On the Wednesday before Thanksgiving 1990, Citicorp chief executive officer John S. Reed walked through the main doors of the fortress-like Federal Reserve Bank of New York, on his way to a meeting that would mark the beginning of an effort to save the nation's largest bank from financial disaster.
The Citicorp chief executive had been summoned by two of the most powerful regulators in the federal government: E. Gerald Corrigan, president of the New York Fed, and William Taylor, director of the Fed's division of bank supervision in Washington. In Corrigan's wood- paneled conference room on the 10th floor, the regulators got directly to the point. Sources familiar with the meeting recall the regulators' polite but blunt message this way:
The U.S. banking system was headed for trouble and so was Citibank, the regulators warned, because of the sharp decline in the real estate market. With its vast deposits, Citibank had a unique responsibility to strengthen itself to help maintain public confidence in the banking system, they said. Loss of confidence could trigger a run on Citibank that would not only threaten the bank, but the entire financial system.
Citibank must do whatever it took to restore its strength, Corrigan and Taylor stressed, even if that meant selling prized businesses, cutting dividends to its shareholders or watering down shareholders' investment by selling more stock.
The meeting was a wake-up call for Reed, who until then had believed that Citibank could get through the real estate crunch without major damage. And it began an extraordinary 2 1/2-year partnership between Reed and the regulators to rescue the nation's biggest bank and avoid worldwide financial turmoil.
The Citicorp saga provides a case study of how financial regulation works in a crisis - subtly, secretly and, in this case, successfully - to nudge a giant bank back from the brink.
The rescue mission that began that day in November 1990 is now coming to an end, according to regulators and Citicorp officials alike. The huge bank, with its $213 billion in assets, remains on the government's "problem bank" list, say Citicorp and Washington sources, but its survival no longer seems to be in doubt. Nor is that of its chairman, who has dodged the bullet that struck the chief executives of so many of the nation's other corporate giants, such as International Business Machines Corp., General Motors Corp. and American Express Co.
One sign that Citibank's crisis has passed is that Reed is no longer required to attend monthly meetings with regulators in Washington to monitor the bank's progress. Those mandatory updates ended earlier this year, banking sources say.
And on Wall Street, where confidence is measured by the price of a stock, Citibank shares have rebounded from a low of $8.50 a share in December 1991 to as high as $30 this year, a resounding comeback.
The stakes for the regulators in this case were enormous. "We were running fire drills in case they had a problem that required government attention," one top former official recalled. A run on Citibank would have required intervention by the Federal Reserve and help from the central banks of other nations, another key insider said.
What evolved was a kind of co-management of the bank. For the last 2 1/2 years, every significant corporate decision made by Reed has been cleared in advance by officials of the Federal Reserve Board, which regulates the bank's holding company, Citicorp, and by the Office of the Comptroller of the Currency (OCC), which oversees its major subsidiary, Citibank NA.
The Citicorp story is also a study in executive survival tactics. Reed was in charge when Citibank made the risky real estate loans that got it in trouble and could well have lost his job as a result.
But after being roused by the Fed officials, Reed seized the initiative - and stayed one step ahead of the regulators and his own board of directors. He kept the confidence of both constituencies and saved not only the bank and his hefty salary and bonus (which totaled $2.2 million last year) but also his reputation.
Confident that the crisis is past, some of the people involved in saving Citibank are now beginning to talk. This account is based on interviews with current and former regulators, and with executives and directors of Citicorp who participated in the events described or worked closely with those who did.
Few of the sources would allow their names to be used. Of the two key Fed players, Taylor died unexpectedly last summer and Corrigan has refused to discuss regulatory issues.
In the Path of a Real Estate Disaster
When Taylor and Corrigan summoned Reed and Citicorp President Richard S. Braddock to the crucial pre-Thanksgiving meeting at the New York Fed, they were worried, colleagues say. The regulators felt they needed to warn Reed that Citibank was standing in the path of a wave of commercial real estate disasters that already had wiped out nine of the 10 largest banks in Texas and was now rolling toward the Northeast.
Citibank was unprepared, the regulators feared. Though its real estate losses had doubled in the previous year, they were still tiny, and only six months earlier the bank has assured shareholders the losses would be no more than 1 percent of the loans.
