Letter from Washington — From the April 2015 issue

Saving the Whale, Again

The catastrophic incompetence of Citigroup

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OneMain is part of Citigroup thanks to a Wall Street dealmaker named Sandy Weill, who realized the stunning possibilities of this kind of business back in 1986. At the time, Weill had recently been eased out from Shearson Lehman/American Express, a financial conglomerate he had helped to build. Eager to get back in the game, he bought a Baltimore firm called Commercial Credit. In the view of Weill and his protégé, Jamie Dimon, their new acquisition was in the beneficent business of supplying “consumer finance” to “Main Street America.” Their office receptionist, Alison Falls, thought otherwise. Overhearing their conversation at work one day, she called out, “Hey, guys, this is the loan-sharking business. ‘Consumer finance’ is just a nice way to describe it.”

Falls had it right. Commercial Credit made loans to poor people at predatory interest rates. Strapped to pay off their loans, borrowers were encouraged to refinance, with added fees each time. Gail Kubiniec, who was then an assistant sales manager at the company’s branch office in Tonawanda, New York, remembers that the basic aim was to lend money to “people uneducated about credit. You could take a five-hundred-dollar loan and pack it with extra items like life insurance — that was very lucrative. Then you could roll it over with more extra items, then reroll the new loan, and the borrower would go on paying and paying and paying.”

Weill considered these practices a “platform” on which his company could grow — and indeed, Commercial Credit stock rose 40 percent in his first year. Not only did this boost his already considerable personal fortune, it enriched his loyal team, the members of which would one day reach commanding heights on Wall Street. Dimon is now the head of JPMorgan Chase. Charles Prince served first as CEO and then as chairman of Citigroup. Robert Willumstad became president of Citigroup and later headed American International Group, where he oversaw the insurer’s spectacular crash in 2008.

By 1988, Commercial Credit was generating enough profit for Weill to take over Primerica, a much bigger company involved in insurance, stockbroking, and other financial services. Three years later, however, a Forbes article reported that “the insurance operations are a can of worms,” and that Weill’s ambitions were still being underwritten by his Baltimore-based cash cow. “Primerica does have one crown jewel,” the article noted, “the company Sandy Weill started with: Commercial Credit.”

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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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