What we should probably do is go and split up investment banking from banking. Have the banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.
—SANDY WEILL, 2012
© Mark Peterson/Corbis
One common aspiration of ambitious Wall Street executives has been the creation of a financial supermarket. The idea always looks good on paper: If a firm can combine the multitude of financial services that customers require, there will be no end to the efficiencies, cross-selling, and profitability that’s created. If those customers are individuals, a single diversified firm could handle all of their brokerage, banking, advisory, insurance, and mutual fund needs; if the customers are businesses, the same firm could offer the full panoply of investment banking and commercial banking for them as well.
But financial supermarkets have never worked. They turn out to be the kind of ill-conceived and unmanageable conglomerates that, ironically, the smart money on Wall Street always bets against. In an earlier chapter, we saw how Charles Merrill conceived of and managed a superb retail investment firm. But when his successors decided to turn Merrill Lynch into a diversified financial operation, it all fell apart. After acquiring insurance companies, investment banks, real estate firms, and a host of other financial services businesses, Merrill Lynch became all things to all people in the financial world—but in a decidedly second-class fashion. It eventually ended with a shotgun marriage to the Bank of America.
The dubious distinction for the greatest financial supermarket failure, however, rests securely with Citigroup, the twenty-first-century iteration of the National City Bank that was described many pages earlier when it was under the direction of Sunshine Charlie Mitchell. The modern Citigroup was created by Sanford (“Sandy”) Weill, a man with ambitions on the scale of Mitchell’s, but imbued with considerably greater management skills and a wider business vision. Over a five-decade career, Weill used his skills and vision to meld together a vast, but ultimately unstable, financial enterprise through a mergers and acquisitions spree that brought together many of the well-known names in finance—Citicorp, Travelers Insurance, Salomon Brothers, Smith Barney, Aetna Property and Casualty, and Shearson Loeb Rhoades & Company—along with scores of smaller, lesser-known financial services firms. In the early years of the twenty-first century Citigroup was the largest financial institution in the world, with assets in excess of $2 trillion and employing more than 350,000 people.
But the mammoth corporation met an even worse fate for its shareholders and for U.S. taxpayers than the Merrill Lynch collapse. Its stock, which sold for as high as $55 per share in 2007, plummeted to less than a dollar a share in the aftermath of the 2008 financial crisis. Absent two government bailouts totaling $45 billion, the stock would have become totally worthless. Few would have guessed the story would end so badly, given its promising beginnings and Weill’s considerable talents.
From Wall Street Runner to Wall Street Mogul
Weill grew up in the Bensonhurst section of Brooklyn, which at the time was made up primarily of Italian-Jewish working-class families and known more for producing prominent Mafia figures than Wall Street titans. Weill keeps a picture of his small stucco childhood home is his office; it’s a far cry from the extravagant Manhattan apartments he would later occupy. (In late 2011 he sold his 15 Central Park West penthouse for $88 million, a record amount for a New York apartment at the time.) Short and pudgy as a child, he was toughened up by bullying. Later, when he was a college student, his father abandoned his family and sold the business Weill had expected to take over. Yet Weill’s story is not purely rags to riches. He was able to escape Bensonhurst during his high school years to attend a military academy and then received a bachelor’s degree in 1955 from Cornell University.
Upon graduation, Weill headed directly for Wall Street to find a job, but not many doors were open to him. He had an Ivy League education, but the “front office” positions he coveted in securities sales and investment banking were usually offered to the Harvard–Yale–Princeton sector of the Ivy League or to applicants from well-heeled families with a prominent social background. Compounding the problem was the fact that the partners of the leading “Jewish houses” of the day, such as Kuhn Loeb, Goldman Sachs, and Lehman Brothers, were mainly of German descent. Weill was the grandson of Eastern European Jews and never got past the reception desk at any of the major firms.
But he was committed to a career in finance and was willing to take any job that would get his foot in the door. That job turned out to be at Bear, Stearns & Company, then a second-tier investment firm. He became a runner, the lowest rung on the Wall Street ladder, picking up and delivering securities between banks and securities firms. He was soon moved from street errands into the “back office,” where the menial yet necessary business of the brokerage business is conducted. In what is typically a dead-end department, he mastered the intricacies of the back office during the day and by night studied for the licensing tests he needed to pass to sell securities. Weill was fascinated with every detail of processing orders and handling margin loans, and in short order he became totally conversant with how the “kitchen” of an investment firm works.
