On April 6, 1998, the merger between Citicorp and Travelers Group was announced to the world, creating a $140 billion dollar firm with assets of almost $700 billion dollars. The chairmen of both parent companies, John Reed and Sanford Weill, were announced as co-chairmen and CEOs of the new entity, Citigroup (NYSE:C), Inc., although the huge difference in management styles between the two immediately presented question marks over such a setup.
Presented as a merger, the deal was truthfully more like a stock swap, with Travelers Group purchasing all of Citicorp shares for $70 billion dollars, and issuing 2.5 new Citigroup shares for each Citicorp share. By using this ratio, existing shareholders of each company wound up owning about half of the new merged one. The new company maintained Citicorp’s “Citi” brand in its name but adopted Travelers’ distinctive “red umbrella” as the new corporate logo, and it was used until 2007.
The remaining provisions of the Glass-Steagall Act ; enacted following the Great Depression forbade banks to merge with insurance underwriters, and meant Citigroup had between two and five years to divest any prohibited assets. Sanford Weill stated at the time of the merger that they believed “over time the legislation will change. We have had enough discussions to believe this will not be a problem” The passing of the Gramm-Leach-Bliley Act in November 1999 proved Reed and Weill’s views, opening the door to financial services conglomerates with a mix of commercial banking, investment banking, insurance underwriting and brokerage services all under one roof essentially.
Citigroup spun off the Travelers Property and Casualty insurance underwriting business in 2002. The spin off was caused by the insurance unit’s drain on Citigroup stock price because Traveler’s earnings were more seasonal and vulnerable to large disasters, particularly the September 11th, 2001 attack on the World Trade Center in downtown New York City. It was difficult to sell this kind of insurance directly to customers also since most industrial customers are accustomed to purchasing insurance through a broker. The Travelers Property Casualty Corporation wound up merged with The St. Paul Companies Inc. in 2004 forming The St. Paul Travelers Companies. Citigroup kept the life insurance and annuities underwriting business; however, they wound up selling those businesses to MetLife in 2005. Citigroup still heavily sells all forms of insurance, but it no longer underwrites insurance. Despite their divesting Travelers Insurance, Citigroup retained Travelers’ signature red umbrella logo as its own until February 2007, when Citigroup agreed to sell the logo back to St. Paul Travelers, which renamed itself Travelers Companies. Citigroup also made a decision to adopt the corporate brand Citi for itself and virtually all its subsidiaries, save for Primerica and Banamex.
Citigroup is divided into four major business groups: Consumer Banking, Global Wealth Management, Global Cards, and Institutional Clients Group. The Global Consumer Group (GCG) of Citigroup generated $19.8billion in net revenue and more than $4billion in net income in 2006 , the Global Consumer Group is made up of four sub-divisions: Credit Cards, Consumer Finance, Consumer Lending Group (Real-Estate Lending, Auto Loans, Student Loans), and Retail Banking Services. Targeting individual consumers as well as small- to medium-sized businesses, The GCG offers financial services across its worldwide branch network, including banking, loans, insurance, and investment services. On March 31, 2008, Citigroup announced that it would create 2 new global businesses; Consumer Banking and Citi Global Cards out of the existing Global Consumer Group. Citi Cards is responsible for around 40% of the profits with the GCG, and represents the largest issuer of credit cards across the world as well as a 3,800-point Automated Teller Network (ATM) network across 45 countries.
The Consumer Finance division branded as CitiFinancial accounts for about 20% of the GCG’s profits, and offers personal loans and homeowner loans to consumers in 20 countries worldwide. There are over 2,100 branches in the U.S. and Canada. The takeover of Associates First Capital in September 2000 enabled CitiFinancial to expand its reach outside of the United States, particularly capitalizing on Associates’ 700,000 customers in Japan and Europe. Citi ended its CitiFinancial operations in the UK in 2008.
Finally, retail banking which encompasses the Citigroup global branch network, branded Citibank. Citibank is the third largest retail bank in the United States based on deposits (although it has considerably fewer retail branches than many of its smaller rivals), and it has Citibank branded branches in countries throughout the world, with the exception of Mexico; In Mexico Citigroup’s bank operations are branded as Banamex and are the country’s second largest bank and a Citigroup subsidiary.
Citi Smith Barney was CitiGroup’s global private wealth management unit, providing brokerage, investment banking and asset management services to corporations, governments and individuals around the world. With over 800 offices worldwide, Smith Barney held 9.6 million domestic client accounts, representing $1.562 trillion in client assets worldwide. Citi announced on January 13, 2009 that they would give Smith Barney to Morgan Stanley investment bank to combine their brokerage firms in exchange for $2.7 billion and 49% interest in the joint venture. Citigroup’s urgent need for cash was reputed to be the driving force in the deal. Many have speculated that this was the beginning of the end of Citigroup’s multi faceted financial approach.
