(FORTUNE Magazine) – AFTER DECADES of we're-indisputably-above-it-all behavior, Citicorp was forced to concede last month that it isn't. The company joined the ranks of other backpedaling financial services organizations when it disclosed in mid- December that it would cut its dividend to $1 from $1.78, reduce the 92,000 employees it had a year ago to around 84,000, and pare its annual expenses of nearly $10 billion by $800 million. But the most telling move was Citi's announcement that it anticipated taking immediate, as well as subsequent, steps to build its stockholders' equity and other kinds of capital. The company thereby retreated from its long-held belief that mini-amounts of capital were adequate to support mega-amounts of loans, securities, and other assets. This proposition rested on the theory that the bank's diversity of operations accorded it some protection from financial shocks. Citi has now had a counterrevelation. Said a December 18 memo from top management to employees: ''The notion of low capital balanced by a broadly diversified business is simply not accepted in today's world.'' That grudging admission grows in part from Citi's grim knowledge that more than a few Wall Streeters, some with no ax to grind, have been saying that this colossus is primed to go bust. This premonition in turn rises partly from spikes in the rates that the company has had to pay for funds. But underlying the alarms is Citicorp's balance sheet, on which a mere sliver of common shareholders' equity supports the nation's largest collection of loans already in trouble or threatening to be. Fortunately, the evidence suggests that the fears of a Citi bankruptcy are overblown. True, this giant -- whose $228 billion in assets make it the largest U.S. banking company and the 11th largest in the world -- has extensive problems within the operation that dominates its business, Citibank. Among these are a conspicuously weak commercial lending operation and certain consumer businesses, such as mortgage lending, that look vulnerable to a recession. But the consumer bank has a thriving credit card business and is overall a strong, imposing engine of profitability. Another bulwark against disaster lies in the too-big-to-fail doctrine. As recently as last September, Federal Reserve Board Chairman Alan Greenspan cautiously acknowledged in congressional testimony that the doctrine was still in place to prevent crises ''excessively disruptive to the financial system.'' What could possibly be more disruptive than a Citi failure? Clearly, then, the policy would protect all Citibank's deposits, even the largest, and probably sweep in the parent Citicorp as well. Says a top Wall Street lawyer who is a banking expert: ''It is unlikely that Citibank could survive the failure of Citicorp. Washington could never take the risk of letting the bank go down, so it could not let Citicorp go either.'' NEVERTHELESS, Citicorp is not too big to flounder -- and world-scale wallowing is plainly under way. December's announcement in effect concedes that. It also brings to mind a statement John S. Reed, now 51, made with relish when he became chairman in 1984: ''This job is like getting to paint the Sistine Chapel.'' Six years of Reed brushwork, alas, have not a work of art produced. Large patches of decay mar the bank picture, and the artist himself now sees need for immediate restoration. Reed's chapel has also faded as a financial tourist attraction. From a high of $35.50 in 1989, Citicorp's stock collapsed to $10.75 in November. Just after the December news, it was $14. At that price, Citi's total market value is $4.6 billion, which makes the nation's largest bank worth less than its largest soup company, Campbell, which weighs in at $7.4 billion. Bears have been betting on a further price decline: For the past two months Citicorp has been No. 1 on the New York Stock Exchange in shares sold short. Citi's recent announcement included two bottom-line estimates for 1990: a fourth-quarter loss as high as $400 million and a full-year profit of up to $500 million. Embedded in the yearly figure is more than $1 billion in earnings for the consumer bank -- Reed's creation and his triumph. A Goldman Sachs security analyst, Robert Albertson, who has recommended Citi's stock through thick and thin, has pointed out repeatedly that the consumer bank alone is worth much more than $4.6 billion. That is probably true, but an investor cannot buy the consumer bank all by its lonesome. Citi insists on throwing in the rest of the bank, which has displayed a continuing genius for getting into serious trouble. A few years back, the trouble was borrowings by less developed countries. These LDC loans remain a source of Citi migraines and possibly always will. The new troubles, also throbbers, are loans made to finance leveraged buyouts and commercial real estate. By Reed's description, these