After Weill acquired his broker’s license, he moved from the back office to the sales department at Bear Stearns and then to Burnham & Company (run by I. W. “Tubby” Burnham, one of Michael Milken’s early and influential bosses). The socially awkward Weill was not a natural salesman but proved to be an apt stock picker and money manager. The word spread, and he was soon making a respectable living as a broker. He also developed a coterie of like-minded young investment professionals on Wall Street—ambitious, very smart, most often Jewish, and keen on launching their own investment firm. In 1960, just five years after Weill began his Wall Street career as a runner, he became a cofounder of the firm that would later be called Cogan, Berlind, Weill & Leavitt.
The new firm was modeled somewhat after Donaldson, Lufkin & Jenrette. Like DLJ, CBWL started as a research boutique that generated commissions primarily from institutional investors based on the quality of its principals’ ideas. As with many start-up investment firms, survival depended on the ability to pick up loyal and substantial customers early in the game. The mutual fund giant Fidelity Management & Research was one such customer for CBWL, supplying the firm with a steady stream of commission business. And also like DLJ, the firm was able to leverage its industry research abilities into occasional investment banking transactions. Most notably, CBWL assisted the young takeover specialist Saul Steinberg in his controversial and highly publicized purchase of the Reliance Insurance Group.
Despite its (vaguely anti-Semitic) nickname in the investment community, “Corned Beef With Lettuce,” CBWL was financially sound and taken seriously on Wall Street. Despite this, Weill was apprehensive about the boutique business model. It generated substantial paydays for the four partners when business was good—especially in years when investment banking deals closed—but there were also lean years when business was slow and mergers and acquisitions work slacked off. So while his partners continued to run the day-to-day business of the firm, Weill started looking for other investment firms to acquire. Such acquisitions, he hoped, would broaden CBWL’s customer base and reduce its reliance on lucrative but less predictable investment banking revenues.
There were several hundred independent New York Stock Exchange member firms across of the country at the time, and the early consolidation of the securities industry was just getting under way. CBWL was not the only firm looking to grow through acquisitions, but it had one very major advantage: a highly efficient back office operation that Weill had built from scratch and whose workings he knew intimately. Typical of the partners of other securities firms, Weill’s three partners regarded mundane operational issues (fails-to-deliver, margin calls, clearing services, securities settlement) with an attitude that bordered on disdain. To them, the success of the firm was based on sales commissions and investment banking fees. They were only too happy to cede authority for the rest of the business to their rough-hewn, cost-conscious Brooklyn partner.
A state-of-the art back office under the direction of a knowledgeable partner was a rarity on Wall Street, and that condition became all too apparent when leading firms became overwhelmed in their attempts to process the flood of paper generated during the record levels of trading in the late 1960s. With a back office designed to handle a level of business well beyond its own, the upstart CBWL—barely a decade old—went on the prowl. Weill hunted for aged but otherwise attractive securities firms whose existences were threatened by their incompetently managed back offices. He didn’t have to look long, and CBWL quickly became the rescuer of much older, larger, and more prestigious brokerage firms.
The game (and name) changer came with CBWL’s takeover of Hayden Stone & Company in 1970. The acquisition was mediated by the New York Stock Exchange, which took notice of CBWL’s easy assimilation of the branch offices of failed firms. The exchange itself was operating in near-panic mode, going so far as to shut down trading on Wednesdays for a time to allow its members to catch up on the overwhelming paperwork problems that heavy trading was causing. Hayden Stone’s situation was particularly dire; the prominent Boston-based firm had been a stalwart of the investment business since its founding in 1892 but was now heading toward failure due to its antiquated processes for handling securities trades. The NYSE’s crisis-management team knew Hayden Stone was incapable of remedying its problems and needed a rescuer. And though CBWL had only two offices, compared to Hayden Stone’s sixty-two, the NYSE agreed to finance a deal calling for the minnow to acquire the whale—as long as the minnow would be fully in charge of the newly formed CBWL–Hayden Stone.
Despite the ongoing culture clashes between the white-shoe principals of Hayden Stone and the fast-talking, sharp-penciled CBWL managers, the new CBWL–Hayden Stone emerged vastly stronger and more profitable than before. The relentlessly aggressive Weill, with his ever-present cigar, was its undisputed driving force. By June 1971, Weill had whipped the firm into shape to go public. CBWL-Hayden Stone, quickly following the lead of Donaldson, Lufkin & Jenrette and Merrill Lynch, became the third Wall Street firm to file a registration statement with the SEC for an initial public offering.
Don Stroben, one of CBWL–Hayden Stone’s early associates, remarked, “The public offering was what really ultimately gave Sandy Weill the ability to do what he did. From then on, he had the good fortune to have something that was rare on Wall Street: capital, as well as a position of control and an ability to execute. That momentum carried him on and on.”1 (The IPO also elevated Weill into the ranks of Wall Street’s millionaires; at the conclusion of the offering his net worth increased by $3.5 million.)2 With an infusion of new capital from its IPO and the best cost-control and back-office operations in the industry, the firm was in an ideal position to pick up the pieces on a weakened and demoralized Wall Street. The paperwork troubles of the late 1960s were followed in the 1970s by stagflation—a combination of slow economic growth and inflation that devastated the values of both stocks and bonds. The knockout punch for many firms was the abolition of fixed-rate commissions in 1975. With new price competition and a bleak outlook for the overall industry, the securities business lost its appeal for many partners, and they began withdrawing their capital.
