How Miss America Changed Citibank, Part I
On its face, the House vote late Thursday to approve a spending bill that included an unrelated provision written by Citigroup was a big legislative victory for the bank and its fellow Wall Street behemoths. Yet its also a victory that comes at a high price.
Citigroup's plans for a $2.7 billion charge this quarter may signal the beginning of the end of high legal bills for itself and other banking companies.
The auto industry's recent willingness to confront its labor unions should be a lesson to bankers that the moral hazard doctrine must be obeyed.
The Federal Reserve Board's proposal to simplify Regulation Z disclosures for card accounts is an exercise in futility.
This is the first article in a two-part series.
One of the smartest things Citibank ever did was to hire Bess Myerson to teach it how to be a better bank. Bess died a month ago in California. The story of her years as a consultant with Citi in the mid-1970s is astonishing in many ways and very relevant to the banking industry today.
My goal is to tell of her many accomplishments to make sure she is remembered long into the future.
Trouble at Citi
Bess was a strange fit for a giant conservative institution like Citi. Fresh out of college in 1945, she had been crowned the first Jewish Miss America. Thereafter she had a long career in modeling and acting. Then, in 1969, she was appointed as New York City's consumer affairs commissioner.
The consumer affairs job had historically been a meaningless patronage position. But in three years Bess turned it into the most powerful and effective protection agency in the United States.
Bess's success in the city government showed that she had a business-like ability to work on big picture ideas and make them happen. In short, she was the kind of serious, competent manager that Citi was always looking for.
In the spring of 1973, I wrote a position paper that helped bring Citi and Bess together. I was a member of the Urban Affairs Advisory Group, an ad hoc committee created by Citi's then-chairman Walter Wriston. The group's mission was to give ideas to Wriston and the bank's management committee that would help bridge a growing fracture between banks and young protestors on the streets. As an in-house lawyer for the bank, I was already involved in the search for solutions.
Wriston was a liberal in the tradition of English Enlightenment. His creation of UAAG was a reflection of his intellect and open-mindedness. He believed that managerial free speech would give Citi advantages in hiring the best people, producing superior products and efficiencies, reducing government interference and weathering business storms.
The early 1970s tested his principles. It was a troublesome time for banks, which were facing sometimes-violent protests connected to the anti-Vietnam War movement.
Citi's travails were made worse when its nemesis, Ralph Nader's Public Interest Research Group, published a book accusing the bank of abusing its retail customers. My paper upped the ante. It bluntly asserted that PIRG was right and that Citi's defenses to the contrary were deceitful.
Suffice it to say, the paper did not receive a warm reception. I was accused of treason, heresy, lying, naiveté, being "a socialist bastard," and other niceties.
My boss put me on probation and denied me a raise that year. I started imagining Citibank in a rear view mirror.
As it turned out, the most important point I made in my paper was that it was impossible for anyone in Citi to expose its wrongful practices without receiving a pink slip. I argued that Citi had to hire somebody credible a person of stature from the outside in order to clean house.
Several tension-filled months later, I read in the New York Times that Citi had hired Bess Myerson as a consultant. A few days after that, a woman executive in Citi who knew Bess called me and asked if she could give my thesis to the great lady. I consented, guessing I was a dead man no matter what.
The following morning, I got a call from Bess. An hour later I was in her new office on Park Avenue, talking face-to-face with Miss America. Holy you know what!
A New Sheriff in Town
Bess and I hit it off immediately. Although she was a genuine American luminary now reporting to the most powerful bankers in the world, and I was a rather low-level Martin Luther in pinstripes, we still had a lot in common.
Bess and I were peasants from New York's boroughs, she from the Bronx and I from Brooklyn. Both of our ancestors had fled Europe to escape religious persecution. Her father was a house painter; mine a manager of an Automat. We were also proud graduates of the city's public high schools and its City University of New York colleges. And we shared the absurdist sense of humor of our class.
By contrast, Bess and the Wriston team were separated by vast cultural and financial divides, not to mention their canyon-wide gender gap. The Wristonites invariably came from old, privileged, wealthy families. Theirs was the province of Ivy League schools, Protestant faiths, the Republican Party and gaggles of the finest Hasty Pudding clubs on the East Coast. Their power in the global banking system was second to none.