Taylor and Robert L. Clarke, then comptroller of the currency, knew that throughout the banking industry, real estate losses were running 20 times that level - even worse at some banks - and that Citibank had more real estate loans than any other bank in America. Citibank's commercial real estate portfolio totaled roughly $30 billion, by one 1990 internal Citicorp estimate.
The regulators were convinced that Citicorp would need more capital to weather this storm. Corrigan and Taylor advised Reed that with its huge global real estate portfolio, Citi would need to raise as much as $5 billion in new capital to cover the likely losses.
Until that moment, Citicorp had not given serious consideration to such a large increase in capital, company officials acknowledge.
According to sources familiar with the meeting, Reed listened as Taylor ticked off his prescription: Stop the dividend, sell more stock, unload assets to raise cash - all actions likely to drive down the price of Citicorp shares.
Taylor and Corrigan did not order Reed to do anything that day, setting a pattern for the relationship between the government and the bank that continued through the subsequent 2 1/2 years of partnership. But they reminded him that the bank's future was at stake. Obviously, Reed's job was also at stake.
"The message was not delivered toughly, but as things subsequently unfolded, it turned out to be a very tough message indeed," a Citibank official recalled.
Reed was chastened by what he had been told, according to former top Citi executives.
"I remember talking with him later that day," said one. "He spoke about the meeting as a lesson. This should be a lesson to never manage your bank in such a way so that the regulators can come back and start telling you either how they think it should be managed, or how it will be managed if you don't do certain things."
Ignoring Signs of Trouble
When Taylor and Corrigan sounded their alarm bell, Citicorp was only beginning to recognize its problems. Its profits would fall sharply in 1990, to $458 million from $1.86 billion only two years earlier. But insiders say no one at the bank anticipated that 1991 would produce the bank's first losing year since the Depression - a $457 million loss.
The problem was not only bad loans and the reserves that had to be set aside to cover them, but escalating expenses. The bank was also finding it increasingly difficult to borrow short-term money at reasonable interest rates. Some Wall Street analysts were muttering darkly about an incipient slow-motion run on the bank.
Citibank was insulated from recognizing these problems by its own size and history. Descended from the famously conservative First National Bank of the City of New York that was chartered in 1863, Citicorp had become a global giant with 3,300 offices, operating on every continent except Antarctica. It claimed to do business with one in every four households in the United States.
Reed and the other senior managers who had mapped the strategy that took Citibank so deep into real estate were slow to recognize they had blundered into a major disaster. "No question, there was a period of deep denial," recalled one former executive. "We did not feel that we had to deal urgently with the problem."
Largely uninformed of the details of Citi's real estate activities, Reed asked for a briefing on the issue early in 1990. The assurances he received left him convinced that Citi was still on solid ground, and Citicorp executives expressed the same confidence at a February 1990 board meeting.
Said one former director who attended that session: "I remember with great clarity. Holy mackerel, not only were they denying a problem, they were pretty positive about real estate. Prior to the period of denial was the period of misleading. ... My only explanation of why John allowed it was that he was not as close to the situation as he might have been."
At this time, regulatory scrutiny was less than aggressive at the bank, according to former senior executives. "The regulators were tolerated, but that was about all," said one former top credit officer. "They had no real muscle, no major say."
After the Thanksgiving meeting, Reed finally took decisive action. He announced in January 1991 that the common stock dividend would be cut nearly in half, from 44.5 cents per quarter to 25 cents, so that a greater portion of the bank's profits could be retained to build up its capital.
Cutting the dividend was a difficult decision, not only for Reed but for the regulators, who were sharply divided over how hard to push Citicorp on the issue.
At the time of the Thanksgiving showdown, L. William Seidman, then chairman of the Federal Deposit Insurance Corp., was complaining loudly about banks that were continuing to pay dividends when they were clearly in financial trouble. Clarke at the OCC, meanwhile, feared that cutting the dividend would make it impossible for Citicorp to raise new capital. And for Corrigan at the Fed, the overriding concern was to avoid any sudden shocks to the financial system, a Federal Reserve source said. Dropping the payout would be an admission that the bank was in much worse shape than anybody had known.