Such capital withdrawals just made the weak firms weaker and less able to withstand downturns in business—and more vulnerable to acquisition by Weill’s CBWL-Hayden Stone, which was growing stronger by the day. Some of the acquisitions involved just a few branch offices and a few were yet more minnow-swallowing-the-whale deals, but they were all rescue efforts of one form or another. Many of the once-prominent firms that had turned him down when he was looking for a job out of college found themselves merged into Weill’s growing empire. By 1980 the firm had become Shearson Loeb Rhoades and was second only to Merrill Lynch in the number of brokers it employed. With the other founding CBWL partners having gone their own ways, Weill was the chief executive and fully in charge. The former Wall Street runner now had his office on the top floor of the World Trade Center, enjoyed the services of a private jet, had former president Gerald Ford on his board of directors—and was only in his forties.
In Pursuit of a Second Empire
Up until 1981 the various segments of the financial services industry operated autonomously in neatly defined markets. Insurers sold varieties of life and casualty policies; banks made loans and accepted deposits; and investment firms served as brokers and investment bankers. But an irreversible transformation began that year when the Prudential Insurance Company announced its acquisition of Bache Halsey Stuart, the third-largest retail securities firm in the United States after Merrill Lynch and Shearson Loeb Rhoades. These two enormous financial institutions were breaking ranks and aligning themselves to cross-sell their insurance and investment products to individuals and businesses. Prudential’s gambit both shocked Weill and stoked his competitive fires. He wanted to lead the parade, not follow it. And to that end, he met with James Robinson, CEO of the credit card giant American Express Company.
Exactly one month from the announcement of the formation of Prudential Bache, Weill and Robinson announced the establishment of Shearson/American Express. At the time, American Express had a firm lock on the high-end segment of the credit card business—exactly the prosperous demographic that would seem ripe for solicitation by stockbrokers. The boards of both companies were quick to approve the combination, and many believed that when the dust settled in the executive suite, Weill would wind up running the show. That was apparently Weill’s guess also, as he told a friend: “Not bad for a kid from Brooklyn. The Jews are going to take over American Express, and they’ll never know what hit them.”3
But Weill overplayed his hand with Robinson and his conservative board of directors. As a result of the merger, Weill became president of American Express and controlled a large chunk of its stock—large enough to make him a very wealthy man, but not enough to control corporate decisions. And one of the decisions of the reconstituted board was to keep Weill, despite his title of president, at a remove from important decisions and from the direct management of frontline executives. From the sidelines, he attempted to engineer mergers and acquisitions, including a joint venture with Warren Buffett to acquire the Fireman’s Fund Insurance Company. But the cautious, American Express–dominated board demurred. The directors rejected the Fireman’s Fund proposal as well as other subsequent proposals Weill brought to them.
By 1985, after the American Express board had snubbed Weill and a string of potential deals, he realized he would never be allowed to put his imprint on American Express—much less run it. So he made his exit. He retreated for a few years to a quasi retirement, spending much of his time on charitable affairs. But most of his mental energy was devoted to finding another platform for a return to Wall Street.
That platform came unsolicited in 1986 from a few discouraged executives of the Commercial Credit Corporation, a Baltimore-based consumer credit subsidiary of the struggling Control Data Corporation. Weill was immediately intrigued by the executives’ suggestion that he acquire the Commercial Credit subsidiary. The company made short-term loans at high interest rates to low-income borrowers, operating in a financial segment far from the rarefied air of Wall Street. But the more closely he looked at the business—and he always went through any proposal with laser-like intensity—the more attractive the opportunity appeared. Commercial Credit offered a steady flow of business generated from a large collection of small loans spread across the country. The company was profitable but underperforming its industry, and Weill quickly figured out what was needed to set things right: tightening operating controls and lowering the company’s own cost of money.
Weill was certain that the board of the cash-needy Control Data would entertain a proposal to sell its Commercial Credit subsidiary through a public offering. He also knew that the offering would be well received if he became the CEO of the newly independent company. The board agreed to his proposal and Control Data sold 80 percent of Commercial Credit for $850 million. Weill now had his platform.
