Who’s To Blame: John Reed On What’s Behind Financial Reform

John Reed, who was the chief of Citicorp from 1984 to 1998, recently shared his hard-won perspective on banks and exchanges.


John Reed, who was the chief of Citicorp from 1984 to 1998, helped orchestrate the big bank’s 1998 merger with Travelers Insurance Group, owner of investment bank Salomon Brothers. That landmark deal created Citigroup and signaled the effective demise of the 1932 Glass-Steagall Act, which separated commercial banking from investment banking, and ushered in an American era of “universal” banking.

Barely a decade later, in February 2009, a contrite Reed testified before Congress in support of provisions in the Dodd-Frank financial reform bill intended to go a long way toward rolling back the 1999 repeal of Glass-Stegall.

“I was astounded that the banking system could collapse as it did,” Reed says now. “I understood that individual banks could get in trouble, but it never crossed my mind that the industry could have the kind of impact on the global economy that it did. I felt a little guilty.” Citi, of course, required a $45 billion federal bailout.

Reed, who left the bank in 2000 after losing out in a power struggle with ex-Travelers boss Sandy Weill (who had proposed that the insurer and bank combine), was less a visionary than a technician. While he was at Citi, the Massachusetts Institute of Technology–educated banker automated check processing and pushed the use of ATMs. Later, as chairman of the New York Stock Exchange (for $1 a year), he transformed it from a relic still reliant on the venerable specialist system into a fully electronic exchange.

Now retired, Reed, 71, recently shared his hard-won perspective on banks and exchanges with Staff Writer Imogen Rose-Smith.


Who’s to blame for the banking crisis?

I blame it on the managements and boards of the institutions. The fact of the matter is that managements ran businesses with insufficient capital. Had the government not stepped in, every one of those institutions would have been bankrupt.

What do you hope comes of financial reform?

A more secure system. I used to ask my kids,“Why do cars have brakes?” They’d say, “You have brakes so you can stop.” No, you have brakes so you can drive fast! Having rules allows banks to do their business well, and aggressively, but it will insulate the economy from a devastating crash.

Can regulators be trusted to enforce Dodd-Frank?

It’s hard. They have to really believe in it, because over time regulators become part of the industry. If there is wiggle room, they will begin to wiggle.

Considering the problems with electronic markets — notably last May’s flash crash — has the technology gone too far?

Technology has had a big impact on trading. Most of the volume is very fast, computer-based trading. Some has liquidity benefits. But because it is software-driven, there is no human intervention — you can get into bottlenecks where all of a sudden parts of the market disappear. The real issue is the trade-off between time and price discovery. If you said you had to sell your house within a week, you’d get a quite different price than if you said you were going to sell over the next six months. And that is the problem with computer-based trading — you get the price that happens to be around in that nanosecond.

Do markets risk being dominated by hyperfast-trading arbitrageurs?

The danger then is, you get some kind of misfunction, and it produces wild gyrations that make the markets unreliable. What you don’t want is to allow this supertechnology to reach the point where it distorts markets and destroys confidence.