Citibank: America’s most political bank

Nice review of the much talked about book on history of Citibank: Borrowed Time: Two Centuries of Booms, Busts, and Bailouts at Citi by James Freeman and Vern McKinley.

In the turbulent history of American banking, one institution looms larger than the rest.

Take a momentous event in US history — the end of slavery, the country’s breakneck industrialisation, its infatuation with the stock market in the 1920s, and the recent mortgage meltdown — and chances are that two-hundred-year-old Citi was involved: sometimes bankrolling the government, other times frantically knocking at its door for help; sometimes a prudent steward of financial stability, others enabling the punters’ most outlandish bets.

For two centuries, the fortunes of Citi have been conflated with the fate of the country more than most politicians and regulators would care to admit. James Freeman and Vern McKinley’s Borrowed Time: Two Centuries of Booms, Busts, and Bailouts at Citi, a formidable deep dive into the vicissitudes of this largest and most controversial of American banks, reveals just how dependent Citi became on the leniency of government officials — and how handsomely the bank repaid their largesse.

Citi is infamous as the biggest beneficiary of the various bailout programs orchestrated by the Federal Reserve and other financial regulatory bodies during the 2008 financial crisis. All told, the bank secured official support worth $517 billion between late 2007 and early 2009 — a whopping 25 times shareholders’ equity.

While the scale of the rescue may have been unprecedented, Freeman and McKinley show that it was by no means the first time Citi relied on government forbearance and funding to remain a going concern. Borrowed time documents how the bank would have struggled to survive the painful hangover from the Roaring Twenties boom and the emerging market rout of the 1980s without preferred treatment from regulators.

In the end it is all about politics:

Freeman and McKinley’s achievement is to present the long-lived symbiosis between Citi and its overseers, not as the product of evil intentions or unreasonable size, as so many critics of banking are apt to suggest; but rather, as the complex interplay between poor risk management, distorted incentives, and political quid pro quo. There is no easy fix to what Borrowed Time calls “America’s most political bank.”

Nevertheless, the discerning reader will not put down this book thinking that Citi has been, always and everywhere, a source of mischief. Indeed, the bank’s history features many shining moments, from its unacknowledged role calming markets during the 1907 panic, to the extension of consumer finance and retail investment that it facilitated, to the end of Glass-Steagall — by then an irredeemable relic — that the bank’s merger with Travelers in 1998 precipitated.

Indeed, one is left wondering whether Citi is that different from its competitors after all, or whether it simply became America’s most political bank by dint of being the largest. Freeman and McKinley seem to believe that such equanimity is undeserved, quoting former FDIC chairwoman Sheila Bair that “some are coming to Washington for help, others are coming to Washington to help.” Still, that begs the question: to help whom, and in exchange for what?

There as elsewhere, Citi’s trajectory merely reflects the tortuous evolution of US financial regulation.

Hmm.

What one realises is how freely one can write such accounts in US. In India, most bank history books are just hagiographies. If not, then one keeps fighting court battles…

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