Excerpt: ‘Age of Greed’

Below is an excerpt from Age of Greed by Jeff Madrick. The chapter is entitled “Sandy Weill, King of the World.”

The bull markets in stocks of 1995 and 1996 led to more underwriting and still larger mergers. But Shearson Smith Barney had only a minor investment banking operation. It also had little international business, even though capital flowed in ever greater volumes across borders. Since investment and corporate clients were now located all over the globe, securities firms like Salomon and Goldman were earning enormous profits trading global fixed income and equity securities and currencies. They also had aggressive trading departments that specialized in derivatives, turning themselves into virtual hedge funds. The stock market delivered the message. Travelers was missing out on major sources of growth; its price-earnings multiple was low compared to other major financial services operations.

Then in early 1997, Morgan Stanley merged with the retail firm Dean Witter. Shearson Smith Barney was in danger of becoming the only large brokerage firm with no significant international presence. Weill’s impatience with the missing links in his operation, despite its enormous size, now turned to alarm. “The announcement shook me thoroughly,” he wrote. Again, mergers drove others to make still bigger mergers in an ever-widening circle.

Earlier that year, Weill and Dimon approached J.P. Morgan to inquire about their interest in a possible merger with Travelers. J.P. Morgan was posting mediocre results. This time, for a change, Travelers was the bigger firm. But there was at least one obstacle, the New Deal Glass-Steagall Act, which legally separated insurance, commercial banking, and investment banking. Weill was determined to make such a combination work, and the Dean Witter acquisition made him all the more impatient. His law firm, Wachtell Lipton, suggested there might be a way to merge with J.P. Morgan if the Federal Reserve would agree not to undo the merger immediately but grant a two-to-five-year window while the merger was reviewed. Meantime, Weill and his lawyers worked on the Fed and Congress to change the Glass-Steagall restrictions on the insurance-banking combination. In these times, under a sympathetic Democratic president and a free market Fed chairman, Weill had every reason to be optimistic; Glass-Steagall had already almost entirely undone the prohibition on investment banking for commercial banks. Weill went to visit Greenspan, who agreed that the Fed would grant a waiting period, but could promise nothing beyond that. It was opening enough for Weill.

There was another significant obstacle. J.P. Morgan’s chairman, Douglas Warner III, was deeply uncomfortable with the merger. He told Weill repeatedly that the two institutions had different “cultures.” The message was clear: Weill was an upstart, Morgan an elegant old company with historic roots. Warner proposed such an impractically high price that Weill knew the deal was dead. Even Dimon, less thin-skinned than Weill, was incensed at the way they were treated.

Soon after, however, Deryck Maughan, the CEO of Salomon Brothers, appointed by Warren Buffett during the Paul Mozer scandal, called Weill. Salomon was for sale. Weill knew and liked the articulate, British-born investment banker. Years earlier he had asked Maughan to join the board of Carnegie Hall, where Weill had been serving as chairman. Weill knew that Salomon had been at the forefront of trading innovations for decades and that its mortgage-backed securities business and arbitrage operations were among the most profitable on Wall Street. But Maughan had been trying to change the mix of business at Salomon. He was less dependent on risky trading profits than in Meriwether’s years, but the trading operation still accounted for half of the firm’s profits and could eat swiftly through capital. Maughan was determined to build a first-tier investment banking group, and linking with Weill’s retail operations and large capital base could make the difference.

Weill was immediately intrigued, but wanted to get a firmer grasp of how risky Salomon’s trading was. He sent Dimon to study the trading operations firsthand. Dimon was more impressed than he anticipated, and concluded that big losses could be contained. Weill also visited the credit rating agencies, which confirmed that the merger would not damage Travelers’ ratings. But once the merger was final, Weill did not put Dimon in charge, as he had expected. He decreed that Dimon share CEO duties with Maughan, whom Dimon thought an ineffectual manager, more concerned with polish and image than results. Dimon’s relationship with Weill had already been deteriorating badly but now Dimon was incensed, though he swallowed his pride and accepted the co-CEO position.

