In 1990, then Citigroup chairman John Reed realized that the bank’s souring portfolio of bad commercial real estate loans was going to take it to the very brink of disaster. By the end of that year, tier 1 capital had fallen to 3.26% of assets, the Citigroup stock price had halved from a 20-year high to a 20-year low, banking regulators were camped in the boardroom and the legal documents for a collapse were being drafted.
Over the next two years, more problems emerged. The Office of the Comptroller of the Currency lambasted operations at Citigroup’s residential mortgage lending unit, which had pursued high-volume growth with low-documentation loans, sometimes not even checking if a borrower had any source of income. The bank was forced to re-state earnings.
What did Reed and his board do? They rolled up their sleeves and went to work.
Reed saw that, amid the deteriorating economy of the early 1990s, the most important requirement was to excel at the control aspects of banking – costs and credit quality – rather than pursuing revenue growth. He set out a two-year turnaround plan to rebuild margins and operating earnings to absorb credit write-offs; he slashed the expense ratio from 70% to 55.5%