tribulations are ''externalities'' that keep wrecking his plans. But it is the banker's unending lot to deal with externalities and to figure out ways to tap dance lightly among them. The growing agility required and Citi's own stumbles make the company's expansive strategy of trying to be the one true global bank seem like hubris. Says a retired New York banker who competed against Citi for years: ''The world has become so complex that it has outgrown the ability of bankers -- Citi's very much among them -- to manage all that's going on.'' Reed, who declined to be interviewed for this article, would likely quarrel with that proposition. But given his experiences in 1990, he might argue with less than his usual self-confidence. The year was a shocker -- ''an epiphany,'' says one Wall Streeter close to Citi -- for Reed and for his company. Their creed had come from former chairman Walter Wriston: Increase earnings an average 15% a year. This directive led not only Citi but many a copycat bank as well into the high-risk lending that has caused so many of the industry's problems. The Citi culture has also displayed an obliviousness to costs. The December memo itself calls for ''less bureaucracy'' and fewer ''inefficiencies.'' In the 1980s, operating expenses sometimes rose by a feverish 20% to 25% a year. Out of this environment came, in early 1990, a last flashy display of arrogance: Citi raised its dividend by 10%, a mind-boggling deed to recall now. Also, Reed talked grandly to analysts in March about his vision of the 1990s. He forecast annual earnings of $5 billion later this decade. That figure compares with the $1.9 billion that Citi earned in 1988, its best year, and with an annual average of only $655 million for the 1985-89 period, which included $4 billion in special charges for LDC loan loss reserves. A great deflating of the ego followed Reed's giving of the vision. The company had planned to sell certain assets so as to book capital gains and beef up equity. But the sales didn't come off. The commercial real estate business, to which Citi lends nationwide, became terrible in many regions and poor in others. Vacancy rates shot up, and the value of many properties cratered, sinking below the amounts that Citi and other banks had lent to developers. Trouble also spread into residential mortgages, where Citi has been a very aggressive lender -- ready, so it has at times advertised, to approve loans in 15 minutes. At the end of September, payments on 3.6% of Citi's residential mortgages were past due by 90 days or more -- five times as high as a nationwide delinquency rate reported by the Mortgage Bankers Association. AS THE PROBLEMS piled up, Citi's culture swerved into a slow U-turn, replacing its old goal of non-stop growth with moves to cut costs, reduce staff, and shrink. The quarterly peak for assets was March's $233 billion. Citi announced it would exit a business or two, and closed 14 U.S. real estate and corporate finance offices. Some of Reed's cherished developmental spending projects even began to disappear. So did employees -- though Citi kept its statements about staff cutbacks vague and the totals quiet. Still, there were poignant signs of urgency: At least one departmental Christmas party, held early in December, was followed the next day by firings. With Citi's startling announcements two weeks later, the head count totals became clear. By then 3,600 employees had been let go; another 4,400 are to follow. Of these, 1,850 ''will relate,'' as Citi puts it, to businesses to be shut down or sold. Reports filtering out of Citi suggest that almost every retrenchment announced in December was the subject of hot dispute. One camp within the company, it is said, wanted to ''gut it out,'' not giving an inch and trying to scrape by. But Reed is the uncontested leader -- ''He is Citicorp,'' says an informed Wall Streeter -- and he gradually, if belatedly, came to realize that his company had been living too close to the line. Said one of his friends recently: ''I cannot tell you how enormously John's thinking has changed in the last few weeks.'' The strongest evidence lies in Citi's new acknowledgment of its capital shortcomings. As of September the company's balance sheet showed only $8.6 billion in common equity supporting its whittled but still towering assets of $228 billion. The ratio of equity to assets, 3.8%, is well below the 4.4% average for eight other big banks with which Citi is often compared. It is also lower than the 4% that bank regulators consider a bare minimum and the 4% to 4.5% that Reed said early in 1990 was his own target. The need for more capital is obvious; the question is how it gets filled. The hunt for answers is known to have included a worldwide search among institutional and private investors for at least $1 billion of new equity, possibly in the form of convertible preferred stock. A fix of