Former CEO John Reed Apologizes For Creating Citigroup 'Monster'

I'll give Reed some credit; his honesty in the face of the devastation he helped create is preferable to Lloyd 'just call me Jesus' Blankfein's ridiculous traipse through the maze of public scrutiny on the heels of the $13 billion AIG stealth bailout, and the decision to soon pay out $20 billion in bonuses at the end of Goldman's fiscal in November.  Heaven forbid, Goldman retain some excess capital in a rainy day fund that might stave off the need for the next taxpayer rescue.  

Even more outrageous of course would be the notion that Congress, or the FDIC (which, along with the Fed, regulates Goldman now that it's a bank holding company) might raise capital requirements.   Especially in the wake of our recently burst bubble, couldn't we have a little less fractional, in our system of reserve lending?!  Ten to 1 leverage on capital seems a good place to start, though Citigroup was just called out last week for having just 2.4% (tier 1 capital), and that's before you consider thier off-balance sheet garbage.

To the Editor:

Re “Volcker’s Voice, Often Heeded, Fails to Sell a Bank Strategy” (front page, Oct. 21):

As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense.

This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector.

John S. Reed
New York, Oct. 21, 2009

The writer is retired chairman of Citigroup.

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And now his mea culpa as told to 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.”

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.

Continue reading at Bloomberg...

Comments

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In the grip of our Great Recession, with more job losses to come, we have yet to fix the broken financial system that is an underlying cause of this whole mess. The long history of financial panics wrecking American lives had led to what we thought was a tight regulatory system. But the system did not keep pace with fast-moving changes in the financial industry.

It is true that the Federal Reserve, perched at the top of the financial system, is blamed for creating the orgy of debt by failing to see the dangers in the rapid growth of securitization and derivatives, and for maintaining the federal-funds rate at a very low 1% in 2003-2004. Critically, while the regulators looked to their conventional issues of the safety and soundness of individual institutions, no one was responsible for protecting the entire system from the ricochets of interconnected risks.

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[Joe Petrusky]

Politicians and C.E.O.'s come out of the same mold that is why they are in bed together. I applaud mr. Reed for being truthful and admitting his mistakes. I was in favor of repeal of Glass steigal at the time, but now see the errors of my ways. We have to have politicians that are willing to admit mistakes instead of defending their positions that caused the mess we are in.

[Dave Mowers]

People realize that four Wall Street investment banks issue 95% of all derivatives contracts like collateralized debt obligations. That these banks are deemed "too big to fail" and that for every contract there are two parties to the contract. The money to pay these contracts when the economy retracts comes not from the investment banks or investors but from taxpayers. By allowing them to issue unlimited derivatives AND backing the payment of those contracts with the American taxpayer these banks have effectively CAPTURED THE MONETARY SYSTEM. All money printed from now on will only be used to pay these contracts every time we hit a recession. The economy will never expand again, there will never be new jobs until the economy collapses during a recession and all money printed is used to pay derivative contract holders or the banks will fail. This is it, there is no reason to bother trying to do anything anymore, one class of Americans in one industry will now get everything because they will receive all the money printed from now on.

Think about it.

[Harry Johnson]

Well Mr. Reed now that you have admitted you were wrong, what are you going to do about it? Are you going to hand back your ill gotten gains? Will you do the honorable thing, Japanese style? Will you even go so far as to shame and call out your cronies who persist in not admitting guilt?

I though not.