David Stockman was a U.S. Congressman, C.E.O. of a company with 15,000 employees, and the White House budget director under President Reagan. Currently, Stockman rails against crony capitalists, whom he describes as “an entitled class of Wall Street financiers and of corporate CEOs who believe the government is there to do … whatever it takes in order to keep the game going and their stock price moving upward.”[1] The Great Deformation is Stockman’s 744-page indictment of crony capitalism. He focuses on the 2008 Financial Crisis and the “trillion-dollar infusion of capital and liquidity from the public till” used to bail out bankers at the expense of America’s working and middle classes.[2] Citigroup was one of the biggest beneficiaries of Uncle Sam’s largesse in 2008, to the tune of over $100 billion according to Stockman.[3] He refers to Citigroup multiple times in his book, which portrays crony capitalism as “a mutant regime which now threatens to cripple … bedrock institutions of political democracy and the free market economy.” As of December 2017, Citigroup held nearly-$2 trillion in assets on its balance sheet.[4]

When did the government gravy train that culminated in the crony capitalist Wall Street bailouts of 2008 start rolling? In the New Deal Era, according to Stockman. An economic era he characterizes as a “political gong show, not a golden era … that succeeded primarily in planting the seeds of … crony capitalism.”[5] Citigroup’s federal connections however, go back further than the New Deal era. I will show that Citigroup’s “crony” links to the federal government predate the post-depression genesis of crony capitalism discussed by Stockman. In fact, Citigroup’s crony connections precede the bank’s founding, before the founding of the republic itself, making it one of America’s longest established crony capitalist corporations. Evidence to prove this thesis extends back to the founding of the republic, yet my paper will point to three significant episodes of crony capitalism during the War of 1812, Civil War, and the Roaring Twenties eras, in which the actions of the U.S. government served the financial interests of Citigroup.

Genesis of City Bank of New York: Great Crony Capitalist Compromise of 1812

City Bank of New York was founded in an 1812 compromise between three groups of merchant insiders that had been competing for a New York state bank charter since 1811. With ties to President James Madison, Vice President George Clinton, and the First Bank of the United States, the competing factions had a single crony capitalist goal in sight: The U.S. Government’s banking business.[6] These insiders all knew that the charter for First Bank of the United States was not being renewed, and the bank to service both New York City merchants and the federal government would be that new state bank in Manhattan that the three groups of merchants were competing to charter. Ultimately, the charter was awarded to City Bank of New York, whose stock was held by and board was comprised of not just one of the cabals of merchant insiders, but all three of them.[7]

In fact, according to an official Citigroup historian, “Shareholders in the Bank of the United States … provid[ed] … more than 50 percent of the startup capital for … City Bank of New York.”[8] The insiders were all brought together under the leadership of the elder statesman Samuel Osgood who would serve as the bank’s first president. Osgood was an international merchant, a former US postmaster, and a Revolutionary War hero. William Few, who became City Bank’s second president after Osgood’s passing in 1813, was also a well-resumed insider. He had worked in several public sector roles and served on both the New York and Georgia state assemblies.[9]

Under Few’s leadership, the bank would be entrusted with one third of all federal deposits in the state and would help the government raise millions to fight the War of 1812. In one of the earliest episodes of American crony capitalism, City Bank was in the enviable position of becoming a lender and banker of choice for the U.S. government. The bank provided a $200,000 loan to the federal government, enabling it to pay the interest on its debt. In return, a third of the federal government’s bank balances held in New York were deposited at City Bank.[10] The bank earned windfall profits from filling the country’s wartime finance needs. These were icing on what was already, for City Bank’s founders, a deliciously lucrative crony capitalist cake.

Lincoln’s bankers: City Bank of New York finances U.S. Civil War

In 1860, masses of rebels in the southern United States of America made an organized, sustained attempt to secede from the union, to the point of forming their own army and central government under the Confederate States of America banner. President Abraham Lincoln needed troops, materiel, and money, tons of money, to put down the southern rebellion and preserve the union. Congress passed emergency legislation allowing the government to borrow up to $150 million for the military effort. Treasury Secretary Salmon P. Chase, acting on Lincoln’s orders, had a private meeting with New York’s banking elite where he immediately sought to borrow $50 million of $150 million congress had authorized. After the banking scions huddled, John Jacob Astor protégé and City Bank President Moses Taylor answered for the group: “Mr. Secretary, we have decided to subscribe for fifty millions of the United States government’s securities that you offer, and to place the amount at your disposal immediately…”[11]

Moses Taylor was the man to see if you needed $50 million, around $1.5 billion in 2018 inflation-adjusted dollars, immediately. Taylor’s City Bank held significant chunk of Astor’s and the bulk of his own considerable fortune, in addition to the accounts of several successful commodity companies and families like the Vanderbilts. “The City Bank was always run on the formula,” according to late-1800’s bond rating pioneer John Moody, “not of the ordinary commercial bank but of the richest and most conservative old-time merchant, with a great holding of surplus cash …”[12] In contrast to modern-day Citigroup which was saved from extinction by the federal government in 2008, the mid-to-late nineteenth century City Bank was a pillar of financial strength.

