Please ensure Javascript is enabled for purposes of website accessibility

Citigroup and the Birth of the Variable Rate Loan

By Motley Fool Staff - Apr 5, 2016 at 5:22PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

While variable rate term loans are taken for granted nowadays, they’re a relatively recent innovation.

Despite Citigroup's (C -0.87%) struggles over the past decade, the bank industry has a lot to thank the New York-based lender for. First and foremost was its early support for term loans subject to variable, as opposed to fixed, rates. As The Motley Fool's Gaby Lapera and John Maxfield discuss in the video below, this innovation, which traces its roots to Citigroup's management team in the 1960s and 1970s, has made it much easier for banks to combat interest rate risk in the decades since.

A transcript follows the video.

This podcast was recorded on March 28, 2016. 

Gaby Lapera: Correct me if I'm wrong, did Walter Wriston come up with variable rate mortgages or loans? Was that something he did?

John Maxfield: He did.

Lapera: Which is brilliant, if terrible.

Maxfield: Yeah, it's totally brilliant. What it did, at the time ... First of all, the real actual term loans, for the most part before Walter Wriston and his predecessor George Moore came into effect, they really just would do very short-term loans that would roll over on a yearly, monthly basis for corporations. Moore and Wriston came in and they said look, let's do longer term loans, but as opposed to doing a fixed interest rate which would get you into that position where the thrifts were during the savings and loans crisis, where if the short-term interest rates went way up but you were locked into 8% 30-year mortgages where you could lose a lot of money, they said look, let's tie the interest rate on term loans to the prevailing interest rate in the market. That way if the interest rates in the market go up, the interest rates on the loans go up, so that protected them from so-called interest rate risk.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Citigroup Inc. Stock Quote
Citigroup Inc.
$53.62 (-0.87%) $0.47

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.