Citigroup

Last edited by lenazun on November 25, 2009 - 1:18pm

Company Snapshot:

Citigroup, operating as Citi, is a major financial services company based in New York City. The company is the most dramatic example of how banking deregulation both succeeded and failed. Formed by the 1998 merger of Citicorp and Travelers Group, at its peak the company employed over 332,000 people around the world and held over 200 million customer accounts in more than 100 countries.

Citi suffered massive losses after the subprime mortgage securities bust, turning to outside sources such as the Abu Dhabi Investment Authority and the government of Singapore for a $20 billion capital infusion. In the fall of 2008, it was forced to accept two bailout payments from the U.S. federal government. Nevertheless, rumors of insolvency and possible nationalization continue to haunt the company. Its stock plunged to below $2 in mid-February, 2009. (It lost nearly 85 percent of its value in 2008).

In January 2009 Citi announced the resignation of senior advisor Robert Rubin, along with the division of the bank into two entities, with the sale of Smith Barney (the bank's "crown jewel" brokerage business) to Morgan Stanley. The announcement was widely interpreted as signalling the end of an era of striving to be a giant global financial supermarket.

Citi also played a part in other financial scandals of the early 2000s, including Enron and WorldCom.

Number of employees worldwide:

327,000

Chief executive officer:

Vikram S. Pandit

Website:

Citigroup

Global Fortune 500 rank:

Net Income:

$79 million

Total revenue:

159,600,000,000

CrocTail subsidiary information

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Corporate accountability

Accountability overview:

Citi creates and then feeds "Plutonomy" In a memo issued by Citigroup Global Markets, "Revisiting Plutonomy: The Rich Getting Richer" (March 5, 2006), Citigroup boasts that it "coined the term 'Plutonomy' back on October 14, 2005: "Our thesis is that the rich are the dominant drivers of demand in many economies around the world (the US UK, Canada and Australia)...the rich now dominate income, wealth and spending in these countries," and "(w)e think the rich are likely to get even wealthier in the coming years." The implication for investors? Invest in "companies that sell to or service the rich -- luxury goods, private banks etc." Private banks...like Citi's own private banking division? In other words, inequality is getting worse, but that's good for Citi! The memo, which appears in Michael Moore's new movie, "Capitalism: A Love Story", also concludes (p. 2) that "capitalists benefit disproportionately from globalization and the productivity boom, at the relative expense of labor." (duh).

NASD Fines:

On June 6, 2007, NASD announced that it had fined Citigroup Global Markets, Inc. $3 million to settle charges relating to the use of misleading materials in retirement seminars and meetings for BellSouth employees in North Carolina and South Carolina. NASD also ordered Citigroup to pay approximately $12.2 million in restitution to more than 200 former BellSouth employees.

In 2004, NASD censured and fined Citigroup Global Markets, Inc. $275,000 for a series of violations related to its sales of two proprietary managed futures funds - Citigroup Diversified Futures Fund L.P. and Salomon Smith Barney Diversified 2000 Futures Fund L.P. NASD said Citigroup's violations included: Making unsuitable recommendations of the fund to 45 customers, failing to maintain required records of sales, failing to adequately disclose the risks of investing in managed futures.

In March, 2005, NASD fined Citigroup, American Express and Chase $21 Million for improper sales of Class B and C shares. The firms were fined for failing to consider or adequately disclose to their customers that an equal investment in Class A shares would generally have been more economically advantageous for their customers by providing a higher overall rate of return. The charges and settlement involved over 275,000 transactions and 50,000 households.

Tax issues:

Most Offshore Tax Haven Subsidiaries

In December 2008 the Government Accounting Office reported (GAO-09-157) that Citigroup had 427 subsidiaries in jurisdictions listed as tax havens or financial privacy jurisdictions (including 90 in the Cayman Islands alone) -- by far the most of any Fortune 100 company.

"Americans were told you have to pony up some money to help these companies," Senator Byron Dorgan (D-ND) said in response to the GAO finding. "And it's rather infuriating for them to find out now that those companies, when they were profitable, didn't want to pay taxes and found clever ways to hide their money overseas."

Part of the money they don't pay taxes on comes in the form of fees for helping rich people hide their own money from the IRS. According to Mother Jones magazine (Nov./Dec. 2000), Citibank, the nation's largest private banker, "administers trusts and shell corporations for some 40,000 clients through its operations in New York, London, the Bahamas, the Cayman Islands, the Isle of Jersey, and Switzerland."

The Tax Justice Network's report on Citigroup includes a list of 185 offshore subsidiaries listed in Citigroup’s annual SEC filing. The corporation’s past behavior raises questions about its continued use of the offshore secrecy system.

Isle of Jersey Subsidiaries

Examining offshore operations today, Tax Justice Network examined the Jersey network of 11 companies. The existence of these companies is not “hidden” or “secret,” but the ownership structure, indicated in the chart in our report, is curious. TJN asked Citigroup questions about the network and asked to discuss this report before publication with Citigroup officials, but the senior official who deals with civil society declined to respond.

