crisis was concentrated in the so-called shadow banking system, the gray area occupied by nonbank financial institutions that were outside the more heavily regulated commercial banking sector Much of the attention and debate regarding troubled institutions has focused on the failures or near-failures of the nonbank troika of Bear Stearns, Lehman Brothers, and AIG The 2010 Dodd-Frank Act was sold as a way to give regulators important powers they didn’t previously have, to oversee such large, risky firms outside of commercial banking But because Citigroup was a federally regulated bank holding company containing a federally insured bank, it was already subject to the full range of supervisory authorities It had not one but multiple federal banking agencies already overseeing its activities And perhaps most embarrassing of all to the regulatory establishment, it 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 It was for President Obama that Mr Geithner served as Treasury secretary, and when he stepped down, he was replaced by a former Citi employee named Jack Lew Don’t count on him to expose the full dimensions of this disaster * * * The financial markets can be a rough place, so one could argue that any business lasting so long must be doing something right And the bank certainly did a lot right in its first one hundred years, although at its origin in 1812, Citi was more like the politically connected operation we see today than the market success it would become for much of the nineteenth century Created just two days before the start of the War of 1812 and a year after the closing of the First Bank of the United States, City Bank of New York was conceived to serve the needs of both Washington and Wall Street Of course, back then Wall Street looked a lot more like Main Street Before lower Manhattan became the world’s financial center, it was a center for merchants and traders who wanted credit Without the First Bank of the United States, both New York’s merchant class and the relatively young national government saw the need for a new provider of financial services The New Yorkers in particular wanted Gotham to compete with Baltimore, Boston, and Philadelphia as a banking center At its start, the bank we now call Citi was no obscure garage start-up Many of the bank’s initial stockholders had owned stock in the First Bank of the United States Citi’s first president, Samuel Osgood, had been a member of the Continental Congress and America’s first postmaster general The bank’s creation was intensely political as rival factions in the New York state assembly—each aligned with factions in the federal government—competed in a lobbying battle for a state charter Legislators eventually struck a compromise whereby the faction aligned with President James Madison and the rival group affiliated with Vice President George Clinton each secured a number of board seats in the new enterprise Though Clinton died two months before the birth of the bank, rival politicos were able to come together in the pursuit of personal, civic, and sovereign advantage Just as today, Citi at its inception was deeply intertwined with the national government—with benefits for both parties Early investors sought to profit from their alliance with Washington, while City Bank provided critically needed financing for the government to mount a national defense, as well as depository services This meant the bank was significantly wounded by the founding of the Second Bank of the United States just a few years after City’s founding A private investor allowed it to survive into the 1820s Unlike in our current era of too-big-to-fail banks, when the Panic of 1837 proved too much for City to bear, there was no taxpayer bailout John Jacob Astor, perhaps the country’s richest person at the time, bought a piece of the bank and provided desperately needed capital As important, he installed his protégé Moses Taylor on City Bank’s board Taylor would eventually lead the bank beginning in the 1850s through decades of stability and success In striking contrast to the government-backed modern Citi, which has careened through long periods of serial crises, the nineteenth-century version of the bank seems to have absorbed the lessons of its 1837 near-collapse and did not repeat the mistakes that required a private rescue Astor the rescuer was New York City’s preeminent real estate magnate Unlike later Manhattan real estate titans like Donald Trump, the frugal Astor carried little debt and had the ready cash in a crisis to buy a controlling stake in the bank Astor’s man Taylor was similarly focused on earning steady profits rather than headlines In 1919, financial historian John Moody wrote that Taylor’s “cash reserve was his pride” and said of the bank that “with every panic it grew stronger.” Unlike some more recent members of the Citi executive team, Taylor didn’t seem to suffer from Potomac Fever According to Anna Robeson Brown Burr, Taylor