Walter Wriston didn’t arrive at City Bank with painful childhood memories of 1930s deprivation. He didn’t share the fears of his new colleagues about the potential for financial ruin. And he was, truth be told, not particularly interested in banking. All of which may help explain the business revolution he began to foment almost from the moment he walked in the door.
Wriston had participated in his high school math club in Appleton, Wisconsin, but when he went to college at Connecticut’s Wesleyan University he focused on foreign affairs, history, and political science. Not an outstanding student but by all accounts a diligent worker, he won a prize for public speaking and worked as a stringer for the nearby Hartford Courant newspaper.1
The lanky kid who enrolled at Wesleyan in the fall of 1937 was not a child of the Great Depression, because it had largely passed him by. The Appleton of Wriston’s youth had managed to muddle along despite the national catastrophe because the local paper mills had for the most part continued to operate. And the Wristons were not just another local family. Appleton was also home to Lawrence College (now Lawrence University), where Wriston’s father served as president. Instead of wondering where the next meal would come from, young Walter was wondering which important personage from the worlds of academia, business, or politics would be the next visitor at the family dinner table. When Wriston was a senior in high school, his father became president of the Ivy League’s Brown University.2
Wriston’s parents didn’t spoil their children. They set high standards and taught the importance of thrift and self-reliance. At the age of fifteen, their son Walter had become the youngest Eagle Scout in the country.3 But given his upbringing, Wriston was not governed by the extreme caution that would mark so many Americans of his generation who had grown up in an age of scarcity and fear.
Yet especially after he became a college student, certain moments would be engraved on Wriston’s memory forever. They would remind him of the danger of allowing anyone to have too much power to govern others. Wriston’s parents, especially his father, had for years been staunchly opposed to Roosevelt’s New Deal, viewing it as an attack on individual liberty in favor of bureaucratic central planning. Wriston shared this view. But it was a family vacation before his junior year at Wesleyan that would confirm for him the danger of surrendering too much authority to the state.
The Wristons traveled to Europe in 1939, just weeks before Hitler’s Germany invaded Poland. Wriston biographer Phillip Zweig explains that the family “found themselves standing outside the Frankfurt railway station watching in horror as waves of Nazi Youth units goose-stepped by, waving swastika banners and singing ‘Deutschland uber Alles,’ the Third Reich’s national anthem.”4
For the young Wriston, the lesson was clear: “I saw what happens with total regulation of people’s lives, which starts with economic regulation and leaps over into politics and abolition of free speech.” While he conceded that some regulation was necessary to protect health and safety, he generally opposed government intervention in the economy.5
Back from the disturbing visit to Europe, Wriston was elected president of Wesleyan’s Willkie for President Club. The candidate lost the election of 1940 in a landslide, but Wriston’s own candidacy for graduate school was successful. The future banker studied at Tufts University’s Fletcher School of Law and Diplomacy and then in 1942 started a career as a junior foreign service officer in the State Department. The next year, he was drafted into the army. Wriston waited an extended period in the US and ended up as a signal officer on a remote Pacific island. After several years in uniform, he became a civilian again.
Thanks to his father’s friendship with City Bank vice chairman W. Randolph Burgess, Wriston landed a position as a junior inspector in the Comptroller’s division of the bank at $3,000 a year. One can assume that he had not been fielding too many other job offers. He later admitted: “If I were to sit up at night making a list of everything dull, banking would come out on top.” Wriston began work in 1946 and, not surprisingly, did not exactly fall in love with the highly regulated, staid world of post–New Deal banking. He later recalled, “Banking was kind of a nice club. You had your inventories under control because the government told you how much you could pay on deposits.”6 Many other returning veterans weren’t falling in love with City, either:
Having risked their lives on the battlefields of Europe and Asia, the returning GIs had little patience with the silly bureaucratic conventions perpetuated by those who had stayed behind. Wriston himself was once slapped with a written reprimand for reading the Wall Street Journal at his desk.7
Some office rules are simply beyond the pale. The 1940s dress code for men at City Bank demanded black shoes, no exceptions. Button-down shirts were forbidden; starched collars were required. The bank president at the time, William Gage “Iron Duke” Brady Jr., once called out a young war veteran in City’s training program for his choice of neckwear, saying, “You know I don’t like bow ties.” The aspiring young banker replied, “I guess that’s why I’m wearing one and you’re not.” Wriston would recall that the veteran, who was independently wealthy, was the hero of the bank’s young staff.8 In time, Wriston would attack many other City conventions, some of which weren’t so silly.