The deal was announced in September 1997 for $9 billion in stock, the new Travelers subsidiary to be called Salomon Smith Barney. Three weeks later, the Asian financial crisis struck. “I am not sure we ever really enjoyed a honeymoon with Salomon Brothers,” wrote Weill. In October, Salomon lost $50 million almost overnight. Then the risk arbitrage department got stuck on the wrong side of a major investment, and lost $100 million, when British Telecommunications pulled out of a deal to acquire MCI. (LTCM made a similar wrong bet, as did many others on the Street.)

Alarmed by such swift losses, Weill immediately began to limit the exposure of the trading desks at Salomon. He didn’t have the stomach for the kind of risk trading that was now common at hedge funds and the largest investment banks, but he did not yet eliminate Salomon’s famed arbitrage desk, the one started by John Meriwether. Even with Salomon’s losses, the other operations at Travelers held up, and the price of Travelers’ stock rose nearly 80 percent as stock prices resumed climbing in 1998. He was ready to do more deals. With his stock strong, and Salomon absorbed, Weill was on the hunt again. By 1997, Citicorp had risen from the ashes at the start of the decade to become the most successful bank of its time. John Reed, its chairman, had been thinking about a merger; he believed his businesses were still not as stable as he would have liked, and he also thought he needed still greater exposure globally. He had ridden out the serious failures at Citicorp, particularly the devastating loan losses in developing nations in the 1980s, which continued to take a toll through the end of the decade, and then followed by real estate losses as the 1990s began. At one point in 1990, Citicorp’s prospects were so poor that Reed hoped J.P. Morgan would buy it. Some of the ventures he initiated also failed, including his purchase of Quotron, the electronic stock quote terminal company, investments in consumer banking, and lending for LBOs. Citicorp’s troubles had once almost seemed terminal: the company lost nearly half a billion dollars in the recession of 1991. But with the economic expansion in 1994, Citicorp rebounded, earning a record $3.5 billion in 1995. Reed’s next goal was to build a still greater consumer brand for the company, making Citicorp, he said, the equivalent of Coca-Cola or McDonald’s to customers around the world.

Reed was a thoughtful, intellectual CEO and in most ways the opposite of Weill. He wrote long memos and regularly held staff meetings. But he admired the Travelers chairman’s energy and daring, sought the stability a large insurance company could provide, and also wanted to be much larger. In 1998, Citicorp and Travelers were valued about equally in the stock market, and when, in February 1998, Weill approached Reed about a possible merger, Reed was ready to talk. It may have helped that Reed lost money toward the end of 1997 in the Asian market turmoil, undermining some of the confidence he gained from the successes of the prior three years.

Weill wrote in his autobiography about his first formal meeting with Reed: “I launched into a monologue on why the Citicorp and Travelers franchises would complement one another and played up how a merger would be an ideal marriage of product and distribution while offering market positions and financial strength that would be the envy of our competitors.” No surprise, he emphasized one-stop shopping: how Travelers could benefit from Citicorp’s hundreds of thousands of credit card customers by selling them stock, mutual funds, and annuities. Citicorp could sell its checking services and credit cards through Travelers stockbrokers and insurance salespeople. In turn, Citicorp would be able to provide its corporate lending clients underwriting services and M&A advice from Salomon Smith Barney, which would profit from the new loan clients Citicorp would bring to the investment bank. In terms of geographical reach, Travelers was everywhere in America, while Citicorp was concentrated in New York. And Citicorp had the international reach Travelers lacked.

There was one remaining impediment, Glass-Steagall. Weill had already tested a J.P. Morgan merger on Greenspan, proposing the two companies could combine and operate legally for two years, awaiting a ruling and working on changing the law. Weill had access to the Fed chairman. But Reed and his legal staff were skeptical that the New Deal restriction could be so easily circumvented.