turned down the job of Treasury secretary during Reconstruction Taylor held to the view that he “must not spend a dollar unless absolutely necessary.” To modern taxpayers, he might appear reassuringly boring And that describes much of the nineteenth century at the bank In contrast to the modern politicized Citi, which tends to falter during times of financial stress, the old bank thrived even as the US suffered numerous financial panics after the Civil War The firm that would become Citibank grew its assets, its loans, and its profits—not too quickly, but reliably Taylor was not simply a banker but an activist investor and a sort of amiable corporate raider who would lend money and acquire stock in struggling industrial companies and then over time exercise control and install his own management team “The friendly tone of many of the letters to Taylor suggest that he may have been less voracious than other New York financiers of the period,” according to the New York Public Library, which houses Taylor’s papers Upon Taylor’s death, control passed to his son-in-law Percy Pyne, a low-key and cautious executive In the era before taxpayers were standing behind the company, risk-taking was not very appealing Pyne’s successor, James Stillman, was the Rockefeller family’s favorite banker Swelling deposits from Standard Oil and other customers who moved their money out of weaker banks helped make City Bank the country’s largest savings institution The bank also moved much closer to Washington as it helped finance the Spanish-American War The good times at City wouldn’t last In the twentieth century, with increasing support and direction from the federal government, the good times would be replaced by great times and terrible times, a recurring cycle of exciting booms and horrific busts The bank’s risk-taking in the 1920s inspired Senator Carter Glass to blame City Bank CEO “Sunshine Charlie” Mitchell “more than any fifty men” for the stock market crash of 1929 Ironically —or perhaps not—a future chairman of the Executive Committee at Citi, Robert Rubin, would lead the effort seventy years later to rewrite the senator’s signature Glass-Steagall Act, which sought among other things to limit risk-taking at federally insured banks In the late 1990s, Citi was actually in violation of Glass-Steagall until Rubin, then the US Treasury secretary, helped engineer a new law that made Citi compliant Between the time the legislation was originally introduced and its enactment, Citi hired him to serve as a highly compensated executive with “no line responsibilities.” He went on to advise the executives who did have responsibilities to ramp up the firm’s risks in the years leading up to the financial crisis Citi needed serial government bailouts in 2008 and 2009 to stay afloat This was nothing new at Citi, and sometimes the governments doing the rescuing haven’t even been ours Saudi prince Alwaleed bin Talal in the 1990s and an Abu Dhabi sovereign wealth fund in 2007 also provided life rafts to the bank Prior to the 1990s, it was usually Uncle Sugar that helped out whenever Citi ran into trouble, especially after Walter Wriston ascended to the top of City Bank in the 1960s But he had his own issues with foreign governments Among the most influential bankers of his or any era, he is perhaps most famous for wildly overestimating the creditworthiness of developing countries During the financial panic of 2008 and in the years since, financial reporters, bank executives, and politicians liked to discuss the unprecedented nature of that crisis But as you’ll see in the pages to come, disasters have been relatively frequent during the century of government-protected banking— especially at Citi A Bank for the Treasury Secretary Just as the financial crisis was beginning to flare in 2008, Citigroup hired Sanjiv Das to be CEO of the giant bank’s $300 billion mortgage unit More than a few people asked him why he had agreed to accept such an assignment He may have been wondering the same thing as he took a cab to Citi’s headquarters, then located at 399 Park Avenue in New York City It was to be his very first day on the job, and Das was enjoying a pleasant conversation with the taxi driver, a fellow immigrant from India Das began to describe his new role at the bank “Just my luck,” the taxi driver interjected “I have some keys I need to give you.” The driver then produced two house keys and handed them to Citi’s new mortgage boss “Your guys sold me the loans to flip these houses.” The cabbie then politely elaborated that with the market cratering, he was unable to sell the homes and, since he could not possibly afford to pay the mortgages, he would simply hand the properties back to Citi Das was incredulous that his new employer had given two mortgages to the cheerful speculator behind the wheel of the taxi But the story got worse The driver helpfully explained that while he only had two mortgages from Citi, he also had three