By 1948, Wriston was working in City’s credit department and learning about the three Cs: character, capacity, and collateral.9 When considering whether to extend credit, a banker must know whether the potential borrower has both the integrity and the financial wherewithal to repay a loan, but also understand which assets of the borrower can be seized and sold by the bank if the loan is not repaid. Wriston perhaps could have spent more time in this course of study.
The next year he received a call from George Moore, a vice president who would eventually run the entire bank. Moore was looking for rising stars to groom for executive leadership and he was intrigued by Wriston’s background. Moore got right to the point, telling him: “You look like a pretty smart guy, so you’re coming to work for me tomorrow morning.”
Wriston became immersed in the business of providing credit to the transportation industry, especially railroad companies, and he also began a long and fruitful business relationship with Greek tycoon Aristotle Onassis. Much of the shipping and steel industries of the time thought Onassis was crazy when he sought financing for the construction of giant ocean tankers to carry oil. But Texaco agreed to pay him to move the cargo, and Wriston arranged the financing to build the massive vessels, along with long-term loans from the insurer MetLife. The rest is energy-market history.10 City became the world’s leading bank in financing shipping. Wriston was generally not in the habit of drinking, but his achievements in this area certainly gave everyone involved a reason to cheer. Zweig explains:
The launching of a new Onassis tanker was always a cause for celebration. Early on, a number of the tankers were built by Bethlehem Steel, which obviously became comfortable with supertankers, at its Sparrow Point yard in Quincy, Massachusetts. Wriston recalls that Bethlehem’s president customarily chartered a train to bring people up for the launching of a ship. “Fueled almost entirely with Scotch,” Wriston recalled later, “they were blowouts like you couldn’t believe.”11
Before long Wriston was overseeing the entire City unit serving transportation firms. This domain grew larger in 1955, when City Bank bought its similarly named rival First National Bank of the City of New York. First National’s blue-chip clients included the railroads Burlington Northern, Great Northern, and Northern Pacific. Like the banks of the time, it seems the railroads were not particularly creative when it came to naming themselves. After City completed the acquisition, the combined firm was called the First National City Bank of New York.
Bank names, of course, are usually intended to be boring and to project an image of stability. But inside, the place was changing. Wriston was helping to transform City from an owner of government bonds to a real bank, extending credit to finance the growth of global business. By the early 1950s, for the first time in twenty years, loans were a bigger part of the balance sheet than investments.12 The 1955 acquisition and Wriston’s charge into new types of transportation financing accelerated this trend.
Now City was ready to once again charge into overseas markets. US banking was still heavily regulated by both state and federal governments, and an ambitious banker would naturally set his gaze on places that offered the chance for growth. In 1956, Walter Wriston joined the international division.
City’s overseas operation had been erratic to say the least, from the initial success during the Vanderlip years to the Russian and Cuban debacles, to the partial revival under Charles Mitchell before the disasters of the Depression era. When Wriston signed on, the international division was not in crisis but barely profitable. His new colleagues were not entirely thrilled to see him. Division head Leo Shaw told Wriston at their first meeting: “You’ve got to be born into this business, and I’m sorry you’re here.” He added: “You’re too old to learn anything. I didn’t want you, so here we are. Good-bye.” Another senior banker described Wriston as “about as popular as a skunk at a tea party” among the longtime international staff who had long worked under Shaw. The division head, who had been on board during both the Russian and Cuban disasters, epitomized a culture fearful of new ventures and resistant to change.13
Shaw didn’t exactly warm up to the new employee foisted on him by headquarters. He didn’t invite Wriston to key meetings, assign him any work, provide leads, or share information about overseas markets. But by traveling around the far-flung branch network, Wriston figured out on his own that City was virtually unknown in the local markets where it operated. Shaw had been making sure the bank earned a modest profit on currency trades and seems to have done almost nothing to build the bank’s brand overseas.
