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Reed Apologizes for Glass-Steagall Repeal, Building Citigroup
By Bob Ivry
November 6, 2009
Nov. 6 (Bloomberg) -- John S. Reed, who helped engineer the merger that
created Citigroup Inc., apologized for his role in building a company
that has taken $45 billion in direct U.S. aid and said banks that big
should be divided into separate parts.
“I’m sorry,” Reed, 70, said in an interview yesterday. “These are
people I love and care about. You could imagine emotionally it’s not
easy to see what’s happened.”
Citigroup was formed in 1998 when Citicorp, a commercial bank,
combined with Sanford I. Weill’s Travelers Group Inc., which owned the
investment firm Salomon Smith Barney Holdings Inc. The New York-based
company lost $27.7 billion in 2008 and took $118 billion in writedowns.
Now 34 percent-owned by the Treasury Department, Citigroup sought help
in the wake of a credit freeze that claimed three of Wall Street’s
biggest firms and led to the deepest recession in 70 years.
Congress’ overhaul of U.S. financial regulations should include
ordering banks to hold more capital, ensuring executives’ compensation
is aligned with long-term profitability and banning firms that take
deposits from also engaging in equities and fixed-income trading, Reed
said.
“I would compartmentalize the industry for the same reason you
compartmentalize ships,” Reed said in the interview in his office on
Park Avenue in New York. “If you have a leak, the leak doesn’t spread
and sink the whole vessel. So generally speaking you’d have consumer
banking separate from trading bonds and equity.”
Citizen’s View
Lawmakers were wrong to repeal the Depression-era Glass- Steagall
Act in 1999, Reed said. At the time, he supported overturn of the law,
which required the separation of institutions that engaged in
traditional customer banking services from those involved in capital
markets.
“We learn from our mistakes,” said Reed, who wrote an Oct. 21
letter to the editor of the New York Times endorsing a division of
banking activities. “When you’re running a company you do what you
think is right for the stockholders. Right now I’m looking at this as a
citizen.”
Reed headed Citicorp for 14 years until the merger with Travelers.
The deal created the world’s biggest financial company in a stock swap
valued at about $85 billion. Reed and Weill were co-chairmen and
co-chief executive officers until Reed’s retirement in 2000.
Citigroup spokesman Stephen Cohen declined to comment.
The third-largest U.S. bank, Citigroup shed about $300 billion in
assets, or 13 percent of its total, in the third quarter compared with
a year ago and is selling what it calls non-core properties, according
to regulatory filings. The company said yesterday that it will spin off
its Primerica Financial Services subsidiary.
CDO Pioneer
CEO Vikram S. Pandit has eliminated about 100,000 jobs since late 2007, reducing the headcount by 26 percent as of Sept. 30.
Citigroup pioneered the production of collateralized debt
obligations, bundles of home loans whose cash flows were sold to
investors. When subprime mortgage borrowers began defaulting on their
payments in 2007, the CDOs lost value and became part of Citigroup’s
$118 billion in writedowns and credit losses.
In the last year, the bank received $45 billion from the U.S.
government to bolster its capital and another $300 billion in loss
guarantees. The Treasury Department retained its 34 percent stake after
converting a portion of the $45 billion in rescue funds to equity.
To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net.
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