other mortgages from rival financial institutions Perhaps he was hoping to meet other bank CEOs—and return more keys—as he ferried executives around Manhattan With the keys jangling in his pocket, Das arrived for his first meeting with Citigroup’s board of directors He recalls walking into the room and seeing arrayed around the conference room “all the glitterati that had led them off the cliff.” Das reports that director Robert Rubin never looked up from the BlackBerry device in his hands while asking, “How the f— we get out of this problem?” Das says that he walked over to Rubin and handed him the keys he had just received from the cabbie with five mortgages Das then promised to propose a solution to Citi’s mortgage problem “if you tell me how the f— you got in it.” The explanation will take a while Our story begins more than two centuries ago Even more than in 2008—when Citi was led by politically connected directors like former US Treasury secretary Rubin—the bank at its founding was a creature of politics It was quite literally a creation of government But Citi could only come into being after another government creation was allowed to die Ironically, although Citi is a classic example of a bank considered too big to fail by Washington politicians and regulators, Citi exists only because lawmakers of the early nineteenth century decided to close a bank with a much larger role in the nation’s financial system In 1811, Congress decided not to renew the expiring charter of the First Bank of the United States, and the reasons had a lot to with unresolved questions about its founding twenty years earlier Back in 1791, America’s first secretary of the Treasury, Alexander Hamilton, had won the political argument for a national bank But he had not necessarily won the intellectual argument And the legal argument would not be won until fifteen years after his death with the unanimous decision of the Supreme Court in McCulloch v Maryland Hamilton did manage to persuade Congress and President Washington that creating a national bank largely owned by private investors would help facilitate both public and private finance What was more difficult was clearly demonstrating that the new federal government had the authority to so Where in America’s new governing document did the feds enjoy the power to create a financial firm —or any other kind of corporation for that matter? Bank advocates argued that the power to create the bank was implicit in the new Constitution, and usually pointed to several phrases in Article I, Section in making their case: The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States To borrow Money on the credit of the United States; To regulate Commerce with foreign Nations, and among the several States To coin Money To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States Bank opponents, who included Representative James Madison, argued that while a governmentcreated national bank might make it easier to exercise many of these powers, it wasn’t necessary They also saw an invitation to future mischief in the argument that a federal government of limited and enumerated powers also enjoyed other powers that weren’t enumerated Secretary of State Thomas Jefferson warned of a banking monopoly and pointed out that authorization to create corporations and specifically banks had been debated and rejected during the drafting of the Constitution, so this authority could hardly be implicit The issue was certainly not a new one In 1781, long before the Constitution was drafted, the Congress operating under the Articles of Confederation had created a Bank of North America But as with the First Bank of the United States, it seems that legislators had been more eager to solve financial problems than convinced of their authority to fix them (Historians have debated whether one or the other or perhaps neither of these early institutions should be considered America’s first central bank.) Ten years later, before President Washington signed the bill to create the First Bank of the United States, he separately asked Jefferson and Attorney General Edmund Randolph for their opinions Jefferson warned: I consider the foundation of the Constitution as laid on this ground: That “all powers not delegated to the United States, by the Constitution, nor prohibited by it to the States, are reserved to the States or to the people.” To take a single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless field of power, no longer susceptible of any definition Jefferson elaborated on the danger of perverting the “necessary and proper” clause into a vehicle to get around the Constitution’s limits on federal power: the Constitution allows only the means which are “necessary,” not those which are merely “convenient” for effecting the enumerated powers If such a latitude of construction be allowed to this phrase as to give any non-enumerated power, it will go to everyone, for there is not one which ingenuity