At a meeting with Commercial Credit’s employees shortly after the spin-off, he stated with characteristic frankness, “I have built one empire in my life—which was Shearson. And I want to do it one more time before I retire.”4 Much as Weill overbuilt the back-office capacity of CBWL in order to easily assimilate opportunistic acquisitions, he overbuilt the management team that would take over Commercial Credit. The bankers who decamped to Baltimore to run the relatively small company—about $1 billion in revenues and $5 billion in assets—included former presidents of some of the largest financial institutions of the day and other high-ranking officers. Most notable was Jamie Dimon, Weill’s longtime protégé who would later become chairman of JPMorgan Chase and Wall Street’s most prominent banker. The members of the high-powered team were willing to leave secure positions, take pay cuts, and move to Baltimore because they believed that Weill’s second empire would succeed, and they wanted to be on the ground floor. Weill returned their confidence by dividing 10 percent of the shares of the newly public Commercial Credit Company among them.
Reprising a familiar routine, Commercial Credit began its ascent into the big leagues of finance by capturing prey much larger than itself. Just as the tiny CBWL took over Hayden Stone, in early 1988 Commercial Credit set its sights on a company called Primerica. Primerica’s sales approached $4 billion, roughly four times those of Commercial Credit, but its most attractive component—the well-known Smith Barney securities operation—was still reeling from the October 1987 stock market collapse and thus represented just the kind of opportunity Weill relished. Smith Barney had a seasoned sales force that catered to the carriage trade, and its reputation for quality was reinforced with clever advertising—“They make money the old fashioned way. They earn it.” It looked to be the perfect route back to Wall Street.
Yet there were a number of problems in acquiring Primerica, any of which might have dissuaded a buyer less tenacious than Weill. For one, Primerica was much more than Smith Barney. Under the corporate umbrella was a life insurance subsidiary, A. L. Williams & Associates, that conducted a business far outside the mainstream of the insurance industry. It had a sales force of some two hundred thousand working-class agents selling its term-life products on a part-time basis and under the inspiration of an evangelizing founder, Art Williams. But rather than recoiling from the insurance company’s unorthodox business practices, Weill developed a fondness for Williams and the business he built. There would not be much cross-selling going on between A. L. Williams’s blue-collar sales force and the blue bloods at Smith Barney, but there was at least some commonality with Commercial Credit’s employees and customers. After Weill’s usual thorough review of the company, he got past the odd coupling of Smith Barney and A. L. Williams and saw Primerica as an opportune acquisition.
But how was this minnow-and-the-whale transaction going to be financed? The short answer: through the reputation of Sandy Weill. Under the terms of the proposed Commercial Credit–Primerica union, Commercial Credit would provide the Primerica shareholders with only a token amount of cash and many shares of its stock, so that the transaction was predominantly a stock swap. For the deal to get done, the Primerica shareholders had to believe that the stock they would get in return for surrendering their ownership would become more valuable as a result of Weill’s management magic. It was not an easy sell to all of the Primerica shareholders, but in December 1988 the acquisition closed. Weill and his management team from Commercial Credit would call the shots, but they would run the combined operation under the name of Primerica Corporation. A few months later, Primerica began trading on the New York Stock Exchange. Weill was back, and his second empire was established.
A Big Birthday Present
Weill’s second-act empire ran like the first—with relentless cost cutting and a string of opportunistic acquisitions. Immediately following the merger, Weill set, and then exceeded, a goal of reducing Primerica’s overhead by $50 million. Twenty percent of the company’s corporate staff was laid off, along with 120 people considered to be excess baggage at the Smith Barney unit.5
But at the same time Weill was cutting out the deadwood, he was building a larger and more productive sales staff through acquisitions. Smith Barney’s 2,100-broker sales force grew by about 25 percent when Weill purchased the retail operations of Drexel Burnham just as the firm was falling apart following a guilty plea to charges of racketeering and Michael Milken’s departure. With that acquisition, Weill was doubling back to the very start of his career, when he’d worked for Tubby Burnham—the Burnham in Drexel Burnham.
Much more important, however, was his eventual doubling back to Shearson. Following its 1981 purchase of Shearson Hayden Stone, American Express continued to build its retail sales through internal growth and through the 1988 acquisition of the well-known E. F. Hutton—“When E.F. Hutton talks, people listen.” By 1993, some 8,500 retail brokers were working for Shearson/American Express. But despite the size, the expected synergy between Shearson and American Express wasn’t working. The cross-selling rationale, upon which the union was based, was undermined when the American Express management refused to hand over its list of credit card holders to the brokers at Shearson. American Express was also losing its cachet in the credit card business as a result of competitive services springing up at Visa and MasterCard. So with cross-selling ruled out and a need to refocus on its core business—and with a new American Express CEO in place who had no emotional attachment to the creation of Shearson/American Express—there was little reason to keep the company together.