On several notable occasions, the bank rallied the nation’s great private and organizational fortunes in concert with its own vast resources to provide funds the nation needed to quell its emergencies and win its wars. City Bank’s good turns did not go unremunerated. Interest at rates between 6 and 7.3% per annum[13], fees, and an ever-expanding deposit base were the just rewards for the firm’s role in funding the Union’s march to Civil War victory. By the war’s end, “National City Bank of New York (as it was renamed in 1865) became a depository for the federal government and began to accept the required reserves of national banks in other cities…”[14] Modern-day Citigroup points to the addition of “National” to its name, indicating the bank’s ability to “meet the U.S. government’s most stringent requirements,” as the point in its corporate history when it became a prestigious “bankers’ bank.”[15]

Pre-New Deal chicanery: Contribution to 1929 market collapse & international bad debts

Prior to the stock market crash of 1929 that led to the Great Depression, National City Corporation, National City Bank’s investment banking division, was selling “$2 billion annually in speculative securities and shaky bonds.” The bank’s CEO, Charles “Sunshine Charley” Mitchell admitted his sales agents were hawk “bad investments on unsophisticated customers, many of who then borrowed money from his banking arm to finance their investments.”[16] While the bank and its president were subjected to hearings and public castigation by the likes of Senator Carter Glass and the chief counsel for his Senate committee, Ferdinand Pecora, neither National City Bank, its investment division, nor Mitchell were found to have acted illegally. Still, Pecora chided City Bank and National City for using their reputation of “safety, strength, prudence, and high-mindedness” to sell bad investments to the “financially unsophisticated public.”

Senator Glass would caricature “Sunshine Charley” as the archetypical crooked “bankster” in his rhetoric to sell his Banking Act of 1933, also known as The Glass-Steagall Act. The law placed more stringent regulation on banks, including a ban on consumer banks like National City Bank of operating investment banking divisions like National City Corporation. While politicians railed against the bank’s bad acts in speeches, many of the bank’s worst and most financially irresponsible decisions remained undisclosed in public rhetoric. One of the worst offenses outside the eye of the general public was the firm’s refusal to disclose key information to its regulators relating to the condition of its assets and status of its loans.[17] Since the 1914 the Federal Reserve Act had empowered large banks to “establish branches in foreign countries … for the furtherance of the foreign commerce of the United States, and to act if required to do so as fiscal agents of the United States,”[18] National City’s worldwide footprint and likewise its exposure to shaky foreign loans had ballooned exponentially. By the late 1930’s bad foreign debts from Germany to Russia to Cuba seriously imperiled the bank’s solvency.[19]

The American taxpayers, the ones who were truly floating the bad debt through over $100 million in Fed financing that kept National City Bank afloat, will likely never know just how bad the bank’s books looked.[20] From 1930 to 1933, federal regulators’ records indicate the bank’s refusal to provide key financial information necessary to assess the institution’s financial health. Despite holding over $100 million in notes plus the bank’s charter as leverage, regulators apparently didn’t press too hard for the records. In fact, federal auditors looked the other way for nearly a decade in relation bad loans, collateralized by bonds issued by the bank’s wholly-owned Cuban sugar production subsidiary, that National City Bank continued to show as assets on its increasingly “cooked” books.[21]

Perhaps politicians didn’t dwell on these issues from their stumps because they highlighted the ineffectiveness and impotence of the federal institutions which they themselves had put in place to keep watch over the nation’s banking system. While the National City’s deliberately defiant actions yielded no punishment beyond a severe public scolding, Glass-Steagall did address the deficiencies that had rendered the feds toothless to press the bank for full disclosure: “the refusal to give any information required in the course of the examination of any such affiliate … all the rights, privileges, and franchises of the bank shall be subject to forfeiture.”[22]

Conclusion: Both Citigroup and the United States were founded on crony capitalism

Stockman’s Great Deformation rightly points to the New Deal era and Nixon’s repudiation of Bretton Woods as inflection points that accelerated the rampant and exponential growth of crony capitalists’ assets and influence, “…which now threatens to cripple … bedrock institutions of political democracy and the free market economy.”[23] However, nothing was new under the sun, or under “Sunshine Charley,” or in the 2008 financial crisis. Countless examples exist in Citigroup’s history to prove, as the three examples cited in this paper prove, that crony capitalism has always been part of the Citigroup business model. Furthermore, the 200-year, City Bank of New York to Citigroup, history of the banking institution proves excellent evidence to bolster the argument that crony capitalism has been, and has remained, integral to business and political culture in the United States since its founding.