that kind would dilute the earnings of the current shareholders, an outcome that Reed previously vowed to avoid but now accepts as a price that must be paid. As of the December announcement, however, no capital infusion had been arranged. But at least the announcement made it clear that a major capital drain seemingly threatened by regulators had been avoided. Making their 1990 banking rounds, national examiners camped at Citi for months, conducting an exhaustive study of its real estate loans to determine whether the bank was adequately reserved against losses. Many Wall Street analysts expected the worst. One, Thomas Hanley of Salomon Inc., thought Citi might be underreserved by as much as $2.6 billion. But the examiners delivered a relatively mild reproof. Citi announced that its fourth quarter would be hit by $340 million in reserve additions for commercial loans, a leap of $250 million from the amount provided in the third quarter. That denouement is the object of Wall Street skepticism. Some analysts, Hanley among them, believe the examiners simply pulled their punches. If they did, Citi will have to play catch-up on its reserves in future quarters. Though the jury is out on that question, Citi is getting some verdicts on the competitive front that it can't care for. This bank with the voracious appetite now appears to be blocked by its capital inadequacies from any major expansion. Once Citi would surely have bid for the big credit-card business that MNC Financial, a troubled Baltimore bank holding company, has put up for sale; today it is not in the Maryland hunt. Nor is it likely to course spiritedly through California, which this month is lifting its longstanding barriers against out-of-state banks. Citi owns an also-ran, 118-branch savings and loan headquartered in Oakland but has long wanted a stronger presence in the state. There are reports that last summer it proposed to bid for California's big Gibraltar Financial. But the Fed, so the story goes, sent Citi back to the stable for lack of a strong capital position, and Security Pacific rode off with Gibraltar. Says a knowledgeable Citi retiree: ''I don't think that right now the Fed will permit Citi to do anything.'' Meanwhile the stronger bank holding companies, led by J.P. Morgan, have been poaching opportunistically. Morgan has repeatedly run gentlemanly but pointed ads about ''the security of your assets.'' One result has been market share gains for the bank in currency and interest-rate swaps. Swaps are long-term contracts between a bank and, say, a corporation -- and the latter would naturally like to think the bank will be there throughout the term of the contract. Citi, normally a big contender in swaps, acknowledges some erosion in its business. Morgan also says it has gained some private banking customers, whose concern would typically be the safety of the cash and custodial assets they leave with their banks. Citi admits knowing of one possible defection, but no others. In fact, Thomas E. Jones, the bank's financial executive vice president, says the crisis in the Middle East, where the company has long been a major player, has brought in new business from locals perceiving Citi to be a safe haven. PRIVATE BANKING deposits are a relatively minor part of a critical matter for banks called ''funding'' -- that is, the means by which they raise the money they put into loans and other assets. Citi has one enormous funding strength: nearly $100 billion in deposits that its consumer bank, which includes private banking, brings to the party. These deposits supply about 60% of Citi's day-to-day needs for money. The average deposit is small -- an estimated $10,000 -- and tends to stay put, even in times of stress. For its remaining wants, Citi and every other big bank must compete in the market for ''purchased funds,'' typically bought in jumbo amounts from such suppliers as corporations and money-market funds. This sophisticated market is today apprehensive about banks. Taxable money-market funds, for example, have been retreating from bank certificates of deposit. According to IBC/Donoghue's Money Fund Report, fund holdings of CDs dropped in the first 11 months of 1990 by 50%, or a thudding $17 billion, even as fund assets grew by $37 billion to $357 billion. How Citi fared in this decline isn't known, but some managers of money- market funds are patently keeping their distance from the bank. George S. Robinson, the portfolio manager of a top performing Invesco money fund, says he is still placing money with some banks, but not with Citi. Though he grants that the too-big-to-fail proposition is ''probably true,'' he adds, ''I don't want to be there when we prove that assumption is right or wrong.'' Jitters about Citi also vibrated through the public capital markets in late 1990. First, buyers began to force up rates on Citi's commercial paper. The company thereupon