Just over a year after Wriston’s arrival, Shaw was demoted and Moore took over as head of the overseas division. Wriston became his chief lieutenant and went to war against the old guard and its risk-averse, bureaucratic culture. He and Moore started a system of rotating staff between domestic and overseas assignments so that employees couldn’t spend an entire career in just one country. New managers arrived in many of the foreign branches.14 Wriston blended his transportation and overseas work. Aristotle Onassis continued as a client during this period, with Wriston helping to finance his purchase of Olympic Airways from the Greek government.15
By 1959, Wriston became head of the overseas division.16 He had a mandate from City’s new president, Moore:
Around 1960, we in Citibank took a new position. We would not be merely a bank. We would become a financial service company. We would seek to perform every useful financial service, anywhere in the world, which we were permitted by law to perform and which we believed we could perform at a profit.17
This was in many ways a return to the strategies of Frank Vanderlip and Charles Mitchell, and (spoiler alert!) there would be some similarity in the results. Particularly strong markets for growth included Latin America. Although it was not a “paragon of managerial excellence and efficiency,” Wriston’s overseas division was setting the standard for global banks. As always, the potential rewards of banking in developing countries came along with significant risks, for example the possibility of bloody Marxist revolutions and the resulting state-enforced theft. City lost $45 million when Fidel Castro overthrew the Batista government in Cuba and nationalized the bank’s assets.18
Such setbacks didn’t deter Wriston. In 1963, he made it clear that City was playing offense all over the planet:
The plan in the Overseas Division was first to put a Citibank branch in every commercially important country in the world. The second phase was to begin to tap the local deposit market by putting satellite branches or mini-branches in a country. The third phase was to export retail services and know-how from New York.19
The global focus of the bank only sharpened when Wriston became president in 1967, taking over after Moore’s ascension to chairman. Unlike past presidents Mitchell and Perkins, Wriston did not have an overhang of bad assets to clean up starting on day one. But he would have to face an economy and a financial system that were lurching into one of the most difficult periods in US history. And he was sailing into the storm with less caution than some of his predecessors.
Banking isn’t like other industries, because, as we see in the history of Citigroup, the taxpayer is often forced to stand ready to offer assistance when a banking giant stumbles. Wriston was a highly innovative leader who would go on to drive the adoption of ATMs and credit cards, among other consumer services. But the entrepreneurial spirit that is so valuable in other industries is not so beneficial when public money is at stake. Being innovative by conducting more and more financial activities above the taxpayer safety net is often innovation the US economy can do without.