The parking scandal of the 1970s

Between 1973 and 1980, Citibank shifted about $58 million in profits from high-tax to no-tax jurisdictions through phony foreign exchange trades and loans. These foreign exchange operations were known as "parking."

Exchange law controls aim to prevent excessive "shorting" of currencies. To short a stock or a currency is to sell it when you don’t have it. If a trader thinks the Swiss franc is going down, he will sell it. He doesn't have to have it to sell it. Governments believe that by shorting their currency, traders are able to drive down its value. Therefore, many countries establish limits for how large a position in their currency a bank could have. To avoid the limit, Citibank traders put their "positions" offshore.

"Parking" was also used to launder profits. On any day, if there was a range of prices, a Citibank trader could do two offsetting trades where he lost money and a tax haven branch made a profit. Back-to-back loans – loaning money to a branch and borrowing it back at higher interest – had a similar effect.

The parking branches were Amsterdam, Brussels, Frankfurt, Zurich, London, Milan, Paris, Toronto, Tokyo, Hong Kong, the Philippines, Singapore, Malaysia, Indonesia, India, Saudi Arabia and Mexico. They parked foreign exchange positions in the offshore tax havens Nassau, Panama, the Channel Islands, Monaco, and Bahrain.

Paperwork made it seem as if Citibank parking branches were losing money and the no-tax offshore centers were making all the profits.

Citibank management knew that this procedure was illegal. A Citibank internal auditor testified to the SEC: “It is very simple to do real transactions just for the purpose of transferring profits…They can be done at realistic rates by selecting [buy and sell price] quotes at different times during the day, making them almost impossible for an outsider to discover.”

In 1977, a whistleblower in Citi's Paris office told his bosses about the scam and the next year, when they had still taken no corrective action, he told the top corporate officials and then informed the SEC. Citibank fired him. The bank then attempted to disguise the trades by hiding them in numerous small transactions, using code worda, listing phony prices on the books, making phone orders with no records, and falsifying audits.

The 1981 SEC report said, “The practices and procedures of such parking were done pursuant to policies laid down by senior management in New York.” It said also that, “The facts show clearly that all levels of management (except the outside Board members) knew of the questionable conduct…and senior management approved it.”

The SEC report noted that “the transactions engaged in by Citibank have all the attributes of evasion of the law, not avoidance.” And that “elaborate efforts were made to disguise” the transactions, and the books didn’t reflect the nature of the transactions. The report then concluded “it is clear that Citibank systematically and knowingly violated exchange control, tax or other laws of virtually all of the countries involved.”

Money Laundering in Chile

In October 2004, Chile's tax authorities filed a lawsuit for tax evasion against former military dictator Augusto Pinochet. One of his tax-evasion money-laundering banks was Citibank, which hid and laundered at least $5 million and perhaps millions more, according to the U.S. Senate Permanent Subcommittee on Investigations.

Citigroup ran accounts for Pinochet from 1981, when he was still dictator after the 1973 U.S. - supported coup, until 1996. It ran offshore accounts connected to the Pinochets until 2005, a total of at least 63 U.S. accounts and certificates of deposit for Pinochet and his family. The U.S. Senate report said, “Pinochet used the Citigroup accounts to move funds within the United States and across international lines, transact business, and construct an international web of secret accounts.”

In June 2002, a U.S. bank regulator asked Citigroup whether their Private Bank had accounts for Pinochet or his wife, including accounts under a listed disguised names. The head of Citigroup’s global anti-money laundering group said that an earlier global search had turned up no Pinochet accounts at the bank. Of course, there were dozens.

Laundering Money for Salinas, Bongo, the Abachas

Citigroup's Private Bank accepts only very wealthy clients – with $5 million minimum and generally more than $10 million in deposits. It has about 25,000 "special clients." Its services include setting up off-shore accounts and arranging financial transactions for them to evade taxes.

U.S. Senator Carl Levin, at a hearing of the Senate Permanent Subcommittee on Investigations in 1999, said that the Private Bank of Citibank has had “a rogue’s gallery of private bank clients.”

Clients included Raúl Salinas, the brother of the former President of Mexico; Asif Ali Zardari, the husband of the former Prime Minister of Pakistan; Omar Bongo, the dictator of Gabon, three sons of General Sani Abacha, the late military dictator of Nigeria; Jaime Lusinchi, the former President of Venezuela; two daughters of Radon Suharto, the former dictator of Indonesia; and General Albert Stroessner, the former dictator of Paraguay.

Levin said, "And these are just the clients we know."

The same system Citibank used for them – offshore shell companies and secret accounts – is the system it uses for thousands of other Private Bank clients who have something to hide.

Amy Elliott, Salinas's private banker, told the U.S. Senate subcommittee about the operation she set up for him. She called it "a very standard account structure in the international private banking industry, including Citibank."