Weill, the nonintellectual, had a better sense of the political direction than did Reed, and perhaps of his own influence on Congress and the presidential advisers. The loosening of New Deal regulations restricting banks had been under way for a long time and was now nearly complete. Increasingly, the media supported it. The changes included the complete elimination of Regulation Q restrictions in 1982 by Congress; the Fed’s granting permission in 1987 for banks to underwrite commercial paper, municipal bonds, and mortgage-backed securities; the Fed’s loosening of restrictions to enable commercial banks to underwrite equities up to 25 percent of business in 1989; and the refusal by Congress and President Clinton in both 1994 and 1999 to regulate derivatives. Since the 1980s, Bankers Trust, a commercial bank, had almost transformed itself completely into an investment bank, creating and trading in derivatives, and using basic complex transactions known as swaps to enable corporate clients and municipalities to manage their liabilities and reduce interest rates. In 1985, financial lobbying also took a major step forward, with the creation of the International Swap Dealers Association, to ward off the establishment of new regulations. It only got more powerful in the 1990s, adding the word “derivatives” to its name. Weill was a key supporter.

The argument the bankers like Weill made in favor of deregulation was twofold. There was now an effective SEC overseeing securities underwriting and trading, the private ratings agencies were sophisticated, and investors themselves were knowledgeable. The second argument was that international competition forced banks to offer all services under one roof and build enormous assets to compete and survive; Glass-Steagall was therefore a dinosaur.

More important, Weill had Greenspan on his side. Once Reed agreed to explore the issue with his lawyers, Weill called Greenspan and set up a meeting for the three of them the following week. With their two general counsels, Reed and Weill visited the Fed by the back door to avoid journalists. Being seen together would have amounted to a public announcement of their intention to merge. Such a secret meeting was also a stark example of the ease with which the powerful on Wall Street got the ear of key policymakers and also how easily the Fed, through its rulings, could bypass the intentions of Congress. “I have nothing against size,” Greenspan told them. America’s chief banking regulator could be confident his view would prevail. “It doesn’t bother me at all.”

Weill also talked to the SEC, and called President Clinton and Treasury Secretary Rubin to update them on the proposed deal. The largest merger of all time up to that point was announced in April of 1998, the exchange of stock valued at $73 billion. The stock prices of both Citicorp and Travelers rose immediately on the announcement, the total value of the deal soon exceeding $80 billion. Weill’s shares in the merged entity would be worth $1 billion. Weill readily gave up the Travelers name for the better known Citicorp. Soon he and Reed would change it to Citigroup.

“This is really about cross marketing and providing better products for clients,” Weill told the press corps when the deal was announced. The Wall Street Journal credulously reported Weill’s claim in a piece titled “One Stop Shopping Is the Reason for the Deal.”

Reed and Weill agreed to become co-CEOs. Reed, nearly sixty, had thought they would retire together in a few years, Dimon their natural successor. Reed in particular liked Dimon, in whom he found intellectual qualities similar to his own. Meantime, Weill, who just turned sixty-five, concealed whatever his true ambitions were during the negotiations, but retiring soon was not one of them.

Few believed that the amity between Reed and Weill could last. And there were natural conflicts between the two organizations. Because commercial bankers at Citicorp earned far less than did investment bankers and traders at Salomon Smith Barney, coordinating their activities was fraught with conflicts.

Though the firms were being integrated and Weill and his staff were already working at 399 Park Avenue, Citicorp’s headquarters, the deal was not yet legally consummated as they awaited formal Fed approval for the two-year window to begin. While they waited, Weill threatened to pull the plug entirely on Salomon’s quant trading operations—the old arbitrage desk. It had been losing money on and off throughout 1998, as had LTCM and other similar operations. In July, he finally acted, roiling the markets by unwinding the Salomon positions. A month later, the Russian default occurred, ultimately bringing down LTCM. Salomon’s trading operations lost $360 million that quarter. Citigroup reported a decline in overall earnings of 53 percent from the same quarter a year earlier.

