STATEMENT OF MARK GREEN 

PUBLIC ADVOCATE FOR THE CITY OF NEW YORK 

AT THE 

FEDERAL RESERVE BOARD PUBLIC MEETING 

ON THE PROPOSAL OF TRAVELERS GROUP TO ACQUIRE CITICORP 

June 25, 1998 

If you approve the Travelers Group application, you will be giving a green light to 

the resmcturing of the bulk of the nation’s financial services industry into a handful of 

massive financial services conglomerates. I urge you to say no to this application 

because such a restructuring would occur in the absence of crucial laws to protect 

consumers, because it would expose taxpayers to enormous liability, and because it 

would likely diminish the effectiveness of the Community Reinvestment Act (CRA). 

Members of Citicorp-Travelers Watch will testify today and tomorrow on the 

threat your approval could pose to the CRA. They will also document Citicorp’s 

comparatively poor community reinvestment record and Travelers’ virtual absence from 

inner-city communities. I will focus my comments on consumer issues such as crossmarketing and personal privacy and on how the current regulatory oversight system is 

inadequate for multi-faceted financial services conglomerates such as the proposed 

Citigroup. 

Cross-marketing and defucto product tying. 

Although Citicorp and Travelers have stated that their chief merger motivation is 

to cross-market their wide array financial services and prodocts, the applicant did not 

answer the Board’s explicit request for “detailed information” about cross-marketing 

plans. In its reply to your written questions, Travelers Group said that while there are “no 

detailed plans” for cross-marketing, they “will develop over time.” 

Since cross-marketing presents serious consumer pitfalls, it is important to know 

now-- not after you’ve reached your decision -- how Citigroup is going to cross-market 

among its affiliates. One of these pitfalls is “product tying” -- the &facto requirement 

for a customer buying one financial product to purchase another one at the same time. 

Consider the position of someone applying for a car loan from one Citigroup affiliate who 

is handed a credit insurance application from another Citigroup affiliate. It would be very 

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I CENTRE STREET NEW YORK, NY 10007 TEL: 212/669-7200 FAX21216694701 

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and banking affiliates serves only to increase the motivation to cross-market these 

products. Rep. John Dingell has proposed giving the SEC more power to regulate 

brokerage activities in banks because current protections are insufficient. The Travelers 

Group acquisition of Citicorp would occur without such necessary new protections 

NationsBank is not an .isolated case. A May I996 study by the FDIC found that 

more than one-fourth of the banks surveyed failed to tell on-site customers that products 

are not insured and 55 percent failed to inform telephone customers. 

Consumers are vulnerable to misinformation and manipulation. A 1994 survey 

conducted for the American Association of Retired Persons and the North American 

Securities Administrators Association found that fewer than one in five bank customers 

understood that products such as mutual funds and annuities are uninsured. 

Consumer privacy 

The Consumer Electronic Payments Task Force, headed by the Comptroller of the 

Currency, released a report in May 1998 that raised aWomber of serious concerns about 

the possible misuse of personal financial information One of the report’s findings was 

that Americans are concerned about the use of transaction information for purposes other 

than the original transaction This is exactly what Travelers and Citicorp intend to do, 

since their proposed acquisition is premised in large part on using consumer information 

obtained in one transaction for other purposes. The Board should not approve the 

Travelers application until new privacy protections applying to financial services 

conglomerates are enacted into law. 

Primer@ Credit Corporation, Citibank and Solomon Smith Barney possess 

intimate, private information about tens of millions Americans. Through loan 

applications they know about the jobs many people hold, from credit card records they 

know about recent purchases, from mortgage applications they know the age and value 

of their residences, 6om auto insurance files they know about driving records, and from 

banking files they know if there was recently a large deposit in an account. Travelers 

recently sold an Hh40 which provided access to perS&l medical data such as records of 

visits to mental therapists; Travelers could re-enter the health insurance business and 

regain access to health information. Nothing prevents the proposed Citigroup from 

disseminating this kind of very sensitive personal information among its far-flung 

affiliates. 

Travelers has told you that it would deaf with information dissemination issues by 

adopting an “opt out” system by which consumers could affirmatively indicate to 

Citigroup that they do not want their personal information shared. Travelers did not 

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explain how this “opt out” would function. However, Acting ComptToller of the 

Currency Julie Williams, in a May 8’ speech before a banking organization on privacy 

concerns, warned of serious problems with the “opt out” method where currently used, 

such as that the “opt out” disclosures are “buried in t$middle or near the end of a m&ipage agreement.” A much better approach would to require consumers to affirmatively 

“opt in” to approve dissemina.$on of personal information among Citigroup affiliates. 

