"Borrowed Time" by James Freeman and Vern McKinley.

Above: "Borrowed Time - Two Centuries of Booms, Busts, and Bailouts at Citi." James Freeman/Vern McKinley. 311 Pages. Harper Business.

I completed reading this book today.

As I had worked at Citi for nineteen years, and hearing that the name "Taylor" figured prominently in "Borrowed Time," I rushed to buy the book to see how the authors treated my role in forming Citi's history. I was shocked and disappointed to find that the "Taylor" referred to in the book was Moses Taylor, Citi CEO from 1857 to 1882, and financier of the Union Civil War effort.

 

In February 2009, TIMDT and Mwah (sic), were seated in St. Emilion's and Chrissee's cozy, Park City, UT living room, warmed by a fire, along with twenty other Citibank alumni and their spouses in Park City for a ski reunion. We had just finished a delicious roast beef repast which had been preceded by a lively cocktail hour. It was cold, dark, and foreboding outside.  But, indoors the atmosphere was warm and convivial.  Now, it was time to hear our scheduled speaker, Johann Palmstruch, one of our fellow Citi alums, and now one of the nation's top central bankers. The 2008 financial crisis was in full swing. The future of many of America's great financial institutions hung in the balance. We were eager to hear from Johann Palmstruch about the fate of "mother" Citigroup, the institution that bound us together as Citi employees over two decades, the 70's and 80's.

Johann Palmstruch: "I don't think Citi's going to make it."

Whaaa???!! We were shocked. How could this be? Would federal regulators really allow the two hundred year old bank to dissolve? Well, thinking about it, maybe. Only five months previously, federal regulators, in unprecedented fashion, had stood by as Lehman Brothers, the nation's fourth largest investment bank, collapsed, overburdened with a toxic sub prime mortgage portfolio.

When all of us Park "Citi" skiers worked at Citi in the 70's and 80's, it was the nation's largest commercial bank. Citibank had strong coverage internationally, with half of its resources located outside of the United States. All of us alums dining at St. Emilion's and Chrisee's that evening had worked overseas assignments for Citi.

Throughout the 70's Citi was a strong earner. Then Citi CEO Walter Wriston was the uncontested dean of American bankers. Think Jamie Dimon today. During the '70's Wriston turned down two offers to become US Secretary of the Treasury. Citibank was on any number of lists as one of the top companies for which to work. We Citi alumni, sitting by the toasty fire, all had a surfeit of self esteem when working for Citi. We shared that mood at our ski reunion. We were the best! Uh.... weren't we?

Later in the year, back in our home towns, skis stored away, we learned that Citi was "too big to fail." In 2009, the US taxpayer fronted up for a gargantuan $517 billion dollars (book authors' number) to keep Citibank afloat. Wake up call. Had we skiing alums' inflated egos been hoist on an edifice held together by rotted timbers? Maybe we weren't as good as we thought we were.

Citi's 2009 fall into a US Government safety net was the largest dollar amount bank rescue in history, and, by far, the largest dollar amount rescue of any single entity during the 2008/09 financial crisis.

"Borrowed Time" notes that President Bush, before he left office in early 2009, gave his finance team, headed by Treasury Secretary Henry Paulson, the order to keep Citi alive. Citi's closure, said Bush, would result in too much damage to the American - and world - financial system.

That just twenty years earlier, nearer to us skiers' own era at Citi, Citi had brought itself to the brink of conservatorship with a portfolio of bad sovereign debt, suggested that there may be something systemic about Citi's propensity to fail. And that, indeed, is the theme of "Borrowed Time..." Citi's repeated brush with failure, throughout it two hundred year history.

There is no doubt that Citi was instrumental in supporting the country's rise to world power at the turn of the last century.

Yet, Citi played a role in nearly every financial crisis the country's experienced.

 

Since Citi's ignoble 2009 rescue I have struggled to reconcile my idealistic sense of Citi when I was employed there in the 70's and 80's, with the reality of Citi being a ward of the state.

I joined Citi, straight out of graduate business school, as a trainee in 1973, a profitable year for the bank. Then, Citi's leaders emphasized traditionally sound principles of risk management. Training of us new recruits in sound banking principles and practices received heavy emphasis.

Fully a year of my nineteen year tenure with Citi was spent in formal training programs. I worked hard to learn the basics of lending money... how to manage risk. I had the sense that the training I was receiving was effective, and that what I was learning derived from core values of the institution.

I applied my training to the various turn around jobs I was assigned. Aided by coworkers who shared, along with me, Citi's strong risk management values, the the business entities where I worked were always in better shape when I left than they were when I arrived.

I was lucky to have great, talented mentors/bosses/teachers who believed in Citi's strong credit ethic, left me alone and promoted me when I was succeeding, and constructively guided me when I faltered.

How could the organization which taught me so effectively and provided me with so many opportunities to successfully apply my learnings now be a zombie, kept "alive" by taxpayer coerced largess?

Five or six years into my nineteen year stint with Citi, I began to realize that the corner stone, as I knew it, of strong, principle centered, risk management at Citi was being eroded.

This dissonance between what I had been taught, and what was now being put into practice elsewhere in the bank, bothered me, but, didn't affect me directly, as I had a fair degree of autonomy in most of my positions, far away, geographically and organizationally, from those parts of the bank letting credit standards slide.

Working under talented, supportive supervisors, who continued to emphasize Citi's strong, traditional, risk management values, I could perform necessary fixes in my area of accountability without compromising the value system I had been taught early in my Citi career.

Still, I wondered, what was the point of making things better where I was working if the bank's capital was being eroded by bad risk taking in other profit centers?