may not torture into a convenience in some instance or other, to some one of so long a list of enumerated powers It would swallow up all the delegated powers Therefore it was that the Constitution restrained them to the necessary means, that is to say, to those means without which the grant of power would be nugatory.2 Jefferson was a longtime philosophical rival of Hamilton and a reliable opponent of a strong central government He was also generally suspicious of bankers, so his opposition was unsurprising But Attorney General Randolph, who often straddled the philosophical divide between Jefferson and Hamilton, also concluded that the bank was unconstitutional Since Randolph was the senior legal expert in the executive branch, his opinion on the legality of Hamilton’s plan might have been foreign branches (Overseas Division), xiii, 95–107, 113–16, 116, 155–58, 166, 172–74, 184–87, 200, 200–202, 206, 209–20, 230, 242, 243, 246, 264, 332n25, 332n38, 335n11, 338n10, 338n15, 346n39 Geithner and, 275, 278, 279, 281, 284, 286, 290, 292, 295, 302, 303, 305 German debtors, 155–56, 158, 173 Glass-Steagall Act and, xiii, 170, 255–56 Global Transaction Services, 293 government as client, 17–18, 58, 64, 67, 68–69 government ties, viii, ix, xi, xiii, 11, 17–19, 22, 58, 69–77, 85–95, 167, 178–79, 187–88, 201, 245, 252, 255–57, 276–78, 281, 303, 306 IMF veterans working at, 201 ingredients for a banking disaster, 99 Latin American loan crisis, 201, 203, 209–20, 211, 230–32, 236–37, 259, 339n7, 340n15, 340n16 lending practices and loans, 130, 176, 183, 244, 248–49, 268, 269–70, 345n31 (see also specific loan types) Lew at, 272–73, 277, 306 liquidity and, 42, 43, 50, 146 liquidity puts, 268–69, 280 loopholes and, 123–25 mergers and acquisitions, 69, 153, 184, 230, 251–55, 320–21n29, 321n30 merger attempts (2008), 284–86, 348n34 Mitchell era, 108–23, 128, 147–70, 171, 186 mortgage investments/real estate lending, 1, 61, 239, 242–43, 250, 259, 267, 269, 272, 274–75, 278, 281, 343n26, 345–46n38 MOU (1992), 250, 343n26 MOU (2008), 282, 347n16, 272, 289–90, 292–94, 346n40, 349–50n14 19th century history, viii, x, xi–xiii, 11–12, 17–43, 50–70, 54, 317–18n28 online banking, 229–30 Penn Central crisis, 188–92, 337n30, 337n33 Post–WWII business, 179 Prince and, 264–73, 275 protection of, 291–306 records, difficulty of obtaining, ix, 248–50, 270, 282, 297, 301, 343n25, 343n26, 345n37, 347n16, 347n17 Reed era, 226–32, 235–51 regulators denied documents, 146–47, 328–29n23 regulators relationship with/regulatory capture, x, 41, 57, 121–23, 133–34, 171–73, 210–11, 250–51, 283–84 regulatory oversight, 51, 100–102, 106, 110, 113–15, 118–19, 121, 145–46, 153–58, 154, 245–47, 277, 279–83, 290, 325n23, 326n14, 327n22, 327n24, 329n29, 330n4, 332n25, 335n11, 343n25 risk exposure, xiii, 19, 21, 63, 97–98, 106, 110, 155, 186, 201, 234–35, 241–48, 257, 258, 265–73, 278, 343n26 Rockefellers and, xii, 58–59, 62, 68, 71, 100, 228, 324n16 Russian branch, 98, 99–100, 102, 103, 116, 185, 281, 324n16 Saudis and, 246 SEC penalty (2007), 269 securities affiliate (see National City Co.) securities markets and, 108, 114, 124–32, 146, 265, 267–68 shareholder lawsuit, 166, 333n53 share price, vii, 20, 161 SIVs, 267–68, 269, 271, 272 size of, 58, 59, 65–66, 67, 95, 99, 101, 127, 133, 146, 159, 174, 235, 264, 303, 320n24 Spanish-American War and, xiii, 68–69 Stillman era, 58–72, 79–81, 85, 87, 94, 95, 97, 98 stockholders, first, xi, 18–22 stockholders, largest, 99, 161, 246 stock issuance, 113 subprime loans, 267, 269, 271, 272, 281, 345n31 Taylor era, 37–46, 48–56, 94 technology at, 227–30, 270 as Too Big To Fail bank, vii, ix, 225, 226, 247, 251, 284, 286, 292, 295, 302, 304–6 transportation and shipping industry and, 183–84, 186 Trump loans, 235, 239–41, 258 Union Pacific Railway and, 67–68, 320n25 UPS as customer, 227–28 Vanderlip era, 71, 72, 77–85, 87, 91, 94–107, 110, 113, 124, 128, 186 War of 1812 and, x, 17–18, 68 Weill and, 253–67 women bankers at, 177 Wriston era, 182–92, 205, 207–14, 227 WWII and, 177–78 Civil War, 45–46, 47, 48, 50 Clarke, Robert, 280 Clay, Henry, 37 Cleveland, Grover, 66–67, 68 Clinton, Bill, 251, 256, 257, 277 Clinton, DeWitt, 12 Clinton, George, xi, 9, 12 Cogan, Berlind, Weill & Levitt, 259 Cogley, Timothy, 150 collateralized debt obligations (CDOs), 267, 268, 270, 272 Collins, Paul, 247 Commercial Credit Co., 260–61 commercial paper, 191–92, 193, 199, 268, 337n30 Conover, Todd, 224–25, 280 Consolidated Edison, 39 Conti-Brown, Peter, 134 Continental Illinois Bank, 169, 189, 219n, 221–25, 235, 298, 300, 339n19 Coolidge, Calvin, 133, 149 Corbat, Michael, 307 correspondent banking, 69, 78, 90, 91, 267 Corrigan, Gerald, 245 Cortelyou, George B., 82 Costanzo, Gesualdo, 201 Covington, James Harry, 159 Covington & Burling, 159, 280 Crossen, Cynthia, 33 Cuba, 36, 97–98, 104–5, 186 Citi and, 36–37, 97–98, 104–8, 110–15, 156–58, 162, 185, 281 Das, Sanjiv, 1–2 Davison, Henry P., 81, 86, 87, 88 Deeds, E A., 112, 114 