Even before American Express made the decision to sell Shearson, managers and brokers had been defecting from Shearson to Primerica’s Smith Barney subsidiary. So although it employed only one-fourth the number of stockbrokers, Smith Barney emerged as Shearson’s logical purchaser. The deal Weill made for the repurchase of Shearson, the core of his first empire and his abiding business love, sent the stock of Primerica to record highs. And for good reason. Weill had sold Shearson twelve years earlier to American Express for roughly $900 million in stock and now he was buying it back for just a little over $1 billion. In those dozen years, Shearson had doubled its sales force and had developed a large and effective investment advisory firm with $52 billion in assets under management. What’s more, Shearson was occupying $600 million of prime Manhattan real estate that would be part of the deal.6 Weill was a clever buyer, and immediately after the transaction was announced on March 12, 1993, the stock of Primerica soared even further in recognition of the advantageous arrangement he had negotiated. Weill turned sixty just a few days after the deal closed; Shearson was a belated but gratifying gift.
Rescuer and Genius
The 1993 acquisition of Shearson, however, turned out to be only the second most important event for Weill and Primerica that year. In the fall of 1992, Weill had negotiated Primerica’s purchase of a 27 percent ownership position in Travelers Corporation, one of the country’s largest insurance companies. Primerica’s $722 million investment was part of an effort to reestablish the rapidly falling credit rating of the 128-year-old Travelers in the wake of a string of bad commercial real estate loans. Travelers specialized in providing property insurance for big business and counted about half of the Fortune 500 companies as its customers. But its expertise didn’t extend to commercial lending, and the insurer’s balance sheet was crippled with hundreds of millions of dollars of “nonperforming” loans and dwindling reserves to protect them. To make matters worse, Travelers had been hit by a staggering number of claims in the aftermath of Hurricane Andrew, the August 1992 hurricane that at the time was the costliest in U.S. history.
Weill’s rescue deal with Travelers came with many strings attached. Primerica was granted representation on the insurer’s board commensurate with its 27 percent ownership, and Sandy Weill, Jamie Dimon, and two other Primerica managers became directors. That gave them the opportunity to size up the company from an insider’s perspective—and they liked what they saw. In September 1993, exactly one year from the date of the initial investment, Primerica announced that it would purchase the remaining 73 percent of Travelers stock in a $4 billion swap of Primerica’s common stock for that of Travelers. When the deal closed, Primerica became the largest financial services company in the world and promptly changed its name to Travelers Group.
Weill was diligent as well as opportunistic in his approach to this acquisition. In the year he had to evaluate Travelers before agreeing to the full purchase, he had concluded that the real estate loan problems were largely behind them. His knowledge of the insurance business extended back to his early days at CBWL, when he assisted Saul Steinberg in the takeover of Reliance Insurance, and to his more recent experience with Fireman’s Fund. With that background, he saw issues and opportunities at Travelers that had escaped the attention of its prior management. In particular, he saw a bloated administrative staff in the Hartford, Connecticut, headquarters and little focus on productivity and cost controls. He also knew that Travelers, no matter how badly damaged by recent loan problems and sleepy management, enjoyed a century-old franchise that would outlive its current problems. In particular, the red umbrella the insurer had long used in its advertising was one of the most recognizable symbols in the U.S. business landscape, on a par with the iconic Prudential rock and the Merrill Lynch bull.
Making the transaction even more appealing, the Primerica stock that would be issued to finance the merger with Travelers had appreciated by about a third following the market’s enthusiasm about the acquisition of Shearson, completed just six months earlier. That meant that Primerica’s current shareholders would suffer only a small dilution in their ownership interest after the acquisition was completed. In the eyes of the investment community, Weill could do no wrong. He had convinced Wall Street that his new conglomerate, with the addition of Travelers, would create even more synergy between different kinds of financial service firms.
In hindsight, however, there was little evidence of such synergies before or after the acquisition of Travelers. Primerica’s three discrete units—Smith Barney Shearson with 10,000 brokers; Commercial Credit with its 700 offices across the country; and A. L. Williams with 200,000 part-time insurance agents—had little customer overlap. Commercial Credit’s market was working class, A. L. Williams served the lower end of the middle-class demographic, and Smith Barney Shearson was upscale. There was no apparent interest or potential for sharing customers. And Primerica wasn’t the only company struggling with synergies; enough time had gone by to declare Prudential Insurance’s 1981 acquisition of the 2,500 broker Bache Halsey Stuart Shields a bust. The anticipated benefits of blending insurance and securities sales were hampered by the destructive culture clashes between the two organizations.
