John S. Reed: A View From the Top: Banking, Mergers, Technology, & Enron

John S. Reed was born in Chicago in 1939 but lived in Argentina and Brazil from age 5 to 17. He earned bachelor’s degrees at Washington and Jefferson College and MIT and a master’s degree in industrial management from MIT Sloan School of Management in 1965.

Reed began at Citibank in 1965 as an analyst and strategic planner for the Overseas Division and the Comptroller’s Division. In 1970, he was promoted to executive vice president, the highest post below the level of president. After running the Operating Group (back office), he headed a task force to study the development of worldwide consumer business. This resulted in the formation of Citicorp’s Individual Bank, where he was at the helm.

In 1982, Reed was elected vice chair and director of Citicorp and in September 1984 chairman and CEO of Citicorp and its principal subsidiary, Citibank. During a press conference after his appointment, Mr. Reed remarked “This job is like getting a chance to paint the Sistine Chapel.”

In 1998, John Reed and Sandy Weil, CEO of the Travelers Group insurance company, merged their companies and became Co-CEOs of the new financial services giant called Citigroup. In 2000, Reed retired from his position.

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Ethix: At 33 or 34, you were the youngest executive vice president ever appointed at Citibank. Was this because of your ability to bring technology to bear on bank operations?

John Reed: I was part of the generation that rode in on the business school wave. Our predecessors by and large had not gone to business school. Particularly in the back office area, the accounting and bookkeeping functions that underlie any financial institution, things were managed in a very conventional, traditional way.

My generation arrived with notions of flows and systems, and the use of computers to automate these processes. What our predecessors saw as accounting, bookkeeping, and record-keeping, we saw as information management — a big conceptual shift. Actually, three of us younger guys were made executive V-Ps at the same time. We were promoted primarily because we represented skills our CEO felt were going to be central to the future of the company. They were willing to take a chance on younger people.

Did it help to have studied both engineering and business?

My formal education was mixed. As an undergraduate, I did the 3/2 plan: three years of liberal arts followed by two years of engineering. I worked briefly for Goodyear, spent two years in the Army, and then two years at MIT’s Sloan School of Management. I wasn’t aware of it at the time, but when I look back at it I can see that this broad multi-disciplinary experience served me well.


Where did you get the values that guide how you manage people and look at the world? Did growing up in Latin America affect the values you bring to globalization issues?

My values clearly came from my family. My parents—Midwestern, Calvinistic Presbyterians from Toledo, Ohio—were a strong and positive influence on my life. I have always agreed with them that our objective in life is to do good, not to get ahead or become wealthy.

Living overseas impacted me in a big way. All my formative years from age 5 through 17, I was in Latin America, mainly Argentina. I went to local schools and grew up in an international setting. During the 40s and 50s Argentina welcomed many refugees from Europe as well as from China after the Communist takeover in 1948. I saw the world through my friends. I also had to learn to be careful not to be an ugly American in dealing with people.

I learned what it was like to live under a dictator, Juan Peron. Our city had no crime, which was wonderful for children growing up. On the other hand, in a police state if you are not careful what you say you could get in trouble. That also brought a certain awareness of how the world works.


As Citicorp CEO, did you think about the impact of your global operations on the daily lives of people like those you grew up with in Argentina?

Yes, of course.

On balance, has Citicorp’s presence in places like Argentina has been good for their people? Does the current Argentinean financial crisis have anything to do with international banking operations?

Yes, on the first question, absolutely. I believe very strongly that businesses cannot exist unless they do good for the societies within which they operate. We get our permission to operate from a society and if we are not a net contributor to that society we aren’t going to be there very long.

Citibank has had the great advantage of being local. Around the world, we take local currency deposits and make loans to local people, not just to big multinationals. We minimized our cross-border business. Our presence around the world has been very different from that of Chase, or (until recently) Bank of America, or other international banks. We have been embedded in the local economy as a local banker. The various crises you read about in the news, including the most recent one in Argentina, tend to focus on cross-border lending problems; what the Argentines are currently not repaying are cross-border loans.