She set up a personal investment company, or PIC, to hold Salinas's investments, with the shares of that corporation owned by a secret trust. She said, "Such an account structure provides for confidentiality and also allows for efficient tax and estate planning." She said that Salinas’s desire to transfer money out of Mexico was “exactly what many other wealthy Mexicans, including my clients, were doing at the time.” She said it was a structure that at least 70 percent of Citibank's Mexican clients and most of its Latin American clients use. She said, "It was a standard structure within the International Private Bank.”

She used classic tax-evading, money-laundering techniques: secret shell companies and accounts, a trust known only by a number, layering – one anonymous company owning another company that owns another company -- and concentration or correspondent accounts that blur the identities of depositors. Citibank helped Salinas move $100 million from Mexico to Switzerland and London through shell companies and networked accounts.

Elliott said that the bank's vice chairman, William Rhodes, knew all about it.

The Argentine Offshore Bank Scam of The 1990s

In 2001, Argentina defaulted on its national bonds. The economic crisis that followed brought hardship to the majority of Argentinians, especially to workers, women and the poor. Critics said the economic crisis was provoked by massive evasion of taxes and capital flight. That year, the program "Día D" of America TV in Buenos Aires sent an actor to catch Citibank promoting tax evasion.

The actor, who secretly video-taped the encounter, told the Citibanker that he had just sold a company and didn’t want to report all the profits. The Citibanker told how he could help him evade taxes.

He would send the money via a wire in another name to a transit account at Citibank New York and then move it to an International Personal Banking account. As a nonresident foreigner, the client wouldn't pay taxes. The Citibanker said, "You are not going to have problems with taxes." Argentine authorities wouldn't know about his account. He said, "Eighty-five percent of my clients do this operation. Eight-five percent of clients of the private bank have an offshore portfolio. They manage all the money abroad. Why? Because they are fed up with paying [taxes]."

After the program was broadcast, the Citibanker was fired and the bank moved its private bank accounts to Chile and Uruguay.

Moving Russian Money Offshore In The 1990s

Deryck Maughan, CEO of Citigroup International, told a news conference in 2003 that, "Russia is a large opportunity for the group." Citibank would run clients’ portfolios and for Russians who deposited more than $25,000, it would open Citibank offshore investment accounts.

It wasn't the first time Citibank had helped Russians move their money offshore. A few years earlier, in 2000, the U.S. General Accounting Office (GAO) reported that throughout the 1990s Citigroup allowed more than $800 million in suspicious Russian funds to flow through 136 U.S. accounts tied to shell companies registered in Delaware. The corporations were set up by a Russian immigrant who then opened Citibank accounts for them. Over 70 percent of the Citibank deposits for these accounts was quickly wire-transferred abroad, mostly to tax havens. Investigators believed it was money fleeing taxes or the profits of crime.

Environment and product safety:

On March 27, 2008, Citi joined CERES, the investor network on climate change, nearly a year after Citi announced a $50 billion investment commitment over the next 10 years to address global climate change. The bank's investments would support the commercialization and growth of alternative energy and clean technology among the clients and markets it serves, as well as within its own businesses and operations.

The move comes after years of pressure and targeted campaigning against the bank's investment in destructive projects, led by groups such as the Rainforest Action Network. which continues to push Citi to stop funding coal-fired power plants.

On June 18, 2008, Citigroup's Investment Research Group (Smith Barney) published a report examining 111 companies destined to benefit from the threat of climate change (up from 74 companies in 2007).

Political influence (national and international):

Deregulation and the Enron Scandal

In the 1990s, the venerable old Glass-Steagall Act came under sustained attack by Citi and other big financial interests who promised great efficiencies would come from the kinds of consolidation that the law specifically prohibited. By 1997, the Act had been weakened enough to allow banks to acquire securities firms outright. By 1999, thanks to a lobbying effort led by Citibank and others, Glass-Steagall was essentially history. At long last, investment banking, insurance, and financial underwriting were back under the same umbrella again. The final compromise on the legislation, it is worth noting, was brokered by then treasury secretary Robert Rubin, who joined Citi as a vice-president just four days later. (Rubin resigned from Citi in early January 2009, after playing a "pivotal role in the bank's current woes" (Eric Dash and Julie Criswell, "Citigroup Saw No Red Flags Even as It Made Bolder Bets," NYTimes, 11/23/2008). At the time of the legislation, Citigroup had already merged with Travelers/American Express, in violation of Glass-Steagall.

With the law’s repeal, J.P. Morgan Chase & Co. and Citigroup, Citicorp’s successor, were free to both lend money and underwrite securities for Enron, WorldCom and others. Citigroup, for instance, was paid a total of $167 million by Enron for various services from 1997 to 2001. Citigroup and J.P. Morgan Chase repeatedly issued huge loans to Enron that were disguised as energy trades (which then enabled Enron to misstate the loan proceeds as cash flow from business operations, misleading investors, analysts, tax collectors, and employees who lost their life savings and jobs). At the same time, the big banks were also pivotal players – perhaps the architects – of the offshore special purpose entities that were used to hide the company’s debt and which ultimately brought the company down . (In addition, bank executives personally invested in the lucrative partnerships.) As Sen. Carl Levin (D-Mich.) testified in one of the many congressional investigations of Enron, this one leading to a major investigative report on "The Role of the Financial Institutions in Enron's Collapse" (click here for volume 1; and volume 2): “Citigroup and Chase…not only assisted Enron, they developed the deceptive pre-pays as a financial product and sold it to other companies as so-called balance sheet-friendly financing, earning millions of fees for themselves in the process.” Meanwhile, even though these banks knew just how shaky Enron’s finances really were, they happily pushed investors to buy more Enron stock through their brokerage arms. Certainly, they issued no warnings, not even to credit agencies.