Bibliography

“Citi Timeline.” About | Citi | Timeline. December 5, 2018. Accessed December 5, 2018. https://www.citigroup.com/citi/about/timeline/

“Citigroup Balance Sheet.” NASDAQ.com. December 31, 2017. Accessed December 10, 2018. https://www.nasdaq.com/symbol/c/financials

Ferrin, A. W. “The Great Banks of New York, IV, National City Bank.” Harper’s Magazine, May 1914.

“Federal Reserve Act. Section 25. Foreign Branches.” The Fed – Money Stock and Debt Measures – H.6 Release – April 26, 2018. Accessed December 10, 2018. https://www.federalreserve.gov/aboutthefed/section25.htm

Federal Reserve Bank of New York, “Banking Act of 1933,” Federal Reserve Bank of New York Circular No. 1248, June 22, 1933.

Freeman, James, and Vern McKinley. Borrowed Time: Two Centuries of Booms, Busts, and Bailouts at Citi. New York, NY: Harper Collins Publishers, 2018.

Johnson, Hazel J. Banking Alliances. Singapore: World Scientific, 2000.

Moyers, Bill. “David Stockman on Crony Capitalism,” Moyers & Company, March 9, 2012. https://billmoyers.com/segment/david-stockman-on-crony-capitalism

Palmer, Brian. “You’re Under Arrest … for Causing the Great Depression,” Slate Magazine, Jan. 25, 2011. https://slate.com/news-and-politics/2011/01/bankers-in-jail-did-we-punish-anyone-for-causing-the-1929-stock-market-crash.html

Stockman, David Alan. The Great Deformation: The Corruption of Capitalism in America. New York, NY: Public Affairs, 2014.

[1] Bill Moyers, “David Stockman on Crony Capitalism,” Moyers & Company, March 9, 2012. https://billmoyers.com/segment/david-stockman-on-crony-capitalism/

[2] David Alan Stockman, The Great Deformation: The Corruption of Capitalism in America (New York, NY: Public Affairs, 2014), p. 49.

[3] Ibid.

[4] “Citigroup Balance Sheet,” NASDAQ.com, December 31, 2017, , accessed December 10, 2018, https://www.nasdaq.com/symbol/c/financials.

[5] Stockman, p. 194.

[6] James Freeman and Vern McKinley, Borrowed Time: Two Centuries of Booms, Busts, and Bailouts at Citi (New York, NY: Harper Collins Publishers, 2018), loc. 1328.

[7] Freeman, loc. 1376.

[8] “Citi Timeline,” About | Citi | Timeline, December 5, 2018, , accessed December 5, 2018, https://www.citigroup.com/citi/about/timeline/.

[9] Freeman, loc. 448.

[10] Hazel J. Johnson, Banking Alliances (Singapore: World Scientific, 2000), p. 46.

[11] Freeman, loc. 832.

[12] Freeman, loc. 938.

[13] A. W. Ferrin, “The Great Banks of New York, IV, National City Bank,” Harper’s Magazine, May 1914, p. 254.

[14] Freeman, loc. 2893.

[15] “Citi Timeline.”

[16] Brian Palmer, “You’re Under Arrest … for Causing the Great Depression,” Slate Magazine, Jan. 25, 2011. https://slate.com/news-and-politics/2011/01/bankers-in-jail-did-we-punish-anyone-for-causing-the-1929-stock-market-crash.html

[17] Freeman, loc. 1140.

[18] “Federal Reserve Act. Section 25. Foreign Branches.” The Fed – Money Stock and Debt Measures – H.6 Release – April 26, 2018. Accessed December 10, 2018.

[19] Freeman, loc. 4352.

[20] Freeman, loc. 4892.

[21] Freeman, loc. 2320.

[22] Federal Reserve Bank of New York, “Banking Act of 1933,” Federal Reserve Bank of New York Circular No. 1248, June 22, 1933.

[23] Stockman, p. 3.

Photo by Scott Webb on Unsplash