As we’ve seen, Citi was often at its least stable during periods when it was most politicized. Therefore those who knew the bank’s history may not have been happy to see Wriston developing significant political ties. This is in some ways unavoidable when running a giant bank, but City’s boss took an active role in national debates about financial policy. He was twice offered the job of Treasury secretary under President Nixon and twice turned it down. The first offer came in 1968, just a year after Wriston had taken over as City’s president. The second arrived in 1974 after George Shultz resigned.20 Six years later, shortly after President Reagan’s election, Wriston would attend a meeting of the Coordinating Committee on Economic Policy, tasked with laying the groundwork for the incoming administration. The thirteen-member committee was chaired by Shultz and included the likes of Milton Friedman, Alan Greenspan, Jack Kemp, former Treasury secretary William Simon, and former Fed chairman Arthur Burns.21 Wriston was once again on the short list for Treasury secretary, but eventually lost out to Merrill Lynch chairman Donald Regan. Wriston would later also come under consideration to take Paul Volcker’s spot as chairman of the Federal Reserve when his term was up in 1983. Regan, who had inched out Wriston for the Treasury secretary job, described the potential for his fellow financier to be a “brilliant” Fed chairman. In the end, President Reagan decided to reappoint Volcker.22
Back in Nixon days, the highly connected Wriston ran into the first of a series of crises involving his megabank. It must have come as quite a shock because in Wriston’s first few years at the helm City saw steady growth, with profits regularly breaking the $100 million mark. Then came problems at the Penn Central railroad.23 The resulting intervention by the Federal Reserve revealed the lengths the central bank would go to in attempting to maintain financial stability. City had a long history of financing transportation—railroads in particular—dating back to the restructuring of the Union Pacific Railroad during the 1890s and even further back to the days of Moses Taylor’s investments in the country’s early rail lines. More recently, Wriston had made City the king of transportation financing among the major banks. But this was one deal the bank should have left alone.
Penn Central resulted from the 1968 merger of the Pennsylvania and New York Central Railroads, a response to competitive pressures from interstate highways and the Saint Lawrence Seaway. Penn Central had to live under the heavy regulatory hand of the Interstate Commerce Commission (ICC), so it was a company with little operational flexibility. City had led a syndicate of banks supporting the merger with a $100 million revolving credit line.24 The merger carried the hope that two troubled entities could jointly find enough cost savings to transform themselves into one healthy enterprise.
Unfortunately for Penn Central and its bankers, the cost savings and some hoped-for operational improvements never materialized, even as the new firm took on a heavy debt load. About a year after the deal closed, Penn Central chief financial officer David Bevan met with City officers to talk about increasing the revolving credit line from $100 million to $300 million. Bevan claimed that the increase was needed, among other reasons, because the integration of the two railroads was taking longer than expected. Penn Central’s debt to City would ultimately grow to $63 million (see Table 9), the most of any bank, but lots of other big institutions had followed City into the deal, so they were now exposed, too. The syndicate of fifty-three banks led by City ultimately approved the increase.
But it wasn’t enough. Another meeting with City later in 1969 was focused on increasing the amount of commercial paper funding for Penn Central up to $250 million. The company’s overhang of debt and commercial paper financing translated into interest costs of nearly $50 million a year. The debt burden became such a concern that City began to seek additional collateral to support the syndicate’s loans and Penn Central announced a large quarterly loss in early 1970.25
Table 9: Penn Central Ten Largest Lending Banks
|
Bank |
Loan Balance (in millions) |
|
First National City Bank |
63.2 |
|
Manufacturers Hanover |
40.0 |
|
Chase Manhattan Bank |
34.2 |
|
Chemical Bank |
31.2 |
|
Irving Trust Co. |
30.0 |
|
First National Bank of Chicago |
28.0 |
|
Morgan Guaranty Trust Company |
25.8 |
|
Mellon Bank |
22.0 |
|
Continental Illinois National Bank |
19.0 |
|
Bankers Trust |
15.0 |
|
SUBTOTAL |
308.0 |
|
All participating banks |
494.0 |
Source: SEC Staff Report on the Collapse of the Penn Central Company, balance as of June 1970, 226.
Note: Balance excludes certain loans such as direct equipment loans.