Dickens, Charles, 24 Dimon, Jamie, 254, 260, 262, 263, 264, 265, 285, 289 Dingell, John, 246–47 Dobbeck, Dianne 348n22 Dodd-Frank Act, ix Douglas, Stephen, 45 Dugan, John, 280, 290, 292, 308 Dzivi, Bart, 282, 305 Edison, Thomas, 110, 149 European American Bank and Trust, 198–99 European banks, 86, 94 Fannie Mae/Freddie Mac, 275, 287 Farley, James, 227 Farmers Loan and Trust, 119 FDIC (Federal Deposit Insurance Corp.), 175, 252, 257, 290–91, 349n5 bridge bank authority, 239, 300, 301, 302 CAMELS system, 154–55, 306 Citi’s near failure (2008), 273, 290–96 Continental Illinois, 222–24 Franklin National Bank, 197, 199 Latin American loan crisis and bank failures, 217–18 memo on Citi’s losses (2007–8), 270–71, 345n37 problem bank list, 154, 196, 282 Federal Open Market Committee, 205 Federal Reserve Act, 85–89, 134, 135, 142, 324n29, 324n30 foreign branch banking and, 91–93, 96, 116, 323n22, 323n24 on-site inspections of banks required, 100, 102, 324n17 Federal Reserve Bank of New York, 88, 134, 136–37, 140, 288, 322n10 Citi borrowing from, 103, 106, 110, 139, 162–63, 166 Citi head Mitchell as director, 134, 135–38, 140–43, 162 as Citi regulator, x, 110, 145, 245–46, 277–79, 283, 305 Citi-Wachovia merger and, 286 Citi warning letter (2008), 281–82 Franklin National Bank and, 199 Geithner and, 275–86, 290 member banks financing Wall St and, 137–43 regulatory capture and oversight failures, 283–84, 305 Volcker and, 204, 205 Federal Reserve, 7, 49, 85–94, 97, 134, 135–37 bailout authority of, 94 bank regulation and, 175, 205–6 Bernanke and, 277 Citi bailouts as of 2009, 297, 350n26 Citi-Travelers merger and, 256 Continental Illinois bailout, 221–25 discount window, 130, 152, 192, 197 Division of International Finance, 212 Federal Open Market Committee, 214, 277 financial crisis of 2008, policy responses, 163–64 foreign branch bank closings, 116 Franklin National Bank and, 197–99 Great Depression mistakes, 150–51, 158, 162–64, 169 historic credit contraction (1990), 238–39 inflation (1970s) and, 208–9 interest rates (2000s), 275–77 Latin American loan crisis, 209–20 as lender of last resort, 8, 83–84, 93, 194 loopholes in federal law and, 124, 125–26 as national safety net for banks, 93–94, 103, 119, 120, 152, 222–24, 290 protection and control of banks, xiv, 171, 176–77, 182 rescuing giant corporations, 192, 194 restraining the growth of credit, 208–9, 220 security speculation problem, 137–38, 329n39 strength of the dollar and, 204 Volcker and, 205–17, 220, 231 Wall Street and, 135–41 WWII and, 179 Few, William, 18–19 Financial Crisis Inquiry Commission, 267, 268, 280, 282, 283, 305 financial crisis of 2008, viii, xiv bank bailouts, 167–69, 274, 278, 281–82, 287–89, 295–306, 297, 350n26 blame, 126, 252, 257, 267, 274 Citibank and, 267–86, 272, 289–91, 345n31 Citibank bailouts, ix, xiii, 94, 274, 278, 281–82, 288–89, 292, 295–306, 297, 349–50n14, 352n50 Dimon and, 263 Emergency Economic Stabilization Act, 287 non-bank bailouts, 287 risk exposure in the housing market and, 126, 218, 274–75 First Bank of the United States, x, xi, 2–11, 14, 17, 19, 32, 314n11, 314n14 First National Bank of Boston, 338n10 First National Bank of Chicago, 169, 189, 219n First National Bank of New York, 75, 81, 82, 83, 124, 137, 184 Flanigan, Peter, 190 Fleet/Norstar Financial Group, 239 Forbearance, 217–219, 236, 238, 251, 305, 340n21, 340n22 Ford, Gerald, 208 Ford, Henry, 110, 149 Ford Motor Co., 228–29 “Forgotten Depression, The” (Grant), 105 Franklin, Benjamin, 34–35 Franklin National Bank of New York, 194–99, 201, 336n23, 337–38n5, 338n8 Friedman, Irving, 201 Friedman, Milton, 24, 138, 149, 158, 187, 329n39 Gage, Lyman, 71, 72, 75, 77, 78–79 Galbraith, John Kenneth, 141 Gallatin, Albert, 8–10, 14–16, 42 Gallin, Celia, 166, 333n53 Gardin, John, 96 Garfield, James, 73 Geithner, Timothy, x, 275–86, 288, 290, 292, 295, 301, 303, 304, 306, 348n34, 351n39 Citi and, 275, 278, 279, 281, 284, 286, 290, 292, 295, 302, 303, 305 Germany Citi and, 155–56, 158, 173 Stillhaltung Agreement, 156, 332n28 G G & S S Howland, 35, 36 Girard, Stephen, 13–14, 16–17 Glass, Carter, xiii, 142–43, 148, 158, 252, 288 Glass-Steagall Act, xiii, 170, 256, 258, 334n65 Clinton rewrite, 256, 257, 273 Goldman Sachs, 131, 255, 265, 288 Gold Standard Act of 1900, 77 Gordon, John Steele, 40 Grant, James, 105, 169 Great Depression, 148–51, 158, 160, 164 bank bailouts, 167–69, 298 bank failures, 151–52, 160, 175 Federal Reserve’s policies and, 150–51, 158, 162, 163, 169 Mitchell/Citi blamed, 145–70 See also Reconstruction Finance Corporation Greenspan, Alan, 187, 276 Hamilton, Alexander, 2–3, 5–6, 7, 9, 17 Hamlin, Charles S, 329n40 Harriman, E H., 320n25 Harrison, George L., 137–38, 139, 329n39 Havens, John, 305 Hayden, Stone & Co., 259 Heinz, John, 216 Henneman, H E., 281 Hepburn, A Barton, 57, 69–70 Herzog, Jesus Silva, 212–13 Hickey, Donald R., 14 Hodas, Daniel, 35, 55 Holmes, Oliver Wendell, 40 Hoover, Herbert, 165, 167 Howe, Daniel Walker, 27 IMF (International