The compromise - which regulators knew would bring criticism that they were not moving fast enough - allowed Citicorp to reduce the dividend first to give the market time to adjust and then, later, to eliminate it entirely. By late 1991, the dividend had been suspended.
Along with the dividend cut, Reed drafted what he called "The Plan." It was a five-point statement of what the bank would do in 1991-92 to strengthen itself - a direct response to pressure from Washington.
To unveil The Plan, in January 1991 Reed retreated with his 50 top executives to Great Gorge, a ski resort in northern New Jersey about 90 minutes from Manhattan.
First, Reed said that Citi's top management - famous as long- range visionaries - would focus their attention exclusively on the short-term problems of the next two years. Second, operating expenses would be slashed. Third, new stock would be issued and parts of the vast array of businesses within Citicorp would be sold. And while dealing with the problems, Citi would continue to build on the strength of its core businesses and to maintain strong customer relationships.
Top managers generally welcomed The Plan, but those lower down were leery. "Skepticism was a mile high, both in terms of Reed personally and his plan," said one former executive who was at Great Gorge. "The rank and file viewed it as more corporate bs."
Some Citicorp directors and senior executives were also dubious about Reed's moves. Board members began to get back-channel phone calls from former insiders, who wondered whether the board ought to consider replacing Reed.
At the urging of several directors, Reed added a special session on top management to the agenda for the March 1991 board meeting at the Camino Real luxury hotel in Mexico City.
It was to be "a moment of drama," said a director who was there. "The Citi gang is always buttoned-down, in control. This time they didn't have the buttons. We did." If Reed's job was ever on the line, it was in Mexico City.
Reed handled the board superbly, by all accounts. He warned them of serious trouble ahead and presented a bold plan to deal with it. Neither defensive nor downhearted, he detailed his most up-to-date thoughts on how to execute The Plan.
He asked three questions of the directors. Had he analyzed the problem correctly? Did his solution make sense? And did Citi have the guts to carry it through to the end?
Each director spoke and, according to one, "The reactions ranged from `Looks okay, John,' to more thoughtful versions of that. But it was all approval for the plan."
Then the discussion turned to top management. Reed's top lieutenants left the plush, high-ceilinged parlor. Led by director John W. Hanley, former chairman of Monsanto Co., a number of directors complained about the inadequacies of some of Citibank's senior lending executives. They also wondered aloud whether Reed had enough people close to him who knew how to deal with regulators.
While names were not named, there was no doubt in most directors' minds that several top people must be replaced. "John had already reached the conclusion that people had to go," said one board member. "We were the straw that broke the camel's back."
One reason the board stuck with Reed was that they saw no better alternative, inside or outside the bank. Another director explained, "I looked around the horizon. I saw nobody. I even got out the Business Council's roster {of CEOs}. I didn't find anybody I would trust more than John."
Regulators Step Up Involvement
Citicorp's problems worsened along with the overall U.S. economy as 1991 wore on. "The bank deteriorated steadily, a continued erosion, and a growing involvement by the regulators," said a former top Citicorp executive.
Worried, the regulators became more aggressive. "They brought in tougher people, and there were more of them," recalls a senior bank officer who has since left. "It was a painful period that I am spending most of my time trying to forget."
Citibank was placed on the government's "watch list" of problem banks in December 1991. The list isn't made public, but every quarter the government reports how many banks are on it and totals their assets. The year-end report showed little change in the number of banks but a huge jump in the assets. Everyone in banking knew that Citibank had gone on the list.
As Citibank's problems worsened, a small army of regulators took up positions inside the bank. The OCC had its 22 regular examiners assigned to Citibank, with their own offices in one of the midtown Manhattan buildings that house Citicorp's operations. They had authority to see every record, every loan file, anything any time they wanted, explained Jimmy Barton, who oversees Citibank as deputy comptroller for multinationals.
The Federal Reserve had its examiners in the building every day, too, auditing the holding company. They were joined by special teams of expert examiners. At one point, there were as many as 300 banking examiners going over Citibank's books.
