In every industry there are leaders and large players who seemingly could be leaders but every once in a while something goes wrong. The company has to write down assets, make less money and then rebound for a few years when it seems they make a different mistake but the results are same. In the banking industry, the large player is Citibank and looking at the history of company from being an investor you wonder why? In a book called Borrowed Time by James Freeman and Vern McKinley published by HarperCollins, NY, 2018, the authors help answer the question why?

In banking for credit there are the 3 C’s: character, capacity and collateral. When considering whether to extent credit. a banker must know whether the potential borrower has 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.

Although all banks can give out loans to all industries, the reality is banks tend to specialize. Citibank had a client named Aristole Onassis and he became a large player in the business of shipping. Onassis was in the business of building oil tankers, Texaco needed the oil moved and MetLife arranged the long-term loans. Citibank became the world’s leading bank in financing shipping. Citibank merged with First National Bank of NY and its clients including railroads made Citibank the bank of the railroad industry. In 1969 the railroad clients included Penn Central.

Penn Central was a merger of 2 railroads that were losing money- Pennsylvania and New York Central. Part of the reason Penn was losing money was competition that the government paid for the opening of the St. Lawrence Seaway and the Interstate highways or trucking companies.

When Penn Central declared bankruptcy, the federal government offered loan guarantees. The government was thinking about the commercial paper market. Companies issue commercial paper rather than loans for 60 or 90 days. The market was $40 billion in 1970 with Penn Central having $84 million outstanding. The question for the authors of the book was the government guarantee needed?

An area of growth, Citibank went into were international lending. Citibank’s branches around the world meant it enjoyed an established customer base, knowledge of local conditions, and experienced staff. The branches specialized in foreign exchange trading, dollar based services for foreign customers in NY. By 1969, Citibank had over 200 branches around the world. By 1973, foreign deposits exceed domestic deposits.

In terms of managing the risks, after a study in 1974, the bank lacked a system for assessing the unique risks for lending in each foreign country. The President of the bank Walter Wriston believed loans to countries were guaranteed by taxpayers of the country and were essentially risk free.

Many countries around the world depend on the price of a commodity for the economic viability for example oil. When oil is discovered, loans are made and hopefully the price of the oil remains to cover the cost of drilling, pipelines, refining and using the product. However, in 1980, oil peaked in price and fell for the next 5 years. Loans to governments would have to be written off. Citibank as leader in the field needed to have government bailouts and extend the loans or technically, they would have been insolvent.

Linking to dividend paying stocks, every leading company has an array of clients, but they tend to be clustered in a few categories because the company can serve the customers better. As long as the customers are above board and make money, the specialization is a good thing. When economic cycles turn, how well do the customers perform? How are the customers ensuring bills get paid? When you do your homework, you want to determine how your investments will do on both sides of the economic cycle.

There are more questions than answers, till the next time – to raising questions.