You can’t be human and not think about whether your company has a positive or negative impact. You must make a positive contribution. For one thing, you can’t get good local people to work for you if you’re antisocial or exploitive. Second, to feel okay about going to work, what you’re doing must make some kind of sense personally. When we start a mortgage business in Argentina that enables people to buy their own home and achieve some of their dreams in life, that feels good.


What have been the major changes and developments in banking during your career from 1965 to 2000?

There have been tremendous changes. First, the geographic barriers went down. When I joined Citi in 1965, banking was geographically compartmentalized. Citibank wasn’t allowed to have branches even in Long Island, let alone another state.

What caused these barriers to fall?

Historically, United States banking has been state-regulated. But there was growing pressure from banks to be able to expand into neighboring states. If you’re in New York and can’t provide banking services to someone in New Jersey or Connecticut, these restrictions feel pretty artificial. Eventually, the law was changed—and then the structure of the industry changed. With nationwide banking, a big consolidation occurred and a third or more of the old participants disappeared, such as Security Pacific and First Chicago.

The second major development was the expansion of capital markets. In part this was driven by education. A new generation brought a lot of math and statistics to the business of trading and began buying and selling future expectations. In today’s market you can buy a contract to receive the interest payments on a bunch of mortgages between the year 2001 and 2007. You don’t know for certain what you will receive; you are just buying an expectation which you have quantified and forecast. Literally billions of dollars are traded, buying and selling future statistical likelihoods of something or other.

I think Enron proves that you can take this complexity and speculation a step too far. Enron doesn’t surprise me at all because out there on the frontiers humans have a tendency to go right to the edge. Somebody is going to fall off. Frankly, I think Enron built a business that was more complex than even they understood.

Expanding capital markets also changed mortgage lending. When I joined Citibank, banks did mortgage lending and kept the mortgages on their balance sheet. It’s economically impossible to do that today. You may originate mortgages but then you package them, securitize them, and sell them as mortgage-backed securities. That came strictly from the expansion of the capital markets and it’s now economically impossible to hold those mortgages on your balance sheet.

When I joined Citibank we made short-term loans at fixed interest rates. I remember when we first discussed whether to let interest rates float and whether to extend loans for more than a year. Today most bank loans are in the five to seven year frame, and variable interest rates are routine. All of this came from a change in capital markets, which are to the banking industry like the sun to the planets. If the capital markets can do something that a financial institution used to do, they will take it over and the institution will have to give it up. Capital markets are much more efficient and have much lower friction costs.

Banks with businesses tightly coupled to capital markets suddenly disappeared. You can’t be a mortgage banker in the traditional sense of the word anymore or you disappear. The S&L industry disappeared. Banking now intermediates these capital markets on behalf of customers.

Third, the world shrunk. When I joined Citibank, all of our foreign exchange trading was done by eight people in a small room. Now it happens in every country of the world and requires big trading floors full of computers and hundreds of people. The dollar value being traded is immense. International lending has also become a major activity. When I joined the bank the notion of lending a country currency that they didn’t themselves print went on only to a very limited extent. Back then, we worried about whether Japan and England were good credit risks! The world was also much more compartmentalized. People traveled by ship for vacations; today they get on the Concorde. We communicated by telexes to our branches overseas; today we use the telephone and email all the time.


Were you the first to put the ATM outside of the bank?

Clearly others experimented with the ATM but we were the first to use it in a big way, as a major commitment. What made the difference for us was our conclusion that our customers would not change their habits and use ATMs unless they were available everywhere, 24/7, and totally reliable.

So we put a set of machines in a lobby at the front of each of our branches. We set them up so that during the day they were just part of the branch. At night a set of plastic walls closed but the branch office past them was still lighted. Psychologically, the ATM lobby still felt part of the branch. They were open 24/7 and we put two machines in every cubicle, with separate electrical lines so that if one line went down the other still worked. We put phones on each ATM so no one would feel that they couldn’t talk to a human being if need be.