As Penn Central’s financial situation worsened, management needed to draw down the final $50 million on their revolving credit facility with the banks in May 1970. City was blamed by the syndicate for not staying on top of the railroad’s financial standing. CFO Bevan then started talking to City and Chemical Bank, one of the other major lenders in the syndicate, about approaching the government for a guarantee of its debt, which was a red flag for the banks. Taxpayer bailouts are often the last refuge of a mismanaged failure. Within a week Penn Central’s management was headed to Washington for meetings with Treasury Secretary David Kennedy, Nixon aide Peter Flanigan, and newly installed Federal Reserve Board chairman Arthur Burns.26 The discussion focused on the possibility of up to $750 million in federal loan guarantees. To justify propping up a private company, bailout supporters planned to argue that allowing potential disruptions in domestic railroad operations would put national security at risk.27
Two days after the high-level meetings in Washington, a Wall Street Journal story revealed the mounting problems at Penn Central. The following day, Bevan and City met with the banking syndicate to discuss the potential government guarantee.28 Wriston told the Penn Central board that heads should roll, particularly Bevan and the railroad’s chairman Stuart Saunders. On June 3, Wriston met with Bevan, who wanted more money from the syndicate. Wriston’s reply was immediate: “There’s no way. You don’t have any assets. You’re down the slippery slope.”
The banks would not move forward with any additional funding until the government stepped in with a guarantee. Wriston, who was a frequent and articulate advocate of open markets free of government intervention, supported the idea of a government rescue at a meeting of bankers organized by the Federal Reserve Bank of New York. Wriston even backed the preposterous argument that a railroad bankruptcy was a threat to national security. With City on the hook for financial losses—and a potential loss of prestige as leader of the banking syndicate—Wriston seems to have decided that his beliefs about the proper role of government were becoming a little too expensive.
Within a few days, Bevan, along with Penn Central chairman Saunders, who had appeared on the cover of Time magazine only a few years earlier under the heading “Railroads of the Future,” were relieved of their duties. Vice Chairman Alfred E. Perlman was also dismissed.
Fortunately for taxpayers, influential officials in Congress as well as the Nixon administration weren’t buying the argument that the country couldn’t afford to let the Penn Central guys fail. After Treasury Secretary Kennedy advised the president that he thought the market could absorb a collapse of the railroad firm, Nixon refused to back the government guarantee. On June 21, Penn Central filed for bankruptcy.29
The bankruptcy filing hit the commercial paper market hard. Issuing commercial paper was a relatively new way for big corporations to borrow money for short periods of time instead of getting bank loans. The corporations were issuing securities similar to bonds, but because they were only borrowing for perhaps sixty or ninety days, some buyers thought that holding commercial paper was almost like having cash, rather than an investment that could fail. The market had doubled in size to $40 billion in just a two-year period from 1968 to 1970. Penn Central had an estimated $84 million of commercial paper outstanding at the time of its bankruptcy, with much of the balance coming due that summer. As commercial paper is unsecured, creditors holding it would fare much worse in a default than banks, which typically demanded that loans be partially or fully secured with collateral. The problems at Penn Central sparked worries that perhaps other big companies also might not be as solid as they seemed. This led to a run on the commercial paper market. With the economy wallowing in a recession, there was concern that other firms would also be exposed to losses.30 As their debts came due, corporations might not be able to issue new paper and could face an acute shortage of cash.
To counteract the run on the commercial paper market, the Federal Reserve made it easier for banks to borrow from the discount window so they could in turn provide loans to nonfinancial companies. Federal Reserve chairman Arthur Burns said that if necessary, the central bank would even lend directly to industrial companies.31
It never came to that, as increased liquidity to the banks calmed markets. Investors realized that industrial companies would be able to borrow to make payroll and take care of their other pressing needs for cash. Lending through the discount window expanded by $1 billion during this period and peaked at about $1.7 billion during July 1970.32 Although this reveals a dramatic increase in lending in the period surrounding Penn Central’s collapse, it is a far cry from the $2.7 billion in discount window lending during 1920 and 1921, a full fifty years earlier. City would later announce $28 million in losses related to Penn Central, a tiny fraction of its $1.4 billion in capital as of year-end 1969.33
But at least two results of the minicrisis should have been of deep concern to anyone worried about taxpayer risk and the stability of the financial system. The new leader of American banking, despite his big talk about the virtues of free markets, had been happy to welcome government intervention to prevent private losses—especially his own. And the chairman of the Federal Reserve was more than willing to rescue not just the banking system, but even companies entirely outside the world of finance.