Putting taxpayers on the line. 

When Citicorp was on the brink of insolvency earlier this decade, it was widely 

believed that the government would not let it collapse because it was “too big to fail”-- 

i.e., the repercussions on the banking system and the economy would have been too 

serious. Citigroup would be more than twice as big as Citibank. Practically speaking, to 

make extra sure that such a behemoth never fails, Citigroup as a whole would need to be 

regulated and monitored more rigorously than at present. Unfortunately, the regulatory 

structure required to virtually eliminate the possibility of a Citigroup failure doesn’t exist. 

And the inadequacy of current tire walls separating banking, insurance, and securities 

affiliates pose a special threat to the bank deposit insurance funds. 

Xi’E 1 

Fire wuUv. Although it is claimed that Citigrdup’s affiliates would stand alone 

under all circumstances, realistically speaking, serious reverses and losses in one affiliate 

would redound on the entire holding company. It is highly improbable that regulators 

would permit a major non-bank affiliate of a financial services holding company such as 

Citigroup to fail or even to come close to failure because such a development could 

destroy public confidence in the holding company’s government-insured affiliates. 

Ultimately, a failure of a non-bank affiliate could lead to a bail-out using either deposit 

insurance funds or funds appropriated by Congress. This is a particular concern with 

Citigroup. Since the non-insured portion of Citigroup would be larger than the insured 

portion, large losses at one of the non-insured affiliates could have a very significant 

impact on public confidence in Citibank. 

The current good times aren’t going to last forever. The Clinton Administration is 

properly concerned that an Asian economic meltdown ,tiggered by Japan could have 

severe repercussions for U.S. banks, securities fums ~&id even insurance companies. 

So it is essential that the Board move very slowly and cautiously when considering the 

approval of a new financial structure like Citigroup that could become very unstable in 

times of economic stress. 

It shouldn’t be forgotten that only a few years ago Citibank itself was in trouble 

and was saved by a $2.6 billion capital investment in the bank by a Middle Eastern prince 

and by low rates charged by the Federal Reserve System that allowed it to make large 

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lending profits 

Regulatory oversight. Nearly one-quarter of Citigroup’s total revenue would 

come from insurance, based on 1997 figures. Although it would now be linked to 

Citibank and its billions of dollars of FDIC-insured deposits, Travelers’ insurance 

subsidiaries would essentially remain free of any federal safety and soundness oversight 

since insurance companies are entirely regulated by the states. 

State insurance department examinations, capital requirements and regnlatoty 

enforcement would continue to apply to insurance companies owned by financial services 

holding companies such as Citigroup. Many states’ insurance departments are underfunded, understaffed and uncomfortably close to the industry they are supposed to 

oversee. This was a conclusion of the report the Oversight Subcommittee of the House 

Commerce Committee in 1990, which found “numerous weaknesses and breakdowns in 

this [state insurance regulation] system, including lack of coordination and cooperation, 

infrequent examinations based on outdated information, insufficient capital requirements 

and licensing procedures, failure to require use of actuaries and independent audits, and 

improper influence on regulators.” One must remember that approval of this application 

will set the mold for more to come. Practically speaking, a joinder of Citicorp and 

Travelers -- and more such combinations now being considered -- would extend 

government deposit insurance to questionably state-insurance affiliates. 

There also are serious concerns about the coordination of regulatory oversight 

among numerous federal bodies that regulate banking and securities. Each agency has its 

own area of expertise, while what is really needed is a single body with a wide range of 

expertise that can closely monitor the entire financial services holding company. The 

General Accounting Offtce has been very critical of the lack of regulatory coordination 

that results from mixing insurance, securities, and barik’ing in one entity. 

Therefore, Travelers Group’s application should not be approved absent the 

establishment of an effective overall regulatoty structure. 

Conclusion 

There is no emergency requiring approval of this application at this time. And 

with our financial institutions doing very well in worldwide competition, any arguments 

that we need massive banks” and mega-holding companies such as Citigroup to compete 

effectively in financial services are groundless. 

The only benefit for consumers that the applicant seems to be able to cite are onestop shopping and more personalized service. The American people are not clamoring for 
these supposed benefits. Therefore, since the proposed nonbanking achvlties cannot be 

reasonably expected to produce benefits to the public that outweigh the possible adverse 

effects, the application should be rejected.