What regulators feared most, former government officials said, was a "funding crisis" like the one that took down Continental Illinois National Bank a decade ago. Much of Citi's funds are big corporate deposits, many from overseas that are not protected by federal deposit insurance. If those depositors got nervous and decided to withdraw their funds, even a healthy bank could not survive.
With so much at risk, it was in the interest of both the bank and its regulators to proceed without public confrontation.
"The {OCC} has believed for a long time that what we really like to do is to get management and the board to cooperate and fix their problems," Barton said. "If they are unwilling to do that, then we really don't have much choice but to use the more draconian powers that we have."
The OCC got draconian with Citibank in August 1992, issuing a "memorandum of understanding" (MOU) that put its demands in writing. Terms of the MOU remain secret, but as a publicly owned company, Citicorp was required to disclose that its relationship with the regulators had deteriorated to the point of written reprimand.
Citicorp officials insist the memorandum merely formalized its commitment to The Plan, but one regulator said the issuance of any MOU "means that we have not gotten the response that we would have suggested."
The question of whether to make Citicorp sign a MOU triggered intense regulatory debate, not only between agencies but within the ranks of the OCC and the Fed. Many top regulators were satisfied with The Plan. A written order would accomplish nothing, they argued. Reed was methodically moving to deliver what he had promised, taking his hits on real estate, rebuilding capital.
Reed still wasn't moving fast enough, the more hawkish regulators argued. Giving him so much time amounted to "forbearance" - regulatory jargon for bending the rules. "Forbearance" had become a nasty word in Congress and regulators feared that the lawmakers would come down on them if they did not come down on Citibank.
Redoubling Cost-Cutting Efforts
Wall Street added more pressure, as investors drove the price of Citicorp stock below $9 a share in late 1991. Prodded by both the market and the regulators, Citicorp's redoubled its cost-cutting efforts. The bank also added more than $4 billion to its capital by selling stock and putting two dozen businesses on the block.
Some of the assets sold by Citicorp were odds and ends, offered at what amounted to a corporate garage sale. For example, the bank sold its stake in a Mexican company that brews Dos Equis beer.
But many of the assets that had to be sold were carefully nurtured corporate offspring whose sale represented a painful retreat from longtime Citicorp strategies. Promising high-tech ventures had to be abandoned. A huge student loan business went up for sale. And the regulators insisted that Citi sell two bond businesses that they viewed as costly risks to the bank.
As the cutting continued and regulators tightened their screws, more than 11,000 Citicorp employees lost their jobs. Antagonism between regulators and Citibank executives increased even as the bank's health began to recover.
Knowing that he would not be forgiven for failure, Reed kept pushing. He calmly fired dozens of top managers. But lopping off heads was only part of his plan. Reed decided that Citi needed a complete management shake-up so that he could more directly get a grip on the bank. He felt that he remained too insulated from the people he was relying on to cut costs and raise capital.
At a January 1992 retreat at a hotel in Connecticut, Reed announced that henceforth a group of the six top executives would rule, with a group of 15 lieutenants reporting directly to them. President Richard Braddock's authority was sharply reduced, and later that year, he left the company.
As part of the new order, Reed established task forces to solve specific logjams. "Everyone attacked the work very hard," said a former member of the group of 15. "They knew that their careers depended on the effectiveness of each task force. ... It was intense and emotional."
The task forces found ways to cut almost $1 billion a year of non- interest expenses.
By late last year, the worst was over. The stock price began to recover, and courageous investors who had bought at the bottom began to cash out, doubling, even tripling their money.
Falling interest rates and the general rebound in the U.S. economy contributed to the turnaround, not only of Citibank but of the entire banking system.
This January, the regulators told Reed the monthly meetings were no longer necessary, even though the MOU technically will remain in effect until next February. Citicorp is continuing to set aside about $500 million each quarter to cover bad loans, but the corner appears to have been turned. Virtually every analyst on Wall Street has upgraded the stock.
Citicorp, however, is not the bank it was. Reed's prized overseas operations have been preserved but the bank's domestic sights have been lowered. An entire generation of top bankers has been lost.
Reed said in March that he will need until 1995 to get the bank fully revved up again, but some former Citicorp executives say that bank will not return to its past glory any time soon.
"It used to be the bank," said one. "Today, it is a bank."