Monetary Fund), 212, 214, 215 international banking, 91–93, 95–106, 194–95, 199–201, 200, 203, 207–20, 338n10 Aldrich Bill and, 91–93, 96, 116, 323n22, 323n24 Latin American loan crisis, 201, 203, 209–20, 230–32, 236–37, 339n7, 340n15, 349n16 OCC risk assessment of, 202–3, 338n15 See also LDCs Interstate Commerce Commission (ICC), 188 Irving Trust, 169, 189 Isaac, Bill, 223 Jackson, Andrew, 17, 23, 24, 27, 28–29, 47 Jefferson, Thomas, 3–4, 5, 6, Jekyll Island Club, 87, 88, 89 Jobs, Steve, 61 Johnston, Percy, 167 Jones, Jesse, 167–68 J P Morgan & Co., 98, 200, 201 JPMorgan Chase, 263, 285, 288, 289, 298 Kemp, Jack, 187 Kennedy, David, 190 Kennedy, John F., 204, 205 Kiernan, John, 96 Kissinger, Henry, 206 Knickerbocker Trust, 80, 81 Kovacevich, Richard, 288–89 Kuhn, Loeb & Co., 87, 320n25 Lawton, Charles, 20–21 LDCs (less-developed countries) American bank loans to, 199–200, 200, 207–20, 211, 215, 219, 224, 232, 237, 339n7 Baker Plan, 236 Brady bonds, 237–38 Citi loans to, 199–202, 200, 206, 209, 211, 215, 230–32, 236–37, 248, 332n25 payments or defaults, 209–20 warning system for, 212 LeFevre, Edwin, 62–63, 320n14 Lehman Brothers, ix, 210, 287 Lehmann, Frederick, 129 Levitas, Elliott, 196 Lew, Jack, x, 72–73, 277, 306 Lincoln, Abraham, 44, 45, 46 Loeb, Rhoades & Co., 260 Lynch, Jones & Ryan, 246 MacLaury, Bruce, 204 MacVeagh, Franklin, 125–26 Madison, James, xi, 3, 9, 12, 13, 14–16, 17 Manufacturers Hanover, 189, 198, 200, 201, 211, 219, 219n, 244 Manzari, Steve, 283, 348n22 Martin, William, 206, 208, 339n19 Mayo, Mike, 264, 304 McCraw, Thomas K., 7, 17 McCulloch v Maryland., McDermott, Mary, 261 McGarrah, Gates, 138 Meigs, Charles A., 51, 52, 57 Meltzer, Allan, 135, 142 Mercantile National Bank of New York, 80 Merrill Lynch, 188, 260, 288 Mexico, 201, 203, 209, 211, 212–14, 217, 236, 237, 339n7, 340n15 rescue package for, 213, 214 US bailout of (1995), 251 Meyer, Eugene, 164 Miller, Adolph, 138 Miller, G William, 204 Miller, Heidi, 262 Mitchell, “Sunshine Charlie,” xiii, 108–23, 128, 132–33, 164–65, 170, 171, 186, 326n10, 329n29 as New York Fed Director, 135–43, 162, 329n39 salary and bonuses, 117–18, 121, 160, 163, 165, 327n22 Senate Banking Committee testimony (1933), 158–61, 170, 333n43 tax charges, 160–61, 333n43 Wall Street Crash and, 108, 117, 122–23, 143–70, 252, 288 Monetary History of the United States (Friedman and Schwartz), 138, 149, 158, 329n39 Monetary Policy in the United States (Timberlake), 151 Monetary Reform Act of 1900, 89 money-center banks, 200, 219, 219, 219n, 232 Moody, John, xii, 53, 59 Moore, George, 183, 185, 186, 187, 336n17 Morgan, J Pierpont, 59, 67, 81, 82, 85, 87 Morgan Guaranty Trust, 167, 169, 189, 244 Morgan Stanley, 288 National Bank Act of 1864, 47 National Bank of Commerce, 82 national banks, xi, 2–9, 20, 80, 100, 102, 124–26, 244, 324n17 National City Co (NCC), 108, 114, 124, 125–29, 131–33, 133, 146–47, 151, 156–57, 166, 167, 170, 328–29n23 Citi’s loans to, 130, 131, 328n19, 331–32n21 National Currency Act of 1863, 47 National Monetary Commission, 85–86, 89 New York Clearing House Association, 42, 53–54, 80 New York Stock Exchange, 63, 95 Nixon, Richard, 187, 205 Norbeck, Peter, 162 Obama, Barack Citi’s Lew and, 72–73, 278 Geithner and, x, 277–78 Office of the Comptroller of the Currency (OCC), 46, 124, 126, 245, 323n21, 324n17 Change in Bank Control Act, 284, 348n24 as Citi regulator, 47, 51, 100–102, 106, 113, 115, 118, 145–46, 153–56, 154, 171–75, 245–46, 248–51, 278–81, 290, 305, 327n22, 327n23, 327n24, 329n29, 330n4, 332n25, 335n11, 343n25 Citi’s insolvency (2008) and, 294, 305, 349–50n14 Continental Illinois and, 222–23 forbearance and, 113, 217–19, 236, 238, 251, 305 Franklin National Bank and, 195–97, 198 Interagency Country Exposure Review Committee, 203–4 Mitchell and, 133–34 overseas banking risk and, 202–4, 206, 207, 338n15 regulatory recession (1990), 239 Onassis, Aristotle, 183, 184, 186 online banking, 229–30 Osgood, Samuel, xi, 12, 19 Pandit, Vikram, vii–viii, 281, 289, 291–92, 307 paper currency, 5, 6–7, 22–24, 28–29, 47–48, 89 Parish, David, 16–17 Parsons, Dick, 304 Paulson, Henry “Hank,” vii, ix, 288, 290, 292, 298, 301, 303 Pecora, Ferdinand, 158–61, 170 Penn Central Railroad, 188–93, 189, 336n23, 337n30, 337n33 Perkins, George, 81 Perkins, James H., 166–68, 171–76, 298, 335n11 Perlman, Alfred E., 191 Pierson, Isaac, 19 “pocket bank,” 54 Pole, J W., 146, 280 Polk, James K., 37 Potter, William, 167 Prince, Chuck, 264–67, 280, 283 Proxmire, William, 216–17 Pulitzer, Joseph, 87 Pyne, Albertina Taylor, 56 Pyne, Percy, xii, 56–57, 58, 60 Randolph, Edmund, 4, “ready money,” 42, 50, 54, 58, 62, 103, 243, 263 Reagan, Ronald, 187, 236 real estate bubbles, 26–27, 148, 274–77, 280 real estate lending, 239 Citi and, 1, 61, 239, 242–43, 250, 259, 267, 269, 272, 274–75, 278, 281, 343n26, 345–46n38 crash in the market (1989), 239 subprime loans, 267, 269, 271, 272, 277, 281, 345n31 Reconstruction Finance Corporation (RFC), 167, 169, 297–98, 334n59 