Citi seemed to be in a twilight zone in those days. Some parts of the institution held to the traditional ways of sound risk management while others dropped time worn credit guidelines to layer in seemingly profitable, but highly risky loans. Citi's risk schizophrenia did not augur well, I felt, for bank's future success.

So, where, specifically, did Citi of the 1980's depart from the core values I had learned early in my Citi career, the 1970's?

From the early 80's, Citi's lending exposure to lesser developed countries (LDC), sovereign entities, burgeoned. These loans were not originated using traditional principals of credit evaluation. Repayment capacity of the foreign governments could not be demonstrated using traditional credit evaluation techniques which required specific identification of sources of repayment.

When queried about seeming excess lending to lesser developed countries, Citi's Chairman, Walter Wriston, infamously defended Citi's LDC lending practices, affirming, "countries don't go broke."

As it turned out, in the late 80's, Wriston's successor, John Reed, pressured heavily by federal regulators, was forced to write down large amounts of Citi's LDC debt. Citi's stock price sunk into single digits. For a period during those days, Citi was under very tight regulatory supervision. Apparently, at least according to federal bank regulators, countries did go broke just like any other borrowing entity.

With the ascension of John Reed to CEO, I was hopeful that Citi would realign its core values to include, throughout the institution, the solid lending principles I had been taught early in my Citi career.  From the outset of my employment with city, "character, capacity and capital" were the touch stones of proper credit evaluation.  A potential borrower had to demonstrate adequacy measured against each of them.  The art of lending money could not be effectively pursued without a good sense that you were going to get the money back.  Citi, I felt, needed to lay emphasis on this ethic, particularly after the sovereign debt difficulties.

But, I was to be disappointed. The central focus of strong risk management, evident in my early years with the bank, was not applied in certain key profit centers under the new regime.

From 1988 to 1991 I worked at Citi in New York head office in a corporate staff, consumer finance, risk management position. During that period risk management as a core Citi discipline continued to erode. Citi risk managers in those days, and there were many good ones, were often fighting to get into the room as opposed to having a prominent seat at the table. Without institutional support, the titular risk management function of the bank, filled with wisdom or not, took up floor space, but had little impact in shaping Citi's risk strategy.

Forgetting the hard lessons of the LDC lending debacle, as early as 1990, only two years after swallowing the sovereign debt debacle pill, Citi had eased credit standards to feed a growing appetite for residential mortgages. Nineteen years down the road, Citi's huge stake in subprime toxic mortgages would assure, once again, effectively, another Citi federal conservancy.

In 1991, sound risk management principles having been hard wired into my brain during my early days at Citi, having achieved whatever successes I had in the bank through application of those principles, and having determined that, culturally, Citi had decided to set those time worn risk management principles aside, after nineteen years at Citi, presented with a new opportunity outside of Citi, I decided to leave.

I regretted having to part company with Citi, but, I'll ever be grateful for the training, the challenging jobs, the mentors, and co-workers that made that experience worthwhile.

In late 1991, I assumed responsibility for the turnaround of a publicly traded, troubled Miami thrift. We would have never been able to fix that business and sell it four years later, in 1995, without our team's having put into practice the risk management principles I had learned, and applied, at Citi...nor would our success have occurred without the many Citi alums who, sharing those strong risk management values, joined me to participate in the turnaround experience.

If mother Citi couldn't figure out which road she wanted to follow, at least we could, in Miami, drawing from the good side of Mother Citi's schizophrenic risk taking personality.

 

As we find out in "Borrowed Time," the 2008/09 financial crisis was just one of the crises, many requiring government assistance, affecting Citibank over the course of its 200 year history.

The authors suggest that the frequency of Citi's brushes with failure derives from a belief by its leaders that overreach in assuming risk will be backed up by government support if the reach is too far. This phenomenon is called "moral hazard."

So far, in view of recent history, it's hard to debunk the moral hazard hypothesis. Why else would bank leadership throw sound lending principles out the window unless they believed that in taking out sized risk, they might increase profits, but, in the event of failure, they would be insulated from its consequences?

To be sure, the mistakes of lending excess over Citi's two hundred year history admittedly gives rise to self doubt among us skier alums about how good we really were as bankers. It sounds self serving, but, I like to think that during my own time with schizophrenic Mother Citi I had more exposure to Dr. Jekyll, the good Citi, and less to Mr. Hyde, the bad Citi.

Reading "Borrowed Time" we learn that not all Citi leaders strayed from adherence to sound lending principles. When Citi wasn't pushing the lending envelope too far, it was frequently an important aid to American growth. As was mentioned above, through the instrumentality of Moses Taylor, Citi was a key financier of the northern effort during the Civil War. Citi CEO Frank Vanderlip, at the turn of the 20th century, was prescient in successfully expanding Citi's international branch network while upholding sound lending standards. "Sunshine Charlie" Mitchell, in the authors' opinion, probably didn't deserve all the opprobrium he received as a triggering agent the 1929 stock market crash. Under the leadership of William Gage Brady, Jr., Citi was helpful in financing WWII, with two thirds of the bank's portfolio holding government bonds. All the narratives from the book on the above are interesting... informative.... if not altogether riveting.

"Borrowed Time" isn't a great book. Many of its "insights" are gleaned from public records, including examiner's reports. There seemed to be little new information emanating from interviews or memoirs of key players. There is a text book quality to the book. It wasn't "fun," or "page turning" to read.

Reading "Borrowed Time," it would have been nice to know, in Andrew Ross Sorkin writing style, the ins and outs of how and why, in 2009, Citi reincarnated as "the walking dead." After all, Lehman Brothers had been allowed by regulators to fail in September 2008. Sorkin's account of the Lehman Brothers fail, in his book, "Too Big to Fail," is stirring. There is no such exciting account of Citi's 2009 rescue in "Borrowed Time."