Bess also had power, but of a different and equally formidable kind. The whole country loved her, and consumers saw her as an Athena-like protector against institutions like Citi.
Consider the irony: the Wristonites hired Bess to teach them to be better bankers. She didn't ask them for any advice about her milieu. And when she walked into a room with them, they knew her agenda was going to prevail. To their credit, they were ready to surrender.
When in Doubt, Simplify
Bess's agenda was always to cut through the fat and simplify whatever had to be done. She and I agreed from the get-go that the most sensible way to accomplish a bunch of rock-solid reforms at Citi was to simplify its cumbersome, deceptive consumer loan contracts.
Our philosophy was simple. Because a loan product is essentially a collection of words, you can change it for the good by changing its wording. Put another way, our tactic was to attack the loan contract to blame the lawyers, not the businesspeople, for its defects.
The contract we went after was the "promissory note" that Citi used for its standardized consumer loans, millions of which Citi held to protect its risk and ensure repayment. Astonishingly, the note ran almost 3,000 words and was completely undecipherable.
It seemed that the only party who had ever read it in full was Citi's law firm. That is, until Bess read it and promptly went ballistic.
We initially tried to rewrite the thing in plain language, piece by piece. But its complexities drove us up the wall. It became obvious that a clarification of its terms would probably double its word count. That would do no good for the customers, nor for the employees assigned to sell the product.
We then decided to deconstruct the beast. What an eye-opener! We discovered sentence after sentence, paragraph after paragraph, all in tiny print a nest of sneaky provisions in dense legalese that unfairly tipped the scale in Citi's favor in every possible way.
Bess brought our discovery to senior management and offered two choices: either get rid of the bad stuff or expose it in plain language for the world to see.
To our delight, the lending staff supported Bess. They loved the idea of a shortened, fair agreement written in plain language. Many of them admitted that they had never really known what was in the note, and had often had to make up answers when asked by borrowers to explain it.
The lawyers Citi's in-house team and outside counsel condemned the entire exercise. They predicted it would lead to all sorts of damaging lawsuits, collection problems, competitive disadvantages and lost opportunities.
At a meeting with Citi president Bill Spencer and the executive vice president in charge of consumer lending, the esquires lost.
Many months later, Citi introduced the first plain-language agreement in the financial services industry. Its word count had been slashed to 20% of its original size, and it could be understood by any English or Spanish language speaker. Nothing was hidden.
Even better, the new note was stripped clean of its old sins. Among the worst of them was a sinister provision common in the lending agreements of most banks and retailers at the time a so-called confession of judgment.
Confessions of judgment allowed a creditor to garnish a delinquent borrower's salary without ever going to court to prove there had been a breach of contract. The borrower just had to miss three payments in a row before the provision kicked in. Oddly enough, confessions of judgment were perfectly legal and enforced by courts whenever they were challenged.
Citi's decision to stop using this provision meant losing a valuable collection tool. But it was a major victory for its retail customers. It ended a cruel, humiliating practice that exposed masses of customers every year to shame, the risk of insolvency, loss of a job and family devastation.
Thanks to Bess, as well as Citi, confessions of judgment were eventually prohibited by federal and state laws as an unfair practice.
Bess put an end to many other questionable practices. She got Citi to limit its right to call a default to one simple condition: a failure to make payments on time. The old note had a list of trip wires that put consumers in default and Citi in a stronger position to force delinquents to pay up.
Another practice at the time forced borrowers who had defaulted on their loans into courts that favored Citi. Yet another denied them the possibility of a jury trial. A third required borrowers to pay the bank's legal fees when it won the lawsuit. It disallowed the bank's covering any of their fees if we lost.
Bess purged the first two and equalized the third with a provision that whoever lost the case paid the legal fees.
Next: How Myerson hauled Citi's debt collection unit out of purgatory.
Duncan A. MacDonald is a former general counsel of Citigroup's Europe and North America card businesses.