Our ATM program succeeded and massively changed the profitability of our branches because we used the machines to cross-sell to our own customers. For example, we offered free checking if they would bring us their savings account. We didn’t add a lot of new customers but we probably quintupled our business. We had basically the same customers but more business with them — which is highly economical.


What about the merger of banking and insurance?

This happened very recently and it is premature to decide whether it will work or not over the long haul. It has not worked in England and Europe. I think eventually it is going to turn out to be a nice marriage but it will take some time.


Most banks say they believe in customer service. As a bank customer I have to say that the ATM has served me well, both at home and on the road in Canada and Europe. My gripe would be about battling through endless telephone menus or web site labyrinths to find answers to some of my questions or to connect with a real human being who might help me. On that side of things, customer service seems much worse than in the old days.

Well, you don’t deal with Citibank I gather.


Because we have very good customer telephone service — not connected to your branch but to a service center in Texas. One thing I did as CEO was go to our service center and answer phone calls for a day. One caller told me she was flying to Italy the next day and wanted to know if she could get some Italian lira at her local branch in Scarsdale. Our computer search showed that Scarsdale doesn’t have lira — but that our branch at Kennedy airport did. We found out what airline she was flying and it turned out that our airport branch was very close to her check-in point. Now the people in her branch wouldn’t have known how to answer her question — they would just say “no we don’t have lira.” Our telephone service center (which gets high marks from our customers) was able to help her.

Customers should never be denied access to the bank. A good bank has 24/7 help in any language you want. When Japanese people call us, we have people who can answer them in Japanese. It’s extremely difficult to have trained people who can answer all questions at each point in a broad branch system, even if they have computer terminals hooked up to all the answers. It’s much easier to build a highly-trained staff at one central service headquarters.

But one of my great regrets is that we really didn’t get the consumer side of the business to do as well as it should. That’s an opportunity for the next generation.


You had a major push in e-business to transform your bank. How would you grade that effort? Was it a success?

It is still developing. In ten years the seeds we planted may have grown into a success. Our Internet banking is getting quite good and the people who use it are very happy with it. But customer acquisition on the Internet is very expensive, perhaps $200-$300 per customer. That’s not cheap. I do think we have created the nucleus of some pretty good electronic banking.

Did you anticipate that this development would be slow?

I think so. When we started back in 1968, we had some successes, such as the cash machines, but we also had a number of failures. We tried to deploy debit cards before the market was ready to accept them. By the mid-70s we learned that the pace at which customers absorb new technologies is much slower than the technology-creators expect. So we were not surprised or disappointed by the slow growth of e-banking.


Another hot topic in banking is the privacy of customer data.

One side of this issue involves the tremendous tension between the government’s desire to use banks to acquire data on criminals and terrorists — and the bank’s desire to protect customer privacy. That’s what the controversy over private banking and money laundering is about. If banks really deliver secrecy, a lot of money can be laundered through the system and, of course, the government doesn’t like that.

So we have competing interests. The government quite correctly understands that the banking system is a potential mechanism to keep track of what’s going on and maybe even to interfere with flows of money to dangerous people. The government doesn’t want some dictator or terrorist to be able to move money through a bank into Switzerland and yet, if privacy matters, how much should the bank be concerned where customers get their money and whether they want to move it to Switzerland?

In addition to dictators and terrorists there is the drug trade. Your bank was accused of courting and helping Mexico’s Raul Salinas.

First of all, no one has ever firmly established that Raul Salinas had drug money. He came to the bank accompanied by a good customer of ours who said he wanted to open an account. There wasn’t any obvious reason not to accept his account. Then he moved about 80 or 100 million dollars to Switzerland through us. When Salinas was later accused of various crimes, including murder, and put in jail, there was a big to-do about his banking with us.