began selling the paper only to private investors. Next Citi's money-market preferred stocks began to suffer. These are securities on which the dividend rate is reset through periodic auctions. Citi is the largest issuer by far and in September was paying rates of around 7 3/ 4%, high in comparison with Morgan's 6 1/4% but definitely bearable. By late October, however, after Citi's release of a third-quarter report that illuminated the deterioration in its commercial real estate portfolio, auction rates on the preferreds flared to 13% while Morgan's held near 6%. Even so, at least two Citi auctions in October might have collapsed completely had not the Wall Street firms running the deals stepped in as buyers. Stung, Citi announced it would redeem $500 million of its $950 million in these preferreds. That erasure, though a lamentable loss to the company's capital base, seemed to calm the market for a while. But in the week before Christmas, Citi again was socked with a very unmerry rate, 12 1/4%. The company maintains even so that its setbacks in the capital markets have been tolerable, in part because it is shrinking its assets and simply needs fewer purchased funds. Addressing the question that matters most, Tom Jones said in December, ''We have no funding problems.'' A former chief financial officer at Citi, Donald Howard, now in the same job at Salomon Inc., backs that assertion: ''They're safe because the consumer is giving them so much of what they need.'' TO JOHN REED that is surely a comfort, but less than he needs in this most difficult time. His pride is on the line, and much of his own money to boot. Two years ago he took out a bank loan to buy 100,000 shares of Citicorp stock at $25 each, for a total of about $2.5 million. That investment has lost more than 40% of its value. He owns another 429,000 shares of Citi as well (debt status: unreported) and has said almost all his net worth is in his company. Reed is that rare bird, a CEO who believes so unreservedly in what he is doing that he has put his money where his mouth is. Yet he has obviously been starkly wrong. Earlier this year he delivered his mea culpa in the publication Manhattan Inc.: He confessed that he sometimes dillydallied in getting at problems. Little ones? asked the interviewer. ''No. No. No,'' he answered. ''Big problems.'' He admitted to being about five years late in addressing some manifest difficulties in Citi's commercial loan business. ''These things,'' he said, ''hit you slowly.'' He was also plainly distracted by the legacy Wriston left him: the Third World debt problem, which interests him intellectually -- he spent years in Argentina and Brazil as a kid -- and has also been a terrible burden on the bank. This problem is by no means licked. Citi is still sitting with a portfolio of nearly $10 billion in what it delicately calls loans to ''refinancing countries,'' a.k.a. LDC loans. Of these, $3.6 billion are not performing -- that is, either not paying interest at all or paying a lower rate than that originally negotiated. Derelictions can be expected to persist since this is by nature a no-pay, low-pay, slow-pay crowd. Nevertheless, Reed, in the pursuit of what he calls ''globality,'' has declared Citi's intention to keep supplying dollars to countries that recant their sins and service their debt. Now he has finally turned his attention to the commercial side of the business. Called Global Finance these days, it earned only $458 million in the first nine months of 1990, down from $820 million a year earlier. Those profits, moreover, are due to be wrecked by year-end charges for reserves and severance packages. REED'S NEW FOCUS recalls two challenges of his past: Soon after he came to the bank in 1965 out of MIT's Sloan School of Management, he was put in charge of Citi's back-office operations. He imposed order and whacked costs by viewing the place as a factory. Next he took on the building of a consumer business, wading through huge early losses and eventually constructing today's stronghold. Can he now bring off a third feat of derring-do -- the resurrection of a business he himself let decline through inattention? To pull a hat trick, he must oversee the cleanup of Citi's bad commercial loans and get his officers to thinking intelligently about risks. Reed undoubtedly believes this job doable. ''I am persistent,'' he has said, ''and I usually end up getting what I want.'' But a former senior officer of the bank says his success is problematic: ''In operations John was dealing with clerical types, and in the consumer business, it was branch managers. But in trying to change the commercial bank he's up against the prima donnas, and they will be orders of magnitude more difficult.'' It can't help that Reed's background includes no commercial lending experience and no previous exhibition of interest in this side of the business. Reporting