Nevertheless, Weill’s many fans on Wall Street remained convinced that with his superior brand of management he would make the merger work between the disparate operations of Primerica and Travelers Insurance. The resulting Travelers Group conglomerate operated with some $100 billion in assets and became a formidable player in the financial world. The company’s importance to the American economy was reinforced in 1997 when it was selected for inclusion in the Dow Jones Industrial Average. The first financial services company to become part of the Dow’s thirty-company average was J. P. Morgan & Company in 1991; Travelers Group was just the second. There could be no clearer signal to the world that Sandy Weill was at the very top of his game.
Yet Weill was like the mountaineer who, upon reaching the top of a peak, just sees a new vista open up with even greater peaks ahead. In 1997, that new peak was Salomon Brothers, the enormous bond and underwriting firm whose excesses in the 1980s were revealed in Michael Lewis’s entertaining bestseller, Liar’s Poker. Those excesses lost much of their humor in the 1990s, however, when Salomon was shaken by the disclosure that its bond traders, with their formidable financial resources and market hubris, had used false bids to manipulate the prices of U.S. Treasury securities for their own benefit during the government’s periodic auctions. The firm was forced to pay close to $300 million in fines and to purge its top management. It also led to some degree of market temperance under the effective control of Warren Buffett, who owned a major share of Salomon’s common stock through his Berkshire Hathaway group and became the behind-the-scenes decision maker at the firm. He must have welcomed Weill’s merger proposition, which offered an exit from a business that stretched Buffett’s tolerance for risk well past his limits.
Weill was not much of a risk taker himself, but he felt he could bring more trading discipline into Salomon’s operations without inhibiting the money-making franchise. He was also, as usual, getting his prey inexpensively. Before the bid-rigging scandal, Salomon would have fetched a handsome sum. Now Weill could, for a “modest” price of $9 billion in Travelers Group stock, bring that firm’s powerful investment banking and institutional sales capability into Travelers to complement Smith Barney Shearson’s expansive retail broker network.
On a personal level, the acquisition once more validated Weill’s revival. Warren Buffett, the “Oracle of Omaha,” was willing to trade Berkshire Hathaway’s substantial holdings of Salomon common stock for that of Travelers, and stated in a prepared press release, “Over several decades, Sandy has demonstrated genius in creating huge value for his shareholders by skillfully blending and managing acquisitions in the financial-services industry. In my view, Salomon will be no exception.”7 It couldn’t get much better than having Warren Buffett proclaim your genius and back up his proclamation by accepting a large slug of Travelers Group stock in exchange for his ownership of Salomon stock—the endorsement lessened only slightly by the knowledge that Buffet was also getting rid of a major problem at the same time.
Shattering Glass-Steagall
Yet Weill had still not scaled his Mount Everest: the acquisition of one of the nation’s major international commercial banks. His empire now included both full-service insurance and securities operations, but aside from the small potatoes lending business of Commercial Credit, it had nothing in the way of a major commercial bank. One major obstacle stood in his way: it was still illegal under the terms of the Depression-era Glass-Steagall Act to conduct a commercial banking business and an investment banking business under the same roof.
But not even illegality could stand between Weill and his dream. He knew that, in recent years, commercial bankers had successfully chipped away at the provisions of Glass-Steagall and were receiving one favorable ruling after another from the Federal Reserve about the kind of investment banking–like businesses they could engage in. Weill was convinced that the time was right to force the issue by engineering a blockbuster merger between Travelers and one of the big banks—and then afterward seeking the law’s total repeal to make the merger legal. He was also convinced that he was the logical person to the test the matter, and to that end placed a call to John Reed, the chairman of Citicorp.
Following his modus operandus, Weill did his homework on Citicorp in great detail and, when he was ready, presented the merger idea to Reed in a one-on-one meeting. The meeting had no prelude, and Reed, as analytical and reserved as Weill was impulsive and direct, was taken aback by the unexpected and audacious proposal. Citicorp had been the world’s largest banking enterprise for many years. It operated in nearly one hundred countries and its $3.4 billion in net income in 1995 was the highest level of profits ever recorded by a U.S. commercial bank.8 But 1996 and 1997 had been challenging years for Citicorp, and that may be why Reed agreed to study the matter and get back to Weill. Within a few weeks, the two of them were hammering out a preliminary structure of the merger into a combined trillion-dollar operation that they would manage as co-CEOs.
Weill pitched the deal to Reed, and later to the Citicorp directors and shareholders, on the strength of a familiar promise: synergism. Weill argued that there was potential for nearly unlimited cross-selling within the financial behemoth he envisioned. The possibilities on the corporate side were the most compelling and profitable, with the Travelers Group investment subsidiary—now doing business as Salomon Smith Barney—poised to provide investment banking services for Citibank’s large roster of blue-chip borrowers. There were plenty of cross-sell possibilities at the retail level as well, with Citibank’s credit card holders becoming prospects for Travelers’ annuities and Salomon Smith Barney’s mutual funds—and with both Travelers’ agents and Salomon Smith Barney’s brokers signing up their customers for Citibank’s credit cards and banking services.