Enron wasn’t the only bum stock that the big Wall Street firms were pushing for all the wrong reasons. With investment banking and brokerage services now under the same roof as commercial banking, investment advisers had begun taking their cues from bosses who were more concerned with pleasing big corporate clients than with giving good advice to the small investor. As a result, advisers recommended that their clients buy stocks in companies that they privately derided as “crap” and “junk” for the sole reason that these companies were investment banking clients at their firm. These massive conflicts of interest resulted in an epidemic of worthless “buy” ratings. According to Weiss Ratings, an independent analyst whose revenues do not come from the companies they analyze, the vast majority of Wall Street investment analysts (many tied to the same banks that underwrote the companies they were covering) advised investors to “buy” or “hold” shares in Enron and other failing companies even as they were filing for Chapter 11. Forty-seven of the 50 large brokerage firms covering companies that went bankrupt in the first four months of 2002 continued to recommend that investors buy or hold shares in the companies even as they were filing for Chapter 11. The impact of the analyst-underwriter conflicts spilled over to other activities as well. For example, Citigroups’s telecom analyst Jack Grubman (who ultimately resigned in disgrace and paid a $15 million fine) helped raise money for Qwest, Global Crossing, and WorldCom, helping them plot strategy and attending board meetings while he was touting their stock to unsuspecting investors.

Though New York State Attorney General Eliot Spitzer exposed these kinds of conflicts of interest at 10 major Wall Street banks (Citigroup, Morgan Stanley, Credit Suisse First Boston, Goldman Sachs, J.P. Morgan Chase, Bear Stearns, Lehman Brothers, DeutschBank, UBS Paine Webber, and Piper Jaffray), the punishment did not fit the crime. The $1.4 billion fine that regulators and banks agreed to in April 2003 was a slap on the wrist for these financial giants, barely a day’s revenue for most of them. And the settlement did nothing to address the structural conflicts of interest that resulted from deregulation, even though Spitzer himself had concluded that, "I don't think there is any question that bringing many elements of financial services together has created more complex relationships that need to be properly controlled. Many of the conflicts that we are trying to unravel ... come from the notion that the concentration of financial services would be a good and healthy thing for the economy." Or as Tom Schlesinger, executive director of the Financial Markets Center explained it, “The rationale for repealing Glass-Steagall was that it would create more diversified banks and therefore more stability. What I see in these mega-banks is not diversification but more concentration of risk, which puts the taxpayers on the hook.”

Ties to the Obama Administration

Richard D. Parsons, the new chair of Citigroup (as of 1/09), was a member of President Obama's transition economic advisory board. According to the NYTimes, Parsons declined a request by incumbent Mayer Michael Bloomberg to consider running as his successor.

The Obama administration also includes numerous acolytes of former Citi executive and Clinton administration Treasury Secretary Robert Rubin, including Timothy Geithner, Lawrence Summers (chair of the National Economic Council), and Peter Orszag (budget director). Many of the ties were made through the Hamilton Project, for which Rubin was a driving force.

Other Citi alums in the Obama administration include:

Deputy Secretary of State Jacob Lew, former CFO for Citi's Alternative Investments Group
Michael Froman, Obama's Deputy National Security Advisor for International Economic Affairs, who also hails from Citi's Alternative Investment Group. Froman was chief of staff to former Treasury Secretary Robert Rubin during the Clinton administration, and followed him to Citi.
David Lipton, Froman's deputy, is Citi's former head of global country risk management.
Lewis Alexander, Counselor to Treasury Secretary Tim Geithner, is a former Citi Chief Economist.

(Source: Andrew Cockburn, "The Wall Street White House", Counterpunch, 7/2/09).

Geithner and Citi

On April 27, 2009, the NYTimes reported that Treasury Secretary Timothy Geithner "was particularly close to executives of Citigroup, the largest bank under his supervision. Robert E. Rubin, a senior Citi executive and a former Treasury secretary, was Mr. Geithner’s mentor from his years in the Clinton administration, and the two kept in close touch in New York. ... But for all his ties to Citi, Mr. Geithner repeatedly missed or overlooked signs that the bank — along with the rest of the financial system — was falling apart. When he did spot trouble, analysts say, his responses were too measured, or too late."