directly to Reed, as part of a newly installed management team, is another banker who has never made a loan, Richard S. Braddock, 49. Braddock was named to the vacant post of president and chief operating officer last January, coming from the top spot in the consumer bank. Before joining Citi, he was a marketing man at General Foods. His Citi management style is entirely different from Reed's. Reed, while numbers-oriented, is a big-picture thinker and prone to keep his distance from the troops. Braddock's approach is relentlessly and meticulously hands-on. Says a man who has seen Braddock maneuver: ''He is constantly doing reviews and calling people to account. He's on everybody's case both as taskmaster and cheerleader.'' The tasks include overseeing the two big divisions of Global Finance. One of these is JENA, an acronym for Japan, Europe, North America, Australia, and New Zealand -- in short, the developed world. The other division, IBF -- for International Banking & Finance -- covers 67 countries not yet in full flower. In these, IBF does regular commercial banking in local currencies, and reports good earnings. JENA is the home of today's troublesome commercial loans, and the boss is Michael A. Callen, 50. His 26 years of experience at Citi have been split among commercial lending, investment banking, and treasury jobs in which he raised money for the bank. He moved into JENA when it was created last January and quickly stripped away two layers of management. He now has an amazing total of 53 operating executives reporting directly to him. They run what are called activity centers, or A.C.s, or sometimes even ''aches.'' Real estate finance is, for example, an ache, which you probably didn't need to be told. But so is securitization, the country of Germany, swaps, and 49 other identifiable subdivisions, many of them pleasantly profitable. The Citibanker running each is called, yes, a head-ache. Callen himself is an Excedrin-strength fast-talker, a useful characteristic considering all the chatter required of him. His routine includes monthly meetings lasting for at least an hour, and sometimes conducted through video conferences, with each of the 53 head-aches. He is lavishing much more than routine care on his two most intractable aches, real estate finance and the highly leveraged transactions called HLT loans. Lending in these two areas took off in the 1980s even as Citi and other commercial banks were losing much of their trade from blue-chip corporations, | which took to trolling for capital in the commercial paper and securities markets. Citibankers viewed real estate and HLT loans as profitable substitutes. These credits also represented a high-risk way for Citi to chase those 15% earnings increases. Callen himself deplores the lack of ''balance'' that led Citi's lending officers to hare after real estate as the 1980s progressed. The bank's U.S. commercial real estate portfolio expanded from $2.5 billion in 1980 to $12.6 billion in 1989, an annual compounded growth rate of almost 20%. By September 1990, borrowings were up to $13.2 billion, and the nonperformers were $2.2 billion of that amount and rising. Total real estate loans may not yet have peaked because the bank is sitting with commitments to lend another $5.5 billion if the borrowers want the money. Citi's spree might suggest that the bank had lost all institutional memory of the pounding it took in the vicious property collapse of the mid-1970s. Instead the lending officers appear to have told themselves they were well protected this time because they were lending not to the schlocky crew of that decade but to a better class of borrower. Having identified these gentlefolk, Citi proceeded to concentrate its funds among them. Donald Trump, for example, now owes the bank an estimated $275 million. The executive team that oversaw Citi's real estate splurge has been jettisoned: The department's head, Frank Creamer, has been moved to another job; his boss, George L. Davis, is gone from the bank; the big boss, Lawrence M. Small, a man close to Reed for years, became a vice chairman without visible portfolio when Callen took over JENA. The new real estate department head, Robert Laughlin, was formerly Callen's chief of staff and is the fireman in charge of dousing this blaze. He has his workout crews conferring almost daily with such big borrowers as Atlanta developer John Portman, whose debt to Citi is $378 million. When the crunch is past, says Callen, real estate will again be an excellent business for Citi. And the next time, he promises, concentration on a small club of borrowers will be out and diversity in. He presents no timetable for the recovery, nor is it clear that Citi's opinions on this subject are reliable. Reed has said the bank ''was warned about real estate'' in 1988 and ''pooh-poohed'' the idea of trouble. The company's quarterly reports began to mention