Reed, John, 226–32, 235–51, 253–54, 256–59, 262, 265, 268, 349n5 Reeves, Owen, 146 Regan, Don, 188, 212–13 regulatory capture, 122, 147, 283 Rentschler, Gordon, 112, 114, 146, 175, 176, 328n19, 335n11 Reynolds, Jackson E., 137 Rhodes, William, 213 Richardson, Mark, 292–93 Roberts, Alasdair, 25, 28 Rockefeller, Elsie Stillman, 71 Rockefeller, John D., 58, 62 Rockefeller, William, 59, 62, 68, 85, 87, 100, 324n16 Roosa, Robert, 204 Roosevelt, Franklin D (FDR), 137, 165–67, 170, 171, 175 Roth, Arthur, 196 Rubin, Robert, xiii, 1, 255, 262, 265, 277, 306 Russia, 98–100, 102, 103, 116, 184, 281, 324n16, 325n22 Salomon, Inc., 253, 257, 261, 273 Samuels, Nathaniel, 210 Saudi American Bank, 246 Saudi Arabia, 246 Saunders, Stuart, 190 savings-and-loan crisis, 239 Schumer, Chuck, 223–24 Schwartz, Anna, 24, 138, 149, 158, 197, 329n39 Second Bank of the United States, xi, 20, 23, 26, 47, 315n26 Seidman, Bill, 208, 217–18, 231 Selgin, George, 47, 90, 91 shadow banking system, ix, 303 Shlaes, Amity, 149 Shaw, Leo, 185 Shearson, Hammill & Co., 260 Shelton, Henry, 87 Sherman, John, 46 Sherman Silver Purchase Act, 64, 65 Shultz, George, 187 Siconolfi, Michael, 253 Silber, William, 205, 209, 214–15, 223, 339n19 Simon, William, 187 Sinclair, Harry, 165–66 Sindona, Michele, 195 Smith, James, 198 Smith, Sherrill, 110 Smith Barney, 253 South Korea, 339n7 Spanish-American War, xiii, 68 Spencer, William, 228 Stagg, J C A., 13, 15, 16 Stagg, Peter, 20–21 Standard Oil, 58, 59, 62 state-chartered banks, xi, 6, 7, 125, 313–14n5 Stewart, Adelia M., 330n4 Stigler, George, 122, 283 Stillman, James, xii, 58–72, 79–81, 85, 86, 95, 97–100, 103, 107, 151, 228, 259, 320n14, 320n25 Stillman, James A., 100, 106, 107–8 Strong, Benjamin, 81, 82, 88, 135–36, 137, 322n10 Structured Investment Vehicles (SIVs), 267–69, 271, 272 Summers, Larry, 277 Swanson, Claude, 92–93 Taft, William Howard, 92, 126–27, 129, 323n22 Taylor, Bill, 349n5 Taylor, Catherine Wilson, 35–36 Taylor, Moses, xi, xii, 34–46, 48–56, 59, 94, 103, 126, 151, 243, 259, 263 Taylor, William, 245 Tereshchenko, Mikhail, 102, 325n22 Texas Commerce, 238 Theobald, Thomas, 223, 230, 235 Third National Bank, 69, 320–21n29, 321n30 Tigert, Ricky, 349n5 Timberlake, Richard, 151 Tippecanoe, Battle of, 10 Too Big To Fail (TBTF) bank, vii, xi, 2, 123, 193–206, 224–26, 236, 237, 247, 251 Bank of New England, 239 Citi as, vii, ix, 225, 226, 247, 251, 284, 286, 292, 302, 304–6 Franklin National Bank and, 197–99 Tooker, Samuel, 18 “To the Pennsylvanians” (Wordsworth), 30 Travelers Group, 252–54 See also Citigroup Troubled Asset Relief Program (TARP), 287, 290, 291, 296–98, 297, 350n26 Trump, Donald, xii, 34, 233–34, 239–41, 251, 258 Trump, Fred, 233–34, 251 trust banks, 80, 82 Trust Co of America, 81–82, 108–20 Trust Co of Cuba, 98 Union Pacific Railway, 67–68, 320n25 “unit banks,” 8, 11, 89 United Parcel Service (UPS), 227–28 United States Trust Co., 59, 79, 319n4 US Congress Civil War financing and, 45 Continental Illinois hearings, 224 financing the military and, 13 Franklin National hearings, 196 Latin American loans hearings, 216 Senate Banking Committee hearings, Mitchell and, 158–61, 170, 333n43 Senate Hearing on Stock Exchange Practices, 158, 328n19 War of 1812 and, 14, 15 US Constitution, banking and, 2–5, 15, 313–14n5 US economy, viii–ix, 9, 10, 25–30, 40, 164, 325n23 Crash of 1929 and Great Depression, xiii, 144–70 deflation and, 48, 50 financial crisis of 2008, viii, xiv, 126, 167–69, 218, 252, 257 First Great Depression (1839–43), 24 growth, 1800s, 24–25, 63 inflation and, 26–27, 29, 48, 63–64, 108, 148, 178, 205, 208–9 monetary policy and, x, 8, 48, 64–65, 75, 120, 134, 150–51, 158, 162–64, 169, 205–6, 208 Panic of 1837, xi, 23–24, 29–31, 33, 37, 40 Panic of 1907, 80–83, 88, 108 Panics of the late 1800s, xii, 48–49, 53, 54, 57, 64–65 post–WWII, 178, 336n23 prosperity of the 1920s, 149 real estate bubbles, 26–27, 148, 274–77, 280 recession of 1920–21, 105, 107, 116, 325n28 recession of 1990 and historic credit contraction, 238–39 recessions of 1913 and, 95 slow growth, 209 Texas recession, 238 unemployment, 65, 144, 149, 151, 279 wage growth, 63 US Treasury, xiii, 13–14, 18, 48, 125–26, 137, 165, 177, 204, 236, 237 early secretaries of, 8, 9, 10, 14–17, 24, 42, 71, 72, 75, 77–79 Federal Reserve created, 85–94 financing wars, 10, 15–17, 46, 171, 176–77 foreign branch banking and, 92, 323n22 Geithner as secretary, x, 277–78, 295–96, 306 gold reserves, 64, 67 gold standard and, 47, 64, 68, 77, 109–10, 149, 151 government debt and, 17, 24, 44 Lew as secretary, x, 72, 278, 306 Mexican crisis and, 212–13 monetary policies, x, 8, 48, 64–65, 75, 120, 134, 150–51, 158, 162–64, 169, 205–6, 208 Office of Thrift Supervision, 27, 284, 285 paper currency and printing money, 6–7, 17, 47, 59, 64–65, 110, 151 Paulson as secretary, vii, 288, 298 protecting giant financial institutions, 125–26 Regan as secretary, 188, 212–13 Vanderlip at, 71–77 US Treasury bills, 13, 47, 50, 78, 176, 328n18 