How Citigroup Escaped Financial Disaster in 2008
Two Centuries of Booms, Busts, and Bailouts at Citi
By James Freeman and Vern McKinley
365 pp. Harper Business. $35.
I was very much looking forward to reading “Borrowed Time,” James Freeman and Vern McKinley’s book about “two centuries of booms, busts, and bailouts” at Citigroup, once the nation’s largest bank. (It is now fourth largest, by assets.) I was hoping the authors would deliver a much-needed, and definitive, explanation about how and why a decade ago the federal government decided to rescue Citigroup instead of letting it go down the tubes, where it probably belonged given how unhinged the bank’s risk-taking had become. After all, there have been many books about the 2008 financial crisis and how various Wall Street banks did, or did not, survive it. But there has never been an accounting of how Citigroup got itself into so much trouble and why the decisions were made to bail it out — to the tune of, as the authors reveal, more than $517 billion all told, some $40 billion more than the roughly $476 billion in cash and guarantees described in a 2011 congressional report.
That there hasn’t yet been a treatment of the Citigroup debacle is a noteworthy omission in the canon, considering how what happened at Citigroup bucks the conventional wisdom about the financial crisis: to wit, that it was fomented and exacerbated by the so-called investment banks — like Bear Stearns, Lehman Brothers and Merrill Lynch — and that the so-called commercial banks — like JPMorganChase and Bank of America — came to their financial rescue. (Except, of course, for Lehman Brothers, which was not rescued and then failed in spectacular fashion.) Recognizing that different types of institutions ended up with different outcomes contrasts with the views of political progressives like Senators Elizabeth Warren and Sherrod Brown that none of this would have happened if only the Glass-Steagall Act, the Depression-era law separating commercial banking from investment banking, had never been repealed in 1999. The repeal allowed for the blockbuster merger of Citibank and Travelers, which owned Salomon Brothers and Smith Barney, two investment banks, and created Citigroup in the first place. But those, like me, who have argued that repealing Glass-Steagall did not cause the 2008 financial crisis have always stubbed their toe on Citigroup because it wreaked so much havoc before its enormous bailout.
The authors certainly would appear to have the credentials for a revelatory work of narrative nonfiction. Freeman, a longtime columnist at The Wall Street Journal, is also an assistant editor on the paper’s editorial page. He was once an “investor advocate” at the Securities and Exchange Commission. His collaborator, McKinley, a visiting scholar at George Washington University Law School, is a self-proclaimed specialist in “diagnosing financial instability” in the banking system and a former employee of the Federal Reserve Board of Governors. They also had a compelling thesis through which to explore why the feds bailed out Citigroup in 2008: that throughout the bank’s 206-year history it has often teetered on the edge of financial ruin, only to be rescued repeatedly by friends in high places.
The authors also ignore the low-hanging fruit of Citigroup whistle-blowers, like Richard Bowen and Sherry Hunt, who would have had plenty to say about how their colleagues in the bank’s mortgage department knowingly lowered their credit standards and continued to package shoddy mortgages into securities and to sell them off — for big fees and then big bonuses — as investments all over the world. “Borrowed Time” has plenty of citations from books and articles about the financial crisis and about the often fascinating group of executives who led the bank over its long history, but the endnotes reveal only one actual interview the authors conducted — with Bart Dzivi, the former special counsel to the Financial Crisis Inquiry Commission. What about the sizable cast of characters that brought the bank to the brink of disaster in 2008? Surely not every one of them would have declined to be interviewed.
If the book has any narrative tension, it is found in the authors’ interesting — but too quick — asides about their often unsuccessful efforts to pry supposedly public information about the bank out of its regulators. (Under the auspices of the Freedom of Information Act, Freeman and McKinley initiated a marginally successful lawsuit against the Federal Deposit Insurance Corporation to get documents about Citigroup that weren’t forthcoming.) It turns out there is more information about the bank available in the files of the Office of the Comptroller of the Currency from the 19th and early 20th centuries than there is in its files about, say, the years 1991 and 1992, another time the bank almost failed. The authors argue that in the aftermath of the passage of the Federal Records Act of 1950, regulators have “routinely destroyed the exam reports” for the bank, leading Freeman and McKinley to the sound conclusion that it is “easier to repeat history if the lessons of the past are erased.”
Colorful characters show up in “Borrowed Time” — from Frank Vanderlip and “Sunshine Charlie” Mitchell to John Reed and Sandy Weill — and some of them, especially Mitchell, become better known as a result. Freeman and McKinley also successfully make their point that Citigroup and its predecessors have repeatedly used their political connections to help the bank survive when it otherwise would have — should have — failed. But what remains largely unanswered is why everyone bothered to do it again in 2008.