Citigroup Inc.'s Near-Fatal Miscalculation

By Markets Fool.com

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There's a time and a place for capturing market share, and not knowing when or where that is can be disastrous for a bank and its shareholders.

In July of 2007, Citigroup's former chief executive officer Chuck Prince infamously responded to a question about the bank's leverage lending practices by saying:

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing.

His point, which has largely been lost in translation, was that Citigroup couldn't stop making loans to support leveraged buyouts because doing so would forevermore concede the business to competitors.

"My belief then and my belief now is that one firm in this business cannot unilaterally withdraw from the business and maintain its ability to conduct business in the future," Prince told the Financial Crisis Inquiry Commission three years later.

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The problem with this mind-set is that it's wrong -- not to mention nave for someone in charge of America's then-biggest bank.

You can see this by comparing Prince's claim to the statements of other bank executives at the time. Here's Wells Fargo's former CEO Dick Kovacevich roughly six months later:

Because of our prudent lending to customers with less than prime credit and our decision not to make negative amortization loans, we estimate we lost between two and four percent in mortgage origination market share from 2004 to 2006. That translates into losing between $60 billion and $120 billion in mortgage originations in 2006 alone. We're glad we did. Such lending would have been economically unsound and not right for many borrowers.

And here's JPMorgan Chase's CEO Jamie Dimon in a 2008 interview with Fortune's Shawn Tully: "In the crisis, everyone was trying to grow in products we didn't want to grow in. So we let them have it."

Suffice it to say that neither Wells Fargo nor JPMorgan Chase likely regrets the decision to temporarily concede market share only to then subsequently earn it back in spades. That's just how banking works.

While Citigroup's near-fatal miscalculation happened more than seven years ago, it remains as relevant today as it was back then. At least when it comes to banks, growth and market share are important, but they should never come at the expense of credit losses.

The article Citigroup Inc.'s Near-Fatal Miscalculation originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Apple, Bank of America, and Wells Fargo. The Motley Fool owns shares of Apple, Bank of America, Citigroup Inc, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.