Last week Citi reported a 1991 loss of $457 million-and the figure would have been far worse had it not sold interests from New York to Saudi Arabia to raise cash. Chairman John Reed promises profits in 1992. But even after writing off $4.9 billion of bad loans last year, Citi faces plenty of land mines. More than a third of its $13.8 billion of commercial-real-estate loans aren’t paying interest, including $2 billion of insolvent hotels, office buildings and shopping centers it has taken off customers’ hands. Citi’s vaunted credit-card business, the nation’s largest, is suffering from lower interest rates and an upswing in delinquencies. Even its powerful corporate-finance group lost $1 billion last year. Says Prudential Securities’ bearish banking analyst, George Salem, “It has to be in the billions to get everything cleaned up.”
Most of the problems are homemade. Faced with a slow-growing market in New York, Reed’s predecessor, Walter Wriston, determined to make Citicorp the first truly global bank starting in the late 1970s. Burrowing through holes in the banking laws, Citi pushed into investment banking, bought thrifts from California to Florida, issued credit cards from South Dakota and went after consumer markets from Germany to Singapore. After Reed took over in 1984, the pressure for growth grew even more intense: the company urgently needed income to cover massive losses from loans to Latin America in the 1970s.
But go-go banking meant loosening Citi’s traditionally stringent standards, and the results were disastrous. Citi’s commercialreal-estate portfolio more than doubled between 1986 and 1990, and it became the leader in leveraged-buyout lending just as other banks were bailing out. In 1989 Citi put up $2 billion for a leveraged buyout of United Airlines, then watched in embarrassment as only one other bank joined in; the overpriced deal fell through. “They completely lost control of their commercial lending,” says one New York banker. In a recent interview with the Financial Times, Reed acknowledged, “We are guilty of having run the business a bit cavalierly.” Reed was not available to talk with NEWSWEEK.
The consumer side of the bank has made major missteps of its own. In 1985 Citicorp Mortgage Bank set out to become the nation’s dominant housing lender with “MortgagePower,” a program that gave real-estate brokers a fee for taking loan applications. To build volume faster, Citi granted loans even to buyers who provided little or no information about income or assets. The consequences: as of Sept. 30,4.9 percent of Citi’s $27 billion mortgage portfolio was more than 90 days overdue, and the default rate is still rising. The story doesn’t end there. Citi sold many mortgages to investors with a promise to buy them back if they went bad. Its full exposure has not been revealed, but it repurchased $405 million of delinquent mortgages through Sept. 30. Industry gossip puts the potential losses on home mortgages in the billions. Citicorp Mortgage was reorganized last year, and other lenders say its presence is much diminished. “I don’t even see them as a competitor the next couple of years,” says Angelo Mozilo of Countrywide Mortgage Corp. Citicorp contends its role in home lending is as big as ever.
Reed is not out of aces. Citi is still the biggest consumer banker around, with 1,100 offices across the United States and another 2,200 abroad. Even after $1.8 billion in write-offs last year, the consumer unit returned a $549 million profit. “When this passes, which it will, the franchise will be the greatest in the world,” Wriston contends. But other than cutting costs– Citicorp shed 9,000 employees last year-there is little Reed can do but hunker down. “If the economy comes around this year and our real-estate markets don’t get worse, they have some very powerful income streams,” says a regulator. The longer the turnaround takes, the worse Citi’s position will be. At a time when many banks are merging, it sits on the sidelines, too big to be bought and too poor to buy. It lacks the capital to meet federal requirements that take effect this summer, much less to expand. “The Citicorp of the future is going to be a smaller and in many respects less powerful competitor than it has been, largely bec%ause it’s capitalstarved,” says analyst Raphael Soifer of Brown Brothers Harriman.
How safe is Reed’s job? Although the 52-year-old banker is universally described as “brilliant,” his tenure at the top has been humiliating. In October, Citi was forced to eliminate its dividend for the first time in 178 years-18 months after Reed pushed through an increase. Several Reed appointees in key executive jobs have been pushed out. Last week Dutch economist H. Onno Ruding, a Citicorp director, signed on to run the corporate-finance business-an admission that the talent Reed developed inhouse is not up to the task. Yet neither regulators nor Citicorp’s board are pushing for his ouster. The reason: no one sees an alternative to Reed’s strategy of muddling through. A new chief might do better at inspiring the troops, but producing a financial miracle is a task of a different order.