When Geithner arrived at the NY Fed, Citi's then-CEO Simon Weill was a member of the NY Fed's board. "Mr. Geithner met frequently with Sanford I. Weill, one of Citi’s largest individual shareholders and its former chairman, serving on the board of a charity [National Academy Foundation], Mr. Weill led. As the bank was entering a financial tailspin, Mr. Weill approached Mr. Geithner about taking over as Citi’s chief executive."

"Throughout the spring and summer of 2007, Geithner met repeatedly with members of Citigroup’s management, records show...From mid-May to mid-June alone, he met over breakfast with Charles O. Prince, the company’s chief executive at the time, traveled to Citigroup headquarters in Midtown Manhattan to meet with Lewis B. Kaden, the company’s vice chairman, and had coffee with Thomas G. Maheras, who ran some of the bank’s biggest trading operations."

"While waiting for a breakfast meeting with Mr. Weill at the Four Seasons Hotel in Manhattan, Mr. Geithner phoned Mr. Dugan, the comptroller of the currency, according to both men’s calendars. Both Citigroup and JPMorgan Chase were pushing for the new standards."

According to the Times, Weill even offered Geithner the chance to succeed him as CEO after he left, but Geithner turned the offer down. (Jo Becker and Gretchen Morgenson, "Geithner, Member and Overseer of Finance Club," NYTimes, 4/27/09).

The 2008 Crisis at Citi: How Rubin-esque Risk-Taking Led Citi Astray

Citi's management -- including former Treasury Secretary Robert Rubin (who the Times described as the "architect of the bank's strategy"), Citi CEO Charles O. Prince III (who resigned on Nov. 4, 2007), and Thomas Maheras (head of the bank's trading division) -- has been blamed for making bolder bets while its problems were increasingly obvious. As the New York Times suggested, the crisis at Citi was "years in the making," and should have been obvious to those at the top. Lynn Turner, former SEC chief accountant, added that the bank's balkanized culture and pell-mell management made the problems "inevitable."

Insiders have also described a lax internal culture in which risk managers responsible for putting the brakes on risky trading were close personal friends with those responsible for expanding the bank's mortgage-based securities portfolio.

Nationalize Citi?

Once Citi's problems became clear, numerous banking experts, analysts and economists have suggested that Citi and other failing banks should be put into receivership instead of bailed out by taxpayers, including Senator Lindsay Graham, R-SC, who called for the bank's "controlled liquidation, and William K. Black, a former deputy director of the Federal Savings and Loan Insurance Corp. But federal officials, including Federal Reserve Chairman Ben Bernanke have repeatedly deflected any talk of nationalization, because, among other reasons Citi's size and complexity make winding it down an extremely difficult proposition.

Instead, after a series of emergency meetings, the U.S. government announced on 11/23/2008 that it had entered into an emergency agreement with Citigroup to provide a package of guarantees, liquidity access and capital. (Also see the Term Sheet. The firm has been "brought to its knees" by more than $65 billion in losses, write-downs for troubled assets and charges for future losses. (Additional analysis of the Citi bailout was published by Economists View, Robert Reich, Paul Krugman, and Andrew Samwick).

US Treasury and the Federal Deposit Insurance Corporation (FDIC) agreed to back $306 billion of residential and commercial loans and securities on Citigroup's balance sheet. In exchange, Citigroup agreed to issue preferred shares to the Treasury and FDIC. Treasury also agreed to invest $20 billion in Citigroup from the Troubled Asset Relief Program (TARP) in exchange for preferred stock with an 8% dividend to the Treasury. The day before the announced agreement the company's stock was trading at $3.77 -- a price that represents a total loss of $244 billion in value in just two years.

Citigroup also agreed to comply with executive compensation restrictions, and the FDIC's mortgage modification program. Citi simultaneously announced that it would cut 52,000 jobs.

Bloomberg reported on January 14, 2009 that Citi had a tangible common equity of 2.41 percent of tangible assets -- "too low for investors' liking." The government has not only pumped $45 billion into the bank through the purchase of preferred stock, but has agreed to absorb a portion of losses on as much as $306 billion of assets held by Citi. Bloomberg added that "analysts at Bernstein Research...forecast that net charge-offs at U.S. banks might peak at 2.7 percent in the first half of 2010, well above an estimated 1.66 percent for the 2008 fourth quarter." (David Reilly, "Citigroup Crisis is Emblem of Capital Drought," Bloomberg, 1/14/09).

Thus, despite two federal bailout packages, in early 2009 Citi announced plans to spit itself up, "Taking Apart the Financial Supermarket" that it had built through a series of mergers and acquistions. (Eric Dash, "Citigroup Plans to Spit Itself Up," NYTimes 1/14/09). The announced plan to sell the firm's Smith Barney brokerage to Morgan Stanley, was reportedly an attempt to mitigate billions of dollars of new losses expected to come, but some analysts said they didn't think it would be enough to cover the bank's capital needs. Federal regulators, including Federal Deposit Insurance Corporation chairwoman Sheila C. Bair, have warned the company after the $27 billion second cash infusion that any further requests for assistance would result in a breakup of its operations. The second government lifeline (after the $25 billion injection in 10/08) triggered its status as operating under "open-bank assistance", which involves a loss-sharing arrangement devised by the FDIC and an investment by the Treasury "typically reserved for deeply troubled institutions." (Dash, NYT, 1/14/09). According to the NYT, investors have complained that Citi CEO Vikram Pandit did not move quickly enough to get ahead of federal regulators, who have pushed the bank to replace several directors and rethink its strategy since the fall of 2008.

