This may be hard to believe, but it's true: The current CEO of Citigroup (NYSE:C), Michael Corbat, is the first banker to run the $1.7 trillion bank since the legendary Walter Wriston retired in 1984. This helps explain why shares of the nation's fourth biggest bank by assets are still down by more than 90% compared to their pre-crisis high.
There is no industry in which capable leadership is more important than banking. Because banks are leveraged by a factor of 10 to 1 or more, there's a fine line between running a respectably profitable operation and one that ends in abject failure. This is why more than 100 banks have failed every year on average since the modern American bank industry took shape in the 1860s.
The crux of the issue comes down to prudent lending. "Banks get in trouble for one reason: They make bad loans," famed bank investor Carl Webb once said. To avoid this fate, a bank's leaders must fight the urge to juice short-term revenue by lowering credit standards and thereby boosting loan volumes. As unnatural as it may sound, great bankers know that they must constantly throttle short-term growth to ensure long-term survival.
George Moore, Citigroup's chairman from 1967 to 1970, and before that its president, articulated the role that experience plays in this in his 1987 memoirs, The Banker's Life:
The first thing required of a banker is judgment about whether someone who is borrowing money, or wants to borrow money, can and will pay it back. When I reported for work in August 1927, [I was] assigned to the credit department, which was the apprenticeship for becoming a banker. It's like being a young doctor -- you want to be in the hospital; that's where the patients are.
To drive home the point, Moore went on to note that "the first lesson of banking is that you mustn't, ever, place a bet you can't afford to lose."
That Citigroup's leaders forgot this dictum at some point over the past three decades isn't surprising when you consider that it hasn't been led by a banker -- i.e., someone trained to assess credit risk and underwrite loans -- since Moore's successor stepped down in 1984.
- From 1984 to 1998, Citigroup was led by John Reed, an operations specialist with a penchant for technology.
- From 1998 to 2003, the financier Sandy Weill (a stockbroker) was at the helm.
- From 2003 to 2007, Charles Prince, formerly its general counsel, was the CEO. (Fortune named Prince one of eight economic leaders who "didn't see the crisis coming.")
- And from 2007 to 2012, former investment banker Vikram Pandit ruled the roost.
Given their lack of experience with respect to the core mission of a bank -- extending loans -- it's little surprise that every single one of these executives left in disgrace.
My point isn't to rehash the past. It's rather to underlie the absolute necessity of only investing in banks that have cultures that emphasize experience and succession planning at the top. You can take a flyer on a company like Citigroup, which has proved beyond a doubt that these qualities aren't a priority, but doing so goes against everything we know about banking and responsible long-term investing.