By Abigail Caplovitz Field | June 9, 2012
Citigroup became Citigroup when Citicorp merged with the Travelers’ Group back in 1998. I didn’t pay much attention at the time. I vaguely remember talk about the Traveler’s iconic red umbrella logo surviving. But I’ve been watching and re-watching Inside Job lately, that very densely packed, must see documentary on our financial crisis, and now realize what a big deal the merger was.
Here’s what a Wall Street Journal article, with the newspaper’s classic nested headlines, could have read:
Citicorp and Travellers Group Plan Illegal Merger
Executives Confident They Can Change Law
Market Agrees, Cheers Deal
Instead, here’s how the New York Times reported on the deal April 7, 1998:
Citicorp and Travelers Plan to Merge in Record $70 Billion Deal:
A New No. 1: Financial Giants Unite
The first mention of illegality is down in paragraph 8:
“But there are some major hurdles to be cleared. Travelers said it would apply to the Federal Reserve Board to become a bank holding company. Current law would require it to get rid of some of its nonbanking holdings.” (bold added)
Grafs 11-14 show the executives’ confidence in their management of our government:
Sanford Weill, the Travelers chairman, said he expected the Fed to quickly approve his company’s application to become a bank holding company and added: “I don’t think we have to spin anything off to make this happen.”
Current law, he said, allows at least two and as many as five years for prohibited assets to be divested. “We are hopeful that over that time the legislation will change,” he added.
He said the companies had already had talks with the Fed about specific legal impediments and said, “We have had enough discussions to believe this will not be a problem.”
As well as having had discussions with the Fed and the Treasury, Mr. Reed [Citicorp Chairman] said President Bill Clinton was briefed on the announcement Sunday night.
(Remember, President Clinton has since made a fortune giving speeches to the financial services industry.)
Meanwhile, back up at graf 6, the Times reported Mr. Market was happy:
Much of Wall Street liked the deal, and Citicorp’s stock shot up $35.625 to close at $178.50, while Travelers rose $11.3125 to close at $73.
CNN Money’s coverage was similar. More than halfway through its piece:
Perhaps a more immediate concern for the companies may be getting regulatory approval for the deal. The Glass-Steagall Act of 1933 prevents commercial banks from owning brokerage firms and insurance units, but the companies said they are taking a chance because they expect those laws to change in the near future.
Indeed, legislation is winding its way through Congress which would allow greater flexibility of ownership.
A bit further on, CNN adds an important detail that displays what I mean when I talk about regulators captured by industry:
Even without those changes, the law has more and more been interpreted in favor of merging companies. Sen. Alfonse D’Amato, chairman of the Senate Banking Committee, said Monday that most legal obstacles to the Citigroup merger have already been eliminated.
“I see there will probably be questions raised as to dominance in marketplace, whether it runs into Glass-Steagall, but Glass-Steagall has been effectively amended and courts have sanctioned many of those changes by the regulators,” said D’Amato.
See that? The Senate Banking Committee Chair, who not coincidentally represented Wall Street’s home state, said regulators had “effectively amended” the law in the industry’s favor, and the courts had blessed their law-rewriting.
The 1998 CNN article follows up with this:
Robert Froehlich, market analyst at Scudder Kemper Investments, said that the two companies’ determination to go ahead with the deal is a clear indicator of their confidence. “The markets lead Washington. Washington doesn’t lead the markets,” he declared.
What a breathtakingly accurate and obscene observation. Not that CNN’s piece remarked on the public policy inversion, or quoted anyone who thought it was a bad thing.
The Los Angeles Times was much better. In paragraph 3, near enough the top that even quick skimmers probably saw it, journalists Thomas S. Mulligan and Debora Vrana put it plainly:
But the most remarkable aspect of the agreement–negotiated in deep secrecy over the last four weeks–is that it is a direct challenge to Congress to revamp the nation’s banking laws, which currently forbid banking companies from owning insurance underwriters like one owned by Travelers.
Graf 6 notes:
The deal is significant enough that its two architects–Weill and Citicorp Chairman John S. Reed–notified President Clinton by telephone Sunday night and consulted in Washington last week with Federal Reserve Chairman Alan Greenspan. They also made a courtesy phone call to Treasury Secretary Robert E. Rubin on Friday.
Remember the surprise over the bankers’ immediate and deep access to our government during the financial crisis? The ordinariness of the bankers’ access back in 1998 makes that seem terribly naive. Note also that after Robert Rubin stopped being our Treasury Secretary, he made $126 million as Vice Chairman of Citigroup.
The L.A. Times’s distance from Washington is evident not just in its willingness to put the illegality and hubris of the merger in graf 3, but also in its temerity to include this:
But consumer advocate Ralph Nader asked the Federal Reserve on Monday to reject the proposal, saying it would be too big to regulate and would result in higher prices for consumers. Other critics said it would stifle competition.
Two years before he was unjustly pilloried for costing Al Gore the 2000 election, Nader knew letting the banks get so big would make them uncontrollable, and was willing to say so. Kudos to the LA Times for printing the quote. Imagine if enough mainstream media reported the point, loud and clear, that Congress chickened out and killed the deal. If the banks had never gotten too big to regulate, they’d never be labeled ‘too big to fail’, or most accurately, they wouldn’t be labeled the ‘bailed-out banks.’
If you’ve never seen Inside Job please do. The illegality of Citigroup’s birth and our compliant government’s willingness to legitimate it is a detail that takes less than a minute of the two hour film. Given the tremendous density of information in the movie, it’s amazing how easy and engaging it is to watch. And that’s great, since absorbing and digesting all the truth it offers takes lots of re-watchings.
Full Disclosure: I am an Amazon affiliate, so if you purchase Inside Job at the link I provide, I get a small percentage. If that bothers you, please find some other way to watch the movie.