At last, on October 8, the Fed gave its okay for them to operate legally as a merger for two years to see whether Congress dismantled Glass-Steagall completely. The two-year window gave Weill until the fall of 2000 to persuade Congress to end the restrictions. With the market in turmoil after the LTCM and Russian collapse, and the shares of both Citi and Travelers falling sharply, the deal was worth only $37 billion, half what it had been the day it was announced six months earlier. In addition, some were uncertain Congress would reverse Glass-Steagall.

Now the losses at Salomon due to the Russian default and the LTCM failure created the final tensions between Salomon’s co-CEOs, Dimon and Maughan. After a heated confrontation between them at a company party, Weill and Reed agreed to force Dimon, Weill’s main lieutenant of fifteen years, to resign. The break was a deep personal shock to Dimon, who had essentially grown up by Weill’s side and to whom Weill owed more than he acknowledged.

An unbridgeable breach also grew up between Weill and Reed over Weill’s determination to cut costs sharply and orient the firm to short-term profit making. Reed was consistently more focused on longer-term profits and such relatively abstract ventures as the future of electronic banking. Reed increased the friction when he bluntly told the press it was a mistake to lose Dimon. Then, at a Wall Street analysts conference, several months later, after a strong quarterly showing, Reed talked frankly of his future concerns about overspeculation and global collapses like those in Asia and Russia. Weill, stunned by Reed’s candor—this was not his way—remained effusively optimistic, claiming the merged company and its business model were already victorious after only a few months and were just beginning to generate even more business. The salesman’s optimism, true or false, was one of the sources of his success.

Partly to make peace, Weill hired Robert Rubin in October 1999, a few months after he left the Clinton administration, to serve in a newly created office of the chairman and to be the co-CEOs’ go-between. Not only did Rubin have an international reputation for effectiveness as Clinton’s boom-time treasury secretary, but he was also low-key and had no ambition to run Citigroup. But by now, the differences between Weill and Reed were too serious to reconcile. In early 2000, the board of Citigroup was forced to decide between them. Characteristically, Reed told the board that he and Weill should both resign and a new CEO be appointed. Equally in character, Weill told the board he should be the one to run Citigroup, not Reed. A key vote in Weill’s favor was delivered by board member Mike Armstrong, head of AT&T, which Salomon analyst Jack Grubman had just recommended as a buy to his brokerage clients, some conjectured at Weill’s request. He needed Armstrong’s vote. The board also asked Rubin’s opinion, and he sided with Weill, who was chosen, and Reed became a has been almost overnight, formally resigning in April 2000.

Meanwhile, Weill had been working hard to end the Glass-Steagall restrictions. He organized the most powerful allies, including Morgan Stanley, Merrill Lynch, MetLife, and Prudential, to lobby Congress and the president. He enjoyed close relations with Gene Sperling, one of President Clinton’s high-level economic advisers, whom he talked to about the benefits of the merger. But there were jurisdictional disputes between the Treasury and the Fed about the legislation. Rubin had wanted more control to reside in the Office of the Comptroller of the Currency under the Treasury’s jurisdiction. Greenspan wanted jurisdiction at the Fed. When Lawrence Summers took over Treasury from Rubin, Summers let Greenspan at the Fed have his way. The Republican House had long been ready to abolish Glass-Steagall entirely. In late 1999, the Gramm-Leach-Bliley bill, named after its Republican congressional sponsors, Senator Phil Gramm and Congressmen Jim Leach and Thomas Bliley, was passed with bipartisan support in the House but only along narrow party lines in the Republican-controlled Senate. Glass-Steagall was no more. Much of the media was on board for both the bill and financial deregulation in general. A New York Times editorial had enthusiastically praised the Citicorp-Travelers merger the year before, calling then for complete repeal of Glass-Steagall. “Congress dithers, so John Reed of Citicorp and Sanford Weill of Travelers Group grandly propose to modernize financial markets on their own,” wrote the Times. “Some consumer advocates oppose the merger because, they fear, financial behemoths inevitably threaten ordinary consumers. But one-stop financial shopping could actually protect naive investors. . . . The fact is that Citigroup threatens no one because it would not dominate banking, securities, insurance or any other financial market.”