Vanderlip, Frank, 71–84, 86, 87, 107, 110, 111, 113, 117, 124, 128, 186, 226, 255, 324n16 Federal Reserve and, 85–94 foreign branch banking and, 91–93, 95–106, 323n21 Venezuela, 237–38, 339n7 Volcker, Paul, 188, 204–6, 207–17, 223, 231–32 tightening money supply, 208–9, 220, 339n1, 339n19 Wachovia Bank, 285–86 Wallich, Henry, 204 Wall Street, x, ix, 11, 44–45, 61, 63, 82, 90–91, 122, 123, 126, 289 Citi and, x, 117, 123, 138, 141, 144–70, 252–54 (see also National City Co.) Crash of 1929, xiii, 109, 117, 122–23, 143–70, 252, 288 Federal Reserve creation and, 87–89, 91 Federal Reserve money and, 137–43 Glass-Steagall Act and, 170 loopholes in law and, 124 marketing securities to the public, 117, 123, 127, 128–29, 170 security speculation, 137–38, 329n39 Warburg, Paul, 87, 324n28 War of 1812, x, 10, 12–18, 44, 68 Warren, Elizabeth, 258, 298–99, 351n33 Washington, George, 3, 4, 11 Washington Mutual Bank (WaMu), 284–85 Waterhouse, Scott, 280–81 Weill, Sandy, 253–61, 264–67, 281, 344n16 Wells Fargo Bank, 286, 288–89, 298 Welsh, Samuel and William, 38 Whitney, Eli, 25 Wickersham, George, 129 Wiggin, Albert H., 135–36, 156 Williams, John Skelton, 106, 280 Wilson, Woodrow, 93, 98, 126 Winkler, John, 60–61, 65, 66 Winston, Garrard, 159 Womble, Dorothy, 144–45 Wood, Fernando, 45 Woodbury, Levi, 24 Woodin, William H., 137, 165 Wordsworth, William, 30, 40 World War I, 95–96, 127 World War II, 171, 176–78 Wrinkler, John, 60–61 Wriston, Walter, xiii, 180–92, 194, 207–23, 226, 227, 229, 230, 232, 245, 246 Continental Illinois bailout and, 221–23 lending to LDCs, 207–20, 237, 238 Yellen, Janet, 163 Yerkes, Charles T., 75 Young, Roy, 140 Zweig, Phillip, 174, 181, 184, 229, 230 About the Authors JAMES FREEMAN is assistant editor of the Wall Street Journal ’s editorial page He previously served as investor advocate at the US Securities and Exchange Commission VERN MCKINLEY, a visiting scholar at George Washington University Law School, is a consultant and attorney who specializes in diagnosing financial instability in banking systems Discover great authors, exclusive offers, and more at hc.com Copyright BORROWED TIM E Copyright © 2018 by James Freeman and Vern McKinley All rights reserved under International and Pan-American Copyright Conventions By payment of the required fees, you have been granted the nonexclusive, nontransferable right to access and read the text of this e-book on-screen No part of this text may be reproduced, transmitted, downloaded, decompiled, reverse-engineered, or stored in or introduced into any information storage and retrieval system, in any form or by any means, whether electronic or mechanical, now known or hereafter invented, without the express written permission of HarperCollins e-books FIRST EDITION Library of Congress Cataloging-in-Publication Data Names: Freeman, James (Journalist), author | McKinley, Vern, author Title: Borrowed time: Citi, moral hazard, and the too-big-to-fail myth / James Freeman and Vern McKinley Description: First edition | New York, NY: HarperCollins, [2018] | Includes bibliographical references and index Identifiers: LCCN 2018009514 (print) | LCCN 2018011256 (ebook) | ISBN 9780062669889 (ebk) | ISBN 9780062669872 (hc: alk paper) Subjects: LCSH: Citigroup (Firm) | Banks and banking—United States | Bank failures—United States—Prevention | Bailouts (Government policy)—United States | Financial crises—United States Classification: LCC HG2613.N54 (ebook) | LCC HG2613.N54 C72245 2018 (print) | DDC 332.10973—dc23 LC record available at https://lccn.loc.gov/2018009514 Digital Edition AUGUST 2018 ISBN: 978-0-06-266988-9 Print ISBN: 978-0-06-266987-2 About the Publisher Australia HarperCollins Publishers Australia Pty Ltd Level 13, 201 Elizabeth Street Sydney, NSW 2000, Australia www.harpercollins.com.au Canada HarperCollins Publishers Ltd Bay Adelaide Centre, East Tower 22 Adelaide Street West, 41st Floor Toronto, Ontario, M5H 4E3 www.harpercollins.ca India HarperCollins India A 75, Sector 57 Noida Uttar Pradesh 201 301 www.harpercollins.co.in New Zealand HarperCollins Publishers New Zealand Unit D1, 63 Apollo Drive Rosedale 0632 Auckland, New Zealand www.harpercollins.co.nz United Kingdom HarperCollins Publishers Ltd London Bridge Street London SE1 9GF, UK www.harpercollins.co.uk United States HarperCollins Publishers Inc 195 Broadway New York, NY 10007 www.harpercollins.com ... roaring northwards up Manhattan Island at the rate of two blocks a year Since Manhattan is about two miles wide, that meant that the city was developing about 10 miles of new street-front per year,... become for much of the nineteenth century Created just two days before the start of the War of 1812 and a year after the closing of the First Bank of the United States, City Bank of New York was... lessons of its 1837 near-collapse and did not repeat the mistakes that required a private rescue Astor the rescuer was New York City’s preeminent real estate magnate Unlike later Manhattan real estate