Borrowed Time

Two Centuries of Booms, Busts, and Bailouts at Citi

James Freeman, Vern McKinley

• Publisher: Harper Business
• Year: 2018
• Print ISBN: 9780062669872
• eBook ISBN: 9780062669889
• Topic: History
• Subtopic: Accounting
• Index: History

The disturbing, untold story of one of the largest financial institutions in the world, Citigroup—one of the " too big to fail" banks—from its founding in 1812 to its role in the 2008 financial crisis, and the many disasters in between.

During the 2008 financial crisis, Citi was presented as the victim of events beyond its control—the larger financial panic, unforeseen economic disruptions, and a perfect storm of credit expansion, private greed, and public incompetence. To save the economy and keep the bank afloat, the government provided huge infusions of cash through multiple bailouts that frustrated and angered the American public.

But, as financial experts James Freeman and Vern McKinley reveal, the 2008 crisis was just one of many disasters Citi has experienced since its founding more than two hundred years ago. In Borrowed Time, they reveal Citi’s history of instability and government support. It’s not a story that either Citi or Washington wants told.

From its founding in 1812 and through much of its history the bank has been tied to the federal government—a relationship that has benefited both. Many of its initial stockholders had owned stock in the Bank of the United States, and its first president, Samuel Osgood, had been a member of the Continental Congress and America’s first Postmaster General. From its earliest years, Citi took massive risks that led to crisis. But thanks to private investors, including John Jacob Astor, they survived throughout the nineteenth century.

In the twentieth century, Senator Carter Glass blamed Citi CEO "Sunshine Charlie" Mitchell for the 1929 stock market crash, and the bank was actually in violation of the senator’s signature achievement, the Glass-Steagall law, in the late 1990s until then U.S. Treasury Secretary Robert Rubin engineered the law’s repeal. Rubin later became the chairman of the executive committee of Citigroup, helping to oversee the bank as it ramped up its increasing mortgage risks before the 2008 crash.

The scale of the financial panic of 2008 was not, as the media and experts claim, unprecedented. As Borrowed Time shows, disasters have been relatively frequent during the century of government-protected banking—especially at Citi.

1
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— do 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 do 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 do 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 8 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 government-created 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.)1

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 expected to carry great weight. It certainly could not have been easy to ignore the clear logic in Randolph’s letter to Washington:

“The phrase, ‘and proper,’ if it has any meaning, does not enlarge the powers of Congress, but rather restricts them . . .”3

Washington signed the bill anyway. Like most members of Congress, he wanted an institution to issue paper money, provide a safe place to keep public funds, collect the government’s tax revenue, and provide commercial banking services for the burgeoning American economy. Hamilton largely modeled his creation on the Bank of England. While the elected lawmakers of the United States approved the idea, they perhaps wondered if the critics were right and gave the new Bank of the United States an expiration date. The bank would need to cease operations in twenty years if another law wasn’t enacted to extend its charter.

It was a victory for Hamilton but also a threat to his wealth. His original design had been for a national bank based in Philadelphia and without branches in other cities. When lawmakers instead drafted the bill to include various branches he unsuccessfully argued against the idea. Publicly he expressed concern that mismanagement of a single branch could hurt the reputation of the entire system, but he had a strong private incentive to hold this position. Hamilton was the founder of the Bank of New York and likely hoped that his bank would be the exclusive fiscal agent of the federal government in New York City.4 Once it was clear that the new national bank would be handling that assignment with a new branch in Manhattan, perhaps he began to wonder if Jefferson was right about a new financial monopoly. Bank opponents had warned that a competitor created by the national government would threaten the three existing state-chartered banks as well as other state banks chartered in the future.5

On the day it opened for business in Philadelphia, December 12, 1791, the First Bank of the United States did not just instantly become the country’s largest bank. It was also by far the largest corporation of any kind. It enjoyed a capitalization of $10 million, “more than four times as much as that of the three existing banks combined and far more than the amount of all the gold and silver in the country.”6

It’s wrong for the government to pick winners and losers. But there’s an old saying that when the government picks a winner—bet on it. Private investors did, supplying 80 percent of the bank’s initial capital. The government bought the other 20 percent of the bank by issuing $2 million in federal bonds. The board of the new First Bank of the United States consisted of private directors rather than government appointees. While Hamilton preferred a strong central government, he didn’t trust it to safeguard the young nation’s currency. This is why he didn’t want to leave the printing of money up to Congress or to his own Treasury department. “Hamilton saw the requirement that the Bank of the United States be a profit-making institution as a way to control the government’s temptation to issue notes not backed by gold and silver,” writes Thomas K. McCraw,7 who adds that the “tendency to print money had run amok during the Revolution.”

Hamilton wanted self-interested bankers rather than political actors looking after the issuance of paper, which he said was “an operation so much easier than the laying of taxes that a government, in the practice of paper emissions, would rarely fail in any such emergency to indulge itself too far.”8 The US government in our own time has certainly indulged itself when it comes to paper emissions. As we write, the Federal Reserve is presiding over a balance sheet of more than $4 trillion, which in turn helps the Treasury to operate with $20 trillion in debt—and that’s just the debt that Uncle Sam formally acknowledges, never mind all the unfunded promises stretching far into the future. A question posed by Hamilton remains just as hard to answer more than two centuries later, as it was in his time: “What nation was ever blessed with a constant succession of upright and wise Administrators?”9

But in curing one problem, did Hamilton create others? In our own time, and specifically during the 2008 financial crisis, Americans saw the destruction that can occur when government anoints particular profit-seeking firms to carry out public missions like financing home purchases or evaluating credit risks. Back in Hamilton’s day, the questions from ...

Table of contents

• Dedication
• Contents
• 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