On February 27, 2009 the a third round of government assistance was announced, with taxpayers slated to own as much as 36% of Citigroup's common shares.

In May, 2009, the Federal Reserve directed Citi to bolster its capital reserves by $5 billion over the next six months, after a comprehensive review of the bank's ability to remain well capitalized in a deeper economic recession. The review was conducted under the Treasury and Federal Reserve's Supervisory Capital Assessment Program -- more commonly referred to as the "stress tests". A congressional oversight panel tasked with reviewing the tests, raised questions about the stress tests, including the quality of the banks' self-reported data and the short time frame (through 2010) of the period under examination.

Time magazine reported that "Citi's stress-test results look more like an F than the B+ the bank seemed to get. Among the 19 banks the government probed, Citi was found to have the lowest common capital ratio, which the government said was a key measure to protect against insolvency. What's more, Citi also got credit for a capital conversion it has yet to complete. Strip that out, and the amount of capital Citi needs balloons to nearly $63 billion, more than any of the other banks tested." (Stephen Gandel, "Inside Citi's Stress Test: More Like an F than a B+," Time, May 14, 2009).

Despite Big Bailout, Citi may Still be in Big Trouble

The following chronology of news items suggests that Citi may not be in the clear, and may end up either operating as a “zombie bank”, be slowly nationalized (eventually forced into receivership or conservatorship) or forced to liquidate most of its units (see "Recent Spinoffs" section below).

9/2/09 “Washington Faces Hard Choice on U.S. Lenders” (WSJ)

The Obama administration, which says it doesn’t want to nationalize U.S. banks, may find itself taking a step in that direction if it converts the government’s preferred shares in Citigroup Inc. into common equity to help the firm withstand losses. ... Executives at New York-based Citigroup have discussed the change as a way to quell concerns about capital adequacy while heading off all-out nationalization, according to a person familiar with the matter. ...The bank is talking to regulators about expanding the U.S. stake to as much as 40 percent, the Wall Street Journal reported.

"Nationalization has become part of the public debate, and that’s the first step," said Paul Miller, an analyst at Friedman, Billings, Ramsey Group Inc. in Arlington, Virginia, who added that the U.S. is moving "faster than people think" toward government control. "This is the only way out," Miller said. "Losses are just going to accelerate in the next couple of quarters. The holes in these banks are just too big."

By converting its preferred shares to common, the government could pad too-thin tangible common equity, or TCE, ratios. ... The government holds $52 billion of preferred shares in Citigroup, five times the bank’s market value as of Feb. 20. If the U.S. were to convert all of its holdings into common shares, it would own more than 80 percent of the company.

8/24/09: Cyrus Sanati, “Analyst Sees More Pain for Citi,” (NY Times dealbook)

Fox Pitt Kelton analyst David Trone reported that Citi could experience as much as $68.6 in additional loan losses through 2010. …"After subtracting the $37 billion Citi has set aside in loan-loss reserves and factoring in tax savings from the losses, Mr. Trone calculates that those losses will leave Citi with a $27 billion hole in its balance sheet."

8/8/09: Amandine Ambregni “US Banks Still in Tight Straits Despite Profits,” AFP.

"These [positive second quarter] results come from the investment bank" side and not from commercial lending, which is crucial for economic activity," said Cesare de Novellis, an analyst at Meeschaert New York.

7/20/09 Heather Landy, “Right Direction But Small Steps,” American Banker

"We think Citi's ability to sell assets apportioned to Citi Holdings is critical to [the] success of company," Stuart Plesser, an analyst with Standard & Poor's Equity Research, wrote in a note to clients. ... Ironically, though, it was the Citi Holdings assets that generated higher second-quarter revenue versus last year, not the consumer banking and institutional clients businesses that make up Citicorp. ... Citi Holdings got a boost from the gain on the Smith Barney transaction, along with higher valuations for certain securities that are accounted for on a mark-to-market basis. Its revenue, tempered by sharply higher credit costs, jumped from $2.1 billion in last year's second quarter, to $15.8 billion.

