Letter from Washington — From the April 2015 issue

Saving the Whale, Again

The catastrophic incompetence of Citigroup

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Sheila Bair, who was chair of the Federal Deposit Insurance Corporation (FDIC) from 2006 to 2011, confirms Warren’s assessment, citing her own experiences on the inside. “They intimidate you,” she told me recently, referring to the big financial institutions. “I think this has been a big problem with this administration. You see all these former Citi people influencing government, and you’re afraid to voice opinions that are critical of them or different from their views.”

Multitrillion-dollar derivatives trades may have little direct impact on ordinary Americans, unless and until they bring down the economy, as they did in 2008. But other recent Citigroup initiatives will have more immediate effects. According to the Federal Reserve, 52 percent of Americans are unable to lay their hands on as little as $400 in an emergency. Instead, millions of people in urgent need turn to consumer-loan companies, which charge high interest rates. Among the leaders in this field is OneMain Financial, a Citigroup subsidiary, whose website declares its dedication to the penniless consumer: “Your needs. Your goals. Your dreams.™”

Intent on shedding consumer-related subsidiaries in order to concentrate on trading, Citi has for some time been planning to sell OneMain. To hit its target price of $4 billion, however, Citi needed to boost the company’s already substantial profit margin, which was up 31 percent in 2013 — and the way to do that was to persuade state legislatures to loosen restrictions on interest rates. This usurer-relief campaign has been increasingly successful, with lawmakers in Arizona, Florida, Indiana, Kentucky, Missouri, and North Carolina buying the argument that lenders such as OneMain actually “work with their customer,” as demonstrated by low default rates.

OneMain “definitely led the lobbying effort in North Carolina,” Chris Kukla, senior vice president at the Center for Responsible Lending, told me. He said the loan company was “pretty aggressive” in collecting its money. When a borrower does default, companies like OneMain “back up a truck to the house and take the furniture and the TV set.” However, the company much prefers to keep customers on the hook by repeatedly and expensively refinancing their loans — which helps to explain the low default rates.

Citi’s efforts paid off in June 2013, when the North Carolina legislature raised the ceiling on interest rates. By Kukla’s calculation, the revised law has made the situation for borrowers much worse. The interest on an average loan of about $3,000 has risen from slightly more than 20 percent to 30 percent; borrowing that money costs the company itself just three percent, at most.

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is the Washington editor of Harper’s Magazine and the author of Kill Chain (Henry Holt), which was published last month.

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