This is exactly the tension that I was speaking about: on the one hand, the government wanted Citibank to act somehow as its extension, first, by refusing to deal with him (even though no one provided a solid basis for rejecting his business). Second, if you are dealing with him, they want you somehow to prevent him from moving his own money around — this is the recent problem raised by the terrorists. Then, on the other hand, we want to keep everybody’s personal banking and financial data private. Few people would want to sacrifice their own privacy.

Many of us wish for more privacy when our personal data is sold to telemarketers.

This is a second tension — between business marketing interests, on the one hand, and customer interests in protecting both their data and their personal space, on the other. Of course, as soon as we walk onto a car lot a salesman is sizing us up and trying to figure out our interests. In a similar way, if we know a person’s age, marital status, and other data, we can predict statistically if they are likely to need a mortgage loan or life insurance or other services. Should we use the data we have about our own customers for purposes of making them additional marketing offers? Should we sell that data to other people? Most of us have agreed that that second step shouldn’t be done without the permission of the customer.

So there are unresolved, continuing tensions here. Customers desire to have their privacy respected in all of their dealings with the bank. Financial institutions desire to be profitable and offer a range of services to potential customers. Governments desire to prevent criminal behavior from hiding behind privacy laws.

Do different banks respond to these tensions in different ways?

Very much so. It gets to the culture of the bank and the attitude and experience of their people there and also to the nature of their business. Citibank is especially exposed to international money laundering because it is so much an international bank. Why would Raul Salinas choose Citibank? Because we’re the only private bank in Mexico with an international business. If he wanted to open accounts outside of Mexico, say in London and Switzerland, no other bank can do it; we are going to be it. Bank of America would not be as vulnerable to that particular problem. Bank One wouldn’t be vulnerable at all.


In retrospect, after the Travelers experience, how do you now think about corporate mergers and how that all works? I was at Boeing when we merged with McDonnell. Douglas, Rockwell, and Hughes. From the executive management ranks, I think I saw some things that maybe weren’t so visible at CEO and Board level.

I’ve been giving a lot of speeches on this subject because it’s the most often asked question. The merger of Citicorp and Travelers mainly involved about a hundred people at the management level. We didn’t merge much in the way of day-to-day operations because the businesses themselves were quite different. We didn’t have a brokerage company, Solomon Smith Barney didn’t have a commercial bank; we didn’t have an insurance company, Travelers didn’t have a bank. This was very different from the merger of Boeing and McDonnell-Douglas.

Still, we faced huge challenges on three basic points (see sidebar).

Most mergers actually fail. They are energy- and time-consuming and don’t achieve their intended effect. Ken Derr, who was in charge of the merger of Chevron and Gulf, told me it was the only thing Chevron worked on for three years. They spent all their energies on pulling together and didn’t really run their business during that time.

I believe you have to see a merger as part of an evolutionary pathway, not as an end in and of itself. You must get locked in to what the next step of the evolution after the merger is going to be and ensure that you get there. That was where I failed. Sandy Weil and I put the companies together because we thought there was a powerful business reason for doing so which seems thus far to be true. We took two companies that were making about 4 billion dollars each and produced one that from day one was making 12 and recently got to 15, I believe. So there was a good economic rationale for our merger.

But we did not have the necessary and sufficient discussions on how we were going to run the place and that turned out to be quite painful. I was somewhat, but not fully, aware of the corporate misbehavior of people which was to come which would cost us a lot of people through the ranks. But the real key is that when Sandy first approached me he suggested that we run the company together for three years, then retire together and bring in a new person. I felt that that was too preplanned, that life never works out quite that way. And my board said “Hey Reed, we love you dearly but boards make those decisions, you don’t. We’re glad to hear what you and Sandy think but we’ll make the decision.” This, of course, is correct. You can’t have two CEOs deciding what they are going to do. The board decides who the CEO is and how the place is going to work.