7/17/09 Michael de la Merced, “Behind the Profits Lies Troubles for 2 Bank Giants,” (NYTimes)

While both banks [BoA and Citi] said they were again turning handsome profits, the cheery headline figures masked a sober reality: the results were driven by one-time gains — bonanzas without which both banks would have lost billions. Officials at Bank of America and Citigroup said they were preparing for a rougher second half of the year. Citigroup added nearly $4 billion to its reserves against future loan losses. …Some analysts questioned whether that would be enough.... “They haven’t been as forthright in recognizing how bad their problems are and that’s really hurting them now,” Michael Williams, an analyst at Gradient Research, said of Citigroup. The two firms benefited greatly from asset sales. Citigroup is selling off its prized Smith Barney asset-management arm to a joint venture with Morgan Stanley, reaping an $11.1 billion pretax gain in the process. Bank of America earned $5.3 billion in pretax gains by selling a portion of its stake in China Construction Bank, a major Chinese lender. ... Citigroup plans to continue selling or winding down what it considers noncore assets, having split itself internally into two divisions. Still, both banks are deeply entrenched in traditional services like consumer and commercial lending, and as unemployment and wage numbers continue to worsen and households fall behind on bills, loan and credit card losses are piling up. Small corporations are increasingly defaulting on loans as the business environment remains stagnant — as evidenced by the turmoil at the commercial lender CIT. The outlook is murkiest at Citigroup, long considered to be in the worst shape along the major banks.

7/10/09: Eric Dash, “Citi’s Management Shuffles Reflect Uncertainties” (NYTimes)

Citigroup on Monday put out what may be the least informative deal announcement ever, saying it had sold undisclosed assets to an undisclosed buyer for an undisclosed price, resulting in an undisclosed profit or loss. (Floyd Norris 8/31/09 New York Times) ... On Thursday, the bank announced its third sweep of top management in less than a year, elevating John C. Gerspach (above), the chief accounting officer, to Mr. Kelly’s post, and reeling in an experienced outsider, Eugene M. McQuade, to sharpen its focus on traditional banking in response to concerns from Washington. ... The shakeup highlights the uncertainties Citigroup still faces months after accepting three multibillion-dollar government bailouts: although its operating revenue appears to be stabilizing, the bank continues to grapple with large losses in its consumer and credit card business that are deepening with the recession and could hinder a return to profitability. ... The constant turnover in the executive suite has been troubling, analysts said. Citigroup has now had five chief financial officers in five years, and senior managers keep leaving. A Barclays Capital report of the bank found that just 17 of Citigroup’s 43 highest ranking executives in 2006 remain at the company.

June 1, 2009: Elizabeth Stanton, “GM, Citigroup Replaced in Dow by Cisco, Travelers,” (Bloomberg)

Citigroup, until last year the world’s biggest financial firm by assets, is being replaced by a company it jettisoned in 2002. ... “We were reluctant to remove Citigroup at the height of the financial frenzy, but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake,” (WSJ editor Robert) Thomson said. ... Thomson said Citigroup may be considered again after it has “refashioned itself,” according to the statement.

5/14/09: Stephen Gandel, “Inside Citi’s Stress Test: More like an F than a B+”, Time.

Dig a little deeper … and Citi's stress-test results look more like an F than the B+ the bank seemed to get. Among the 19 banks the government probed, Citi was found to have the lowest common capital ratio, which the government said was a key measure to protect against insolvency. What's more, Citi also got credit for a capital conversion it has yet to complete. Strip that out, and the amount of capital Citi needs balloons to nearly $63 billion, more than any of the other banks tested. ... Despite the relatively small $5.5 billion Citi was told to raise, the stress test deepened concerns about the bank. That means the hurdle Citi will have to jump in order to prove its management is up to the task could be higher than for the other banks. ... In the stress tests, the government said it decided to emphasize common capital because that was the measure that ultimately leads to "lowering the risk of insolvency." Citi's common capital ratio, at just 2.3%, was closer to zero than any other of the banks the government looked at. State Street's ratio at 15.5%, which was the highest of the banks, was nearly seven times greater than Citi's. Fourteen of the banks the government examined had a common capital ratio above 5%. The next lowest ratio to Citi was Wells Fargo, which had a common capital ratio of 3.1%. ... Citi's exam also included a $58 billion credit titled "Other Capital Actions." The credit is for the conversion of preferred stock that Citi says it plans to do but has not yet completed. Among the other 18 banks that were examined, only one other, Bank of America, was allowed to include a similar credit in the results of its stress test. And at $1.8 billion, BofA's credit was far less a factor in the outcome of its test than Citi's was. ... Citi's results also downplayed the damage to shareholders that will result from restoring Citi's common capital ratios. In order to put Citi back on its feet, the company's shareholders will be diluted more than any other public bank that was part of the stress test. When Citi completes its conversion of preferred shares to boost its common equity, current Citi shareholders will end up owning just 24% of the bank, down from nearly 100% today. Yes, other banks have had to issue shares in the wake of the stress test, and dilute their shareholders, but not by nearly that much.

