Word: citicorps
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Revenue from Third World loans in the past has made up an important share of Citicorp's profits. In 1986 the bank earned $257 million, or about 24% of its total income, on loans to countries in the Caribbean and in Central and South America. The growing threat to the bank's welfare was therefore extremely dire; at the same time, the potential for default on these debts was depressing Citicorp's reputation on Wall Street...
Thus, long before last week's announcement, Reed had embarked on a two-part strategy to try to maintain profits on Citicorp's foreign debts while reducing the bank's dependence on them. Citicorp's new, hard accounting line first emerged last September, when a committee representing more than 350 banks was negotiating a debt package with Mexico. Breaking ranks with his U.S. banking colleagues, Reed protested the terms of the final deal. Mexico successfully rescheduled $44 billion of old debts at bargain rates and got $6 billion in fresh cash that helped, in part, to make the interest payments...
...especially worried by the seemingly endless flow of fresh money to major Third World creditors. That cash outflow only served to increase the bank's vulnerability, creating a vicious cycle with which other major banks are also painfully familiar. To reduce that exposure, Reed in 1985 directed that Citicorp begin to build up its offsetting reserves. That year the bank set aside $1.2 billion. Last year the total jumped again, to $1.7 billion...
...Citicorp needed to act boldly because the foreign-debt uncertainty was sapping its ability to compete with aggressive rivals, such as the Japanese, British and Swiss. Only three years ago, Citicorp ranked as the world's No. 1 banking company. Last year it slipped to No. 5 behind a group of Japanese banking companies that are "beating Citicorp's pants off in international lending," according to Joan Goodman, who follows the industry for the Pershing brokerage firm. Because most of Citicorp's foreign competitors have already set aside large reserves against potential Third World losses, those banks have enjoyed higher...
...sweeping $3 billion move was completely in character for Reed, who has made bold strokes before during his meteoric rise at Citicorp. As an executive vice president, for example, he led the bank into the computer era, field marshaling the firm's early entry into the area of teller automation and then directing Citicorp's heavy involvement with Visa and MasterCard credit cards. When it came to making a convincing move last week, Reed reached for a large number. Said he: "Obviously it's a judgment call. Any number with nine zeros can only be approximate. We're clearly costing...