Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Former Citi chief backs breaking up big banks

Victor J. Blue | Bloomberg | Getty Images

John Reed, former chairman of Citicorp, was instrumental in creating one of the world's largest financial institutions. In recent years, he's struck a highly cautious tone on the state of global banking.

At a conference in Boston on Monday, Reed expressed concern that the size of Citigroup, the bank he merged with Travelers in 1999, is so immense and complex it's nearly impossible to manage.

"Even if you know exactly what you want to do, to make sure it happens throughout the organization is an amazingly difficult task," Reed told the audience at the OCC's Future of National Banking forum. "Having three or four CEOs in the last decade hasn't helped."

Long-term story for Citi still there: Trader
Long-term story for Citi still there: Trader

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The comments from Reed (who notes he has not been a Citi executive for more than a decade, and says his opinions do not represent those of his current employer, the Massachusetts Institute of Technology) came in response to an audience question about whether Citi's global reach and complexity hurt it on the recent stress tests.

The Federal Reserve announced on March 26 that Citi held enough capital on its balance sheets, but failed the test on other "qualitative" marks—the only big bank to do so.

Reed in 2012 told the Financial Times he believed banks should break up to dilute the risk they pose to the global financial system; he echoed that sentiment on the sidelines of the OCC conference, saying a bank like Citi could easily cleave in two or more parts. Citi did not immediately respond to a request for comment.

"You've got an erector set right in front of you," Reed told CNBC on the sidelines. "The key is not to be emotional about it."

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In the meantime, banks have built up war chests of excess capital that would serve to absorb any losses from "risky" investments during a future financial shock. But Reed told the audience that practice would likely be ineffective, since earmarking which assets are risky is impossible.

"All bank assets are risky," Reed said, saying often the most dangerous threats are usually hidden. "We don't know what the risks are until after the fact."

Reed said that higher capital levels and more public disclosure would not solve the problems wrought by the failure of Lehman Brothers in September 2008.

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Reed said that when he ran Citigroup in the 1990s, the counterparties the bank relied on—peers as well as central banks—were party to far more information about the risk involved, but ultimately relied on gut instincts about the bank's activities and personalities to make their decisions.

Lehman's "funders must have reached the conclusion Lehman wasn't going to make it. It had nothing to do with capital," Reed said. "It all comes down to judgments made by counterparties."