The legislation was signed into law by Bill Clinton in 2000. Weill had beaten the Fed deadline by many months. No federal regulations would limit the size of financial conglomerates in the foreseeable future. The economy resumed growing in 1999 and Citigroup’s earnings rose rapidly again. Breathing easily now that the merger would not be challenged by the government, Weill continued to make new acquisitions, including in Mexico and Poland. His largest was the takeover of Associates Capital in Texas, another consumer finance firm with the sort of fat overhead and underperformance Weill loved to fix. It added to Citigroup’s earnings that year, which now reached $13 billion. Citi would combine it with the former Commercial Credit into CitiFinancial, soon to become one of the largest subprime mortgage originators in the nation.

Weill was also fabulously rich now due to the stock options he had handsomely paid himself over the years. “He talked about reloading all the time,” said one banking client. Reloading was the term that described Weill’s approach to executive compensation. If you cashed in some options, the company replaced them with an equivalent set of new options. In 2000, Weill exercised options on twenty million shares of Citicorp and received nearly eighteen million in their place. In that year, his total compensation, including the exercise of options, was more than $224 million.

But the year 2000 would be the last happy one for Weill. Reality descended as the stock market bubble burst, and then Enron and WorldCom, two major Citigroup clients, went bankrupt. Weill was soon under investigation by the New York attorney general, Eliot Spitzer. The ties to Jack Grubman, his most influential research analyst, came back to haunt him. Grubman, who had evolved into a telecommunications guru, had raised his rating of AT&T just before Weill needed the vote of the Citigroup board member and company CEO Mike Armstrong to assure his election as CEO.

Weill survived scandal and investigation, suspect loans to Enron and WorldCom, huge fines and drawdowns to settle civil suits, and the stock rose again in 2002. He was worth $1.4 billion now and listed on the Forbes 400 at last. In 2003, seventy years old, he resigned as CEO, free of criminal charges, but under a dark cloud of suspicion.

In Weill’s view, he had created a financial services company that could compete with any in the world and contribute to America’s economic strength. He and others like him deserved the money they made. Weill biographers Amey Stone and Mike Brewster argued that Citigroup was now so large it could absorb serious risks with minimal damage. This was indeed Weill’s claim—so large it could take the outsize risks that often were rewarded by enormous profits. The biographers merely reflected the conventional wisdom of the time. In an interview in 2004, Wriston agreed that such broad diversification was beneficial.

Weill was a classic representation of the times, a man who built a business not through innovation, new products, or entrepreneurial wit but by combining ever bigger companies. This was an extreme example of the very “strategy” the most respected consulting firms preached as the right way to manage contemporary business giants. Run big business like a portfolio of assets, grow through consolidation, and use size itself to your advantage. With size, a business could control the prices it charged, the wages it paid, and the costs of its inventory. As we have seen, size became strategy. Jack Welch was the classic practitioner in the so-called real economy, Weill in the financial community. By 1999, when Weill created the fully merged Citigroup, the top ten largest banks controlled 45 percent of all banking assets compared to only 26 percent ten years earlier. Almost all of it was the result of mergers or acquisitions.

For the banks, growth through consolidation and diversification could have meant more stability, but in fact for Weill and most others it meant they could take more risks to raise short-term profits. The banks, as economists put it, “spent” whatever stability they derived from diversifying their assets by risking it on trading, securitizing, and so on. “The goal was to be big and [my italics] to take on risk,” wrote economists Simon Johnson and James Kwak. Size did not protect against the risks Sandy Weill’s financial conglomerate was now taking. Citigroup had not been chastised by scandal, fines, and government investigation. To the contrary, the risks it would take at the start of the new century jeopardized the giant firm’s existence, and badly damaged the financial community as a whole.

*****

Excerpted from Age of Greed by Jeff Madrick, pp. 308-317. Copyright © 2011 by Jeff Madrick. Excerpted by permission of Knopf, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.