Citi announced on October 11, 2007 the formation of the new Institutional Clients Group comprising Citi Markets & Banking (CMB) and Citi Alternative Investments (CAI) with Vikram Pandit, 50, as its Chairman and CEO. Containing Citigroup’s most market-sensitive divisions, CMB is divided into two primary businesses: Global Capital Markets and Banking and Global Transaction Services (GTS). Global Capital Markets and Banking provides investment- and commercial-banking services covering institutional brokerage, advisory services, foreign exchange, structured products, derivatives, loans, leasing, and equipment finance. Meanwhile, GTS offers cash management, trade finance and securities services to corporations and financial institutions worldwide CMB was responsible for around 32% of Citigroup’s annual revenues, based on 2006 financial year results.
It should be noted Mr. Pandit was promoted to CEO of the entire company two months after the formation of the Institutional Clients Group. To that end, those who have held him responsible for Citigroups issues and debt obligations are wrong. That process of perversity was already well established when he took over the helm.
Citi Alternative Investments (CAI) is an alternative investment platform that manages assets across five classes – private equity, hedge funds, structured products, managed futures, and real estate. Across 16 “boutique investment centers”, it offers various funds or separate accounts that utilize alternative investment strategies, as opposed to the mainstream mutual funds that it recently sold off. CAI manages Citigroup proprietary capital as well as institutional investments from third-parties and high-net-worth investors. CAI contributed 7% of Citigroup’s 2007income.
Heavy exposure to troubled mortgages in the form of Collateralized debt obligation (CDO’s), compounded by poor risk management led Citigroup into troubled waters as the subprime mortgage crisis came to a head. As the crisis began to unfold, Citigroup announced on April 11, 2007 that it would eliminate 17,000 jobs, or about 5 percent of its workforce, in a broad restructuring designed to cut costs and bolster its long underperforming stock. Even after securities and brokerage firm Bear Stearns ran into serious trouble in summer 2007, Citigroup decided the possibility of trouble with its CDO’s was so tiny (less than 1/100 of 1%) that they excluded them from their risk analysis. With the crisis worsening, Citigroup announced on January 7, 2008 that it was considering cutting another 5 percent to 10 percent of its work force, which totaled 327,000 employees at the time. Unfortunately, like most others the company had been using elaborate mathematical risk models which viewed mortgages in specific geographical areas, but never included the possibility of a nationwide housing downturn, or the possibility that millions of mortgage holders would default on their mortgages. As a matter of fact trading head Thomas Maheras was said to be close friends with senior risk officer David Bushnell, which undermined risk oversight. Just as Treasury Secretary, Robert Rubin was said to be influential in lifting regulations that permitted Travelers and Citicorp to merge in 1998; as a member of the board of directors of Citigroup, Rubin and Charles Prince were said to be influential in pushing Citigroup towards CDOs in the subprime mortgage market.
By November 2008, the ongoing crisis hit Citigroup hard and despite federal TARP bailout money, the company announced further cuts. Its stock market value dropped to $6 billion, down from $244 billion two years prior. As a result, Citigroup and Federal regulators negotiated a plan to stabilize the company. Sadly on 24 November 2008 the U.S. government announced the massive bailout of Citigroup, designed to rescue the company from bankruptcy while giving the government a major say in its operations. The Treasury provided $45 billion dollars in Troubled Asset Relief Program (TARP) funds. The Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) covered 90% of the losses on its $335-billion portfolio after Citigroup absorbed the first $29 billion in losses. In return the bank gave Washington $27 billion of preferred shares and warrants to acquire stock. The government also obtained wide powers over banking operations. Citigroup agreed to modify mortgages, using standards set up by the FDIC after the collapse of Indy Mac Bank, with the goal of keeping as many homeowners as possible in their houses. Executive salaries are capped. As a condition of the bailout, Citigroup’s dividend payment has been reduced until further notice.
According to New York Attorney General Andrew Cuomo and as reported by the Wall Street Journal, after having received its $45 billion TARP bailout in late 2008, Citigroup paid hundreds of millions of dollars in bonuses to more than 1038 of its employees. This included 738 employees each receiving $1 million in bonuses, 176 employees each receiving $2 million bonuses, 124 each receiving $3 million in bonuses, and 143 each receiving bonuses of $4 million to more than $10 million. Its single largest shareholder is Prince Al-Waleed bin Talal of Saudi Arabia, who has a 4.9% stake.
