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John 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.