So we didn’t have an agreement. When it became clear to both Sandy and me that leading together was going to kill the place (it wasn’t that he and I couldn’t get along but that the guys working for us were just being driven crazy), I felt strongly that we should both step down to allow a new person to come in from outside and build a new company. This would be Stage Two. First, you do the merger and get the two pieces working together, but then you start growing a management that is post merger. I felt strongly we should bring in somebody from outside who was neither Citi nor Travelers as the next step. Sandy felt strongly that he should stay on alone for a while and the board said ok. Sandy will retire at some point and it will only be then that the full benefit of the merger will start developing as a new management can begin to take advantage of the consolidated company and the emotional turmoil associated with the merged pieces will die.

Architecting these issues is very hard. But you’d better have really worked them through so that everybody on the senior team agrees. That has been a problem at DaimlerChrysler where CEO Schrempp admitted publicly that he basically misled Chrysler about his business model to get them to say yes to a merger. If you lie to somebody about what kind of marriage you’re going to have, you shouldn’t be surprised that when you start living together you have some conflict.

The ethical health of a company depends less on having a nice ethics statement or handbook than on certain values embedded in the traditions and practices of the company culture. How do you merge companies at this ethical-cultural-values level?

It’s very important. It’s all about how you run the place, including how you treat employees, what your values are, and how you implement them. That’s why I emphasize how important it is to talk about it out in advance and make sure you agree on how you’re going to run the thing.

Life After Citi

You’ve left banking behind now and you’re doing other things. What are you passionate about now?

I’d hate to believe that the only thing I could do with my life is work. I’ve got to believe there are other things out there that are worthwhile and that give you some degree of satisfaction and produce some good. So I’m in a search process which I’m enjoying. But I haven’t yet figured it out totally. I’d like to write a book about my years at the bank. I’m doing some teaching (next month at MIT) and I’m working with a committee on the National Academy exploring ways to systematically improve public education. So I’m searching for the right balance. I don’t want to run anything again. I want to find things that are satisfying and positive.

Future Banking, Digital Cash

What do you see as the future of banking, in particular, the role of digital cash? Will money go away? Will technology make it possible to stop thinking about cash altogether and digitize everything?

Yes. We’ll argue about “when” but not about “whether.” Banking is fundamentally application software on an intelligent network. There’s no question about it. Some of the more sophisticated things we do are going to require complex, expert systems, of course. But money is nothing but information. The piece of paper that we carry in our pocket that we think of as money is nothing but a claim on the government. One of the things I did after September 11th was ask my bank where its back up systems are located. If the records in New York were ever destroyed I’d like to know that there’s a record of what I own somewhere else. I think I have some money in the bank but all I have is a record that says I have a portfolio of investments that has a certain value. It’s digital. I was happy to find that the bank’s back-up system is in Arizona.

The questions are about the pace digital cash will come, how it will be introduced and the new technologies absorbed. This process is usually slower than we would think. I’m surprised, for example, that the cellular phone hasn’t replaced the credit card.

It has in some places in Europe.

Yes, but not in any big fashion. But the idea that we have to carry a piece of plastic around to identify who we are to a system seems strange but we do carry these things. All of that will go away.

What role will banks have then?

We will probably have sales and service brands that associate us with one institution rather than another but they won’t necessarily have a physical form of much substance. The
institutional structure of the industry will change tremendously. We aren’t going to have the same number of institutions.

One of the arguments for digital cash is that you could make micro-transactions of small fractions of a cent which means you could start doing commerce in different ways. Do you see this happening? In the early 90s it was said that well within the decade we would be doing more of this. It seems to be sliding back partly for technology reasons, and maybe for security reasons.

But mainly for customer adaptation reasons. People feel anxious about money. American’s are probably more willing to talk about their sex life than their financial life. We did a lot of market research to understand what people feel. People are anxious about money and feel that they don’t save enough or that they borrow too much. And they’re not totally honest with themselves. If you ask them in surveys what their financial situation is it’s always dressed up a little bit. It’s not as good as they describe it. Credit card users, for example, think of themselves as non-revolvers, even when they always revolve.