Weill also had the answer for the Glass-Steagall problem. In 1997, the year before he broached the merger idea with Citicorp, he made a similar proposal to Douglas “Sandy” Warner, CEO at the august J. P. Morgan & Company. Unbeknownst to Warner, Weill had met with Fed chairman Alan Greenspan before the meeting, to plant the idea of a Travelers–J. P. Morgan combination. Greenspan offered no objection “in principle” to the hypothetical merger Weill described—as long as Congress removed the Glass-Steagall barriers. Although the board of J. P. Morgan ultimately rebuffed Weill’s merger proposal, his warm-up meeting with Greenspan confirmed the feasibility of the idea. In October 1998, several months after Weill and Reed made a public announcement of the merger between Travelers and Citicorp, the Fed gave its approval to the deal, once again contingent upon the overturn of Glass-Steagall.
Although there was a conciliatory mood in Congress and the White House regarding financial deregulation, an overturn of the law was not a certainty. There were plenty of skeptics in Congress who feared the dangers that could surface if Wall Street operated with one less inhibition to its activities; Weill knew success would require an all-out effort to convince the holdouts. So, ever the hands-on manager, Weill didn’t rely on his bank lobbyists to carry the day. He plunged into the fray and met personally with key legislators. And when President Clinton initially withheld his support of the Glass-Steagall repeal, Weill made a late night call to him that reportedly turned the president around on the issue.
Weill and his like-minded bankers eventually prevailed, and in November 1999, Clinton signed into law the Financial Services Modernization Act—and Glass-Steagall was no more. Weill was the acknowledged key player in the repeal and, among his many trophies and assortment of pictures and memorabilia in his office, a shingle etched with his likeness and the words “the Shatterer of Glass-Steagall” found a prominent spot on his wall.
Reality Bites
The merger of Travelers and Citicorp was the largest in American history, and Wall Street showed its enthusiasm for the deal by bidding up the common stock of both Travelers and Citicorp after the merger’s announcement. Yet the honeymoon was short-lived, and little by little it became obvious to those inside and outside the financial conglomerate—now known as Citigroup—that the synergies of the merger would never be realized. Weill and Reed’s plan for a smooth-running enterprise that housed the clashing cultures of the investment business and the commercial banking business proved to be yet another example of hope over experience.
Revenues on the Travelers’ side of the business came largely from transactions—sales of insurance policies, merger fees, commissions from securities sales, trading profits—and every day started fresh. At Citicorp, revenues came mainly from interest earned on large loan portfolios, and those revenues accrued day in and day out. So the employees of the two firms tended to have very different outlooks on their job, with the commercial bankers intent on building long-term relationships and the transaction-based investment bankers being opportunistic and short-term thinking.
That dichotomy was nowhere more evident than in the way corporate customers were treated. The Citicorp bankers cultivated relationships, with the goal of nurturing their business clients over the long term with a wide assortment of loan and cash management services to keep the interest payments and fees flowing. They were willing to invest vast talent and time in those efforts to earn steady and recurring business. For Salomon Smith Barney, by contrast, it was all about closing a deal today and searching out new deals tomorrow.
The co-CEOs themselves embodied the culture clash. Weill, neither patient nor methodical, focused on the job at hand and obsessed about quarterly earnings. When an employee asked Weill to “share with us your philosophy of strategic planning,” he answered, “I get up in the morning, I read the Wall Street Journal, and I make a strategic plan for the day.”9 Reed, on the other hand, saw his job as developing and moving toward a long-term vision of Citigroup as the world’s premier financial services firm and a global brand in banking. Reed was interested in creating long-term shareholder value; Weill in the afternoon’s stock price. Reed groomed management with long-term training and aimed for orderly succession; Weill pitted one manager against another and let them fight it out until one emerged the winner.
In 1999, just a few months after the Federal Reserve officially blessed the merger, both Weill and Reed openly agreed that the company needed just one CEO. Weill’s relentless drive was behind the creation of the new Citigroup, but Reed, though quiet and more cerebral, had an ego to match Weill’s and saw himself as the logical man to run the combined enterprise. He had been the boy wonder of Citibank (named CEO at age forty-five) and for fifteen years presided over a long and successful phase of the bank’s history. Since they both wanted the job, they put the decision to the Citigroup board. After a marathon meeting in February, 2000—with a board composed of essentially equal parts ex-Travelers directors and ex-Citicorp directors—they gave the job to Weill.