difficulties in the business only in early 1989, and for the next five quarters Citi's comments consistently underestimated the severity of the problem. For the record, the bank's current opinion is that the real estate market has not yet touched bottom. Within Citi, the HLT problem loans appear to be considered far less serious than the real estate mess. Repayments have recently slimmed down the domestic HLT portfolio from $6.3 billion last June to $5.4 billion in September. In the $5.4 billion are $913 million in nonperforming loans, of which $288 million is known to be owed by Federated Department Stores and Allied Stores, the companies that Robert Campeau ushered into bankruptcy. Citi was still lending to Campeau a bare nine months before the filing. Minor shrinkage has also taken place in the international HLT portfolio, which dropped from $2.5 billion in June to $2.4 billion in September. Only $131 million of the $2.4 billion was nonperforming. But a buildup could be coming, some of it by way of an Australian publisher, John Fairfax Group, which went into receivership in December. The problems of another Australian customer, News Corp.'s Rupert Murdoch, have Citi and his other lead banks considering whether to lend him money to pay interest -- a game reminiscent of LDC lending. CITI'S RELATIVE serenity about its HLT portfolio stems from the fact that the bank is normally a senior creditor and well secured. This standing gives it a good chance to collect interest, recover its principal, and even emerge unscarred from a bankruptcy. But senior creditors have no assurances of reaping 100 cents on the dollar. For example, full payment is in doubt on the Allied and Federated bankruptcies. Federated senior debt has traded recently in the over-the-counter market at 40 cents on the dollar. Reed averred nonetheless in a recent Harvard Business Review interview that Citi would not lose money on its Campeau debt. But he said his troops were ''becoming deal junkies'' in the 1980s, and he specifically criticized the Campeau financing, saying he found it hard to understand how lending to a man who went bankrupt within a year could be construed as good business. Not everyone in his organization agreed with him, he allowed, since some saw the equation as ''big fees against no losses.'' Big fees, of course, explain most of Citi's enthusiasm for HLTs. Fees are earned for committing money, lending it, and bringing other banks into the deal. In 1989 alone, fees and commissions from this business ran to a splashy $207 million. Fees that were deferred for accounting reasons are still hitting | Citi's P&L and offsetting some of the drop in leveraged buyout activity. The money also explains some of Citi's more boorish behavior during the fiesta days for LBOs. A former lending officer at the bank recalls the 1987 episode in which raider Ronald Perelman asked that Citi commit to line up $5 billion that Perelman could use to make a second takeover pass at Gillette. That company was one of the bank's longtime customers. But the former Citibanker says, ''A little figuring showed us that the commitment fees we'd get from Perelman, not counting any later fees, were equal to the present value of all the money we could expect to earn on Gillette in the next four years.'' Citi backed Perelman, Gillette fired Citi, and then Gillette escaped Perelman. He stayed on as a Citi client. His companies, Revlon and McAndrews & Forbes, are today laden with debt and struggling -- but they are not, at least for now, in Citi's bag of HLT nonperformers. IT IS POSSIBLE to imagine a future when Citi's real estate and HLT aches stop throbbing. But with the financial world moving at real-time speed, it is hard to believe that this incredibly diverse and sprawling company will not then have some fresh reason to confound shareholders and regulators alike. Conceivably the fragility of its current situation could be a true turning point for Citi, in which it comes to grips with its own limitations. But there is no indication now that this bank with the boardinghouse reach has lost its sense of manifest destiny. A senior Citi executive even spoke recently about the bank's role as a worldwide ''shock absorber,'' capable of accepting risk beneficently and thereby softening all manner of blows that might fall on society. Most Citi shareholders, one might guess, would just as soon some other pigeon signed up for that job. In trashing the stock, they could be sending the company a message made famous on Broadway: Stop the world -- I want to get off.

CHART: NOT AVAILABLE CREDIT: SOURCES: CITICORP; ANNUAL REPORTS CAPTION: CITICORP'S HEAVY LOAD OF DEADBEAT LOANS

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: PROFITS AT CITICORP: GOOD, BAD, AND UGLY ''Information'' is largely Quotron, the stock quote service. The ''Other'' group includes asset sales and investment gains and losses.