It’s also an area where people have ingrained habits. You can easily pay your bills on the Internet but writing checks isn’t onerous and the result is most people, including me, still do so, out of habit. But I don’t think my son has ever written a check. It wouldn’t cross his mind. He and the younger generation do everything electronically. Clearly change will come but I’m not sure how and when. The phone companies may be more likely innovators than the banks.

Credit Scoring

Is “credit scoring” an acceptable form of profiling customers?

Credit scoring is statistically anticipating the likelihood that this person will become a credit problem. It is based only on cash flows and financial data. You don’t know who the people are, it’s just number crunching. There is nothing personal or unfairly discriminatory about credit scoring. Credit scoring can predict the likelihood of loan write-offs with a high degree of accuracy.

Credit scoring actually helps the customer because it reduces the cost of making credit decisions and that means we can lend money at lower interest rates. That’s another change since I first joined the industry. Personal loans were extremely expensive when they were all done manually. If the loan was only $500, the processing expenses were a very high percentage. Today with credit cards and credit scoring we’ve taken a lot of costs out and we can make personal loans at very low rates. So there’s a lot of customer benefit from credit scoring.

The One-Employer Career

You worked for 35 years for the same company. People today don’t often seem to think of having a long career at one company. Would you still recommend it?

It’s certainly very rewarding. Working for one company gives you a sense of identification with that company and its people. There is a warmth and loyalty that comes from a long association through a career. When people used to tell me they were thinking of leaving I’d always ask how this fit into their life. If your work situation doesn’t fit comfortably into your life you should look at modifying them. People who just churn so as to move up the ladder, i.e. there’s a guy over here who will pay me a little more, give me a little better job, and I’m going to use it as a bargaining tool—I’ve never seen that work. That almost inevitably ends up with the guy in some place from which he gets fired or is unhappy.

On the other hand, people today are more professional, in the sense that more of their work capacity is internal to them. In a factory most of the work capacity lies in the factory itself. A design engineer arrives at Boeing with a lot of capability that he or she has learned in school and which resides in them. This flexibility brings certain benefits to both companies and individuals. I also support the idea of decoupling. I approved a switch at Citibank from a defined benefit plan to a defined contribution plan primarily because we had so many people who were leaving us and all their retirement benefits behind. We changed to make it portable, to allow a person who had been at the company for 15 years to leave with some accumulated benefit.

So I would say the test should be whether you have a good reason to leave. The working assumption should be go to work for somebody with whom you would hope to work for your entire career. Leave only if it seems that you would do better in terms of your own life values elsewhere.

By the way, companies should also be willing to tell some of their people that they really don’t fit in very well and should consider working somewhere else in the interests of their own happiness and ambitions.

Would you agree with Jack Welch that you should get rid of 10 per cent of your people each year?

The way Welch describes it though is along the lines you mentioned: you say “you don’t have a great future here. We’ll give you a year to continue to work here but you should look around for a better fit.”

You shouldn’t have an arbitrary deal that every year the bottom ten per cent gets axed. That’s statistically nice and it sounds good but it can’t be implemented. We had a part of the bank that tried to do that once. It wasn’t my part of the bank and I wasn’t running the whole thing at the time but I observed it. Humans aren’t capable of doing that. So they start lying and cheating. You just can’t say to somebody who happens to have ten good people, you’ve got to get rid of the worst of these ten good people. They can’t do it. They’re not capable of it.

I was lucky. When I joined the company at 25, I said to myself and my wife that I’d like to be in a position when I’m 40 to decide whether I want to stay with the company, go into business for myself, or go into government service. In the Kennedy era all of us thought about serving the country in the government. As it turned out, when I was 40 I chose to stay with the company.