Weill remained as chairman and CEO of Citigroup through 2003, when the board forced Weill to take the honorific title of non-executive chairman in compliance with the bank’s mandatory retirement age of seventy. No one on the board would ever say it outright, but by 2003 they must have realized that they had bet on the wrong man when they chose Weill over Reed—and likely questioned the wisdom of the merger in the first place. An MIT-trained engineer, Reed had run Citicorp methodically over his long tenure as CEO, building on a solid base of consumer and commercial business around the globe. There had been difficulties on his watch at the bank, but nothing compared to those that Travelers created with its hodge-podge of disparate financial services operations.
Salomon Smith Barney emerged as an especially big problem for the new Citigroup. The cowboy culture that Salomon Brothers demonstrated in its bid-rigging scandals of the early 1990s survived with a vengeance when the firm was operating as the Salomon Smith Barney appendage of Citigroup a decade later. Salomon seemed to be involved in every bit of mischief Wall Street created during those years, including major roles in the Enron and WorldCom scandals. It was also the lead culprit in the SEC’s $1.4 billion settlement with ten investment banking firms in 2003 for fraudulent practices in connection with their research and underwriting businesses. Salomon was far and away the greatest miscreant in the fraud and wound up shouldering $400 million of the fine.
As a result of the scandals, the Salomon name was dropped, and Citigroup’s remaining securities business continued on as just Smith Barney. The damage had been done—but not all of it. The Salomon bankers and traders later played important roles in generating mammoth, institution-ruining trading losses when they became part of Citigroup’s Global Markets group.
Meanwhile Weill, rather than settling down to the more mundane task of integrating the disparate businesses of the new conglomerate, continued building his empire. In 2000, he engineered Citigroup’s $31 billion purchase of Associates First Capital Corporation, pushing the bank further into the rough-and-tumble world of consumer finance and, in particular, into the expanding business of sub-prime lending to unwary customers. Just a year after the acquisition, the U.S. Federal Trade Commission filed a complaint against Associates, stating in its March 6, 2001, press release:
The Associates engaged in widespread deceptive practices. They hid essential information from consumers, misrepresented loan terms, flipped loans, and packed optional fees to raise the costs of the loans. What had made the alleged practices more egregious is that they primarily victimized consumers who were the most vulnerable—hard working homeowners who had to borrow to meet emergency needs and often had no other access to capital.10
Citigroup eventually paid a $240 million fine based on the FTC’s complaint.
And what of the synergy that was the grand plan for the merger in the first place? In 2002, Travelers Property and Casualty, the flagship of Weill’s earlier holding company, was spun off from Citigroup based on its limited cross-sell potential and major insurance claims stemming from 9/11 and other large loss-producing events of the early twenty-first century. Citigroup retained the coveted red umbrella logo, but in 2007 sold it back to a reconstituted insurance operation called the Travelers Companies. Similarly, what was left of Primerica was spun off from Citigroup following the 2008 financial crisis. Smith Barney, once Travelers’ most valuable asset, was eventually sold to Morgan Stanley.
Chris Whalen, a longtime Wall Street observer, summed up the futility of the attempted synergies by saying, “The dream, the mirage has always been the global supermarket, but the reality is that Citigroup was a shopping mall. You can talk about synergies all day long. It never happened.”11 The Citigroup that operates today looks more like the institution it was prior to Weill’s involvement. And the unwieldy financial supermarket version of Citigroup that Weill created, and which lasted for but a decade, looks in retrospect like little more than a temporary monument to ego. And saving that ramshackle monument from bankruptcy, as U.S. taxpayers know all too well, ultimately required $45 billion in cash injections plus loss guarantees from the government of over $300 billion on troubled assets, making Citigroup the beneficiary of the largest bank bailout in history. Weill’s conglomerate, though briefly heralded as the first fully integrated financial institution, became more widely recognized as the epitome of financial folly.
Weill—who cut all ties with Citigroup in 2006—faults his successor management for ballooning the bank’s balance sheet with ill-conceived mortgage-backed securities and derivative investments, implying that the taxpayer bailout of Citigroup would have been unnecessary under his management. Who can say he isn’t right? Weill was a hands-on CEO who watched the details and understood how to control financial risk. Yet at the same time it’s incontrovertible that he, as “the Shatterer of Glass-Steagall,” played a leading role in creating a deregulated Wall Street—one where banks grew too big to fail.
To his credit, Weill eventually acknowledged the inherent problems of the financial mishmash he created. In a 2012 television interview, the seventy-nine-year-old Weill offered an apology of sorts for the failed supermarket concept: “I think the earlier model was right for that time. I don’t think it’s right anymore.” And, as reflected in the opening quote to this chapter, he was admirably forthright about the 1999 overturn of Glass-Steagall, calling the repeal a mistake and suggesting a return to the 1933 act’s goals.