4/20/09 Martin Weiss, “Big Bank profits are bogus! Massive public deception” Money and Markets

Citibank is the nation’s third largest, with assets of $1.2 trillion in its main banking unit. Its total credit exposure to derivatives is a bit lower than Morgan’s, at 278 percent, but still extremely high. Plus, it has other troubles, especially the surging default rates in its sprawling global portfolio of credit cards and other consumer loans. (More on these in a moment.) First, Citigroup deployed the Toxic Asset Cover-Up. By inflating the value of the bad assets on its books, it was able to beef up its after-tax profits by $413 million. Second, Citigroup used the Reserve Flim-Flam gimmick: By (a) shoving most of its bad-debt losses into last year’s fourth quarter and (b) greatly understating its likely losses in the first quarter, the bank legally rigged its books to look like it had made major improvements. Even assuming no further deterioration in its loan portfolio, I estimate this gimmick alone bloated profits by at least another $1 billion. Third, Citigroup went all out with the Great Debt Sham, marking down its own debt and creating an additional $2.7 billion in purely bogus profits from this maneuver alone.

By almost every measure, Citigroup’s first-quarter numbers are worse than they were just three months earlier and far worse than they were 12 months before. ...My forecast: Citigroup’s effort last week to twist this into an “improvement” will go down in history as one of the greatest banking deceptions of all time. ...But Citigroup is not the only one. Nearly all other major banks are suffering similar surges in their credit losses and delinquency rates. Nearly all are using at least one of the same gimmicks to bloat their first-quarter profits. And every single one is destined to see massive new losses, driving their shares to new lows and the banking system as a whole into a far more severe crisis. ...Bottom line: Rather than the private-public partnership the government has called for to address the nation’s banking woes, we see little more than private-public collusion to hide the truth from the public, paper over the problems and, ultimately, sink the banks into an even deeper hole.

4/18/09: Eric Dash, “Sharp Pencil Lets Citigroup Declare Profit,” (New York Times)

Like several other banks that reported surprisingly strong results this week, Citigroup used some creative accounting, all of it legal, to bolster its bottom line at a pivotal moment. ... Meredith Whitney, a prominent research analyst, said what banks were doing amounted to a "great whitewash". The industry's goal — and one that some policymakers share — was to create the impression that banks were stabilizing so private investors would invest in them, minimizing the need for additional taxpayer money, she said. ...Citigroup posted its first profitable quarter in 18 months, in part because of unusually strong results from its trading operations. But the long-struggling company also employed several common accounting tactics to increase its reported earnings. ...One of the maneuvers, widely used during the global financial crisis, involves the way Citigroup accounted for a decline in the value of its own debt, a move known as a credit value adjustment. The strategy added $US2.7 billion to the company's bottom line during the quarter, a figure that dwarfed Citigroup's reported net income. ...Here is how it worked: Citigroup's debt has lost value in the bond market because of concerns about the company's financial health. But under accounting rules, Citigroup was allowed to book a one-time gain approximately equivalent to that decline because, in theory, it could buy back its debt on the cheap in the open market. However, Citigroup did not actually do that. ..."It's junk income," said Jack Ciesielski, the publisher of an accounting advisory service. "They are making more money from being a lousy credit than from extending loans to good credits." ...Edward Kelly, Citigroup's financial chief, defended the practice of valuing its bonds at market prices, since it values other investments the same way. The number fluctuates from quarter to quarter. For instance, Citigroup recorded a loss in the fourth quarter of last year, when the prices of its bonds bounced back. "I think it is unfair to focus on it in isolation rather than considering it with all the factors," Mr Kelly said.

2/27/09 Shawn Tully, “Will the banks survive?” Fortune

The true basket case among the biggest banks is Citigroup. Citigroup's core businesses in areas like credit cards, branch banking, and international corporate lending are so weak that it cannot generate enough revenue to compensate for the deluge of losses. That means its puny equity capital is destined to keep shrinking or disappear entirely. Citi executives are already asking Washington for additional aid in exchange for as much as 40% of Citi's common stock. And after the stress test, it will probably need more cash, making it all but certain that the government will end up with a majority stake. ... How the government proceeds from there will say a lot about the future of the banking sector. The fear is that Washington will continue to prop up Citi and other wounded banks in their current form. The best course would be to force battered banks to sell enough assets to restore their financial health - if that's possible - or to dissolve. That would demonstrate that Washington is serious about reviving the industry - the one that is absolutely essential to the nation's economic recovery.

3/12/09 David Serchuk and Michael Maiello, “Stress Testing the Banks,” (Panel) Forbes. com

Lloyd Khaner, manager of hedge fund Khaner Capital: “While the market and the government appear to favor a private solution to this problem, I think that nationalization or quasi-nationalization (think Citigroup and Bank of America right now) of some banks will be part of the solution. To use a medical analogy that I hope is not offensive to anyone, the patients (banks) have cancer, the cancer is operable, so let's cut it out and then start the chemotherapy treatments.”

3/9/09: Justin Fox, “How Much of Citigroup could the FDIC actually take over?” Time Magazine. (Curious Capitalist blog)

FDIC chairman Sheila Bair doesn’t think a full government takeover of Citigroup and other multinational financial institutions is practical or even possible. Here are her reasons, as summarized by Pete Davis: 1. The legal authority to take over large banks does not currently extend to multinational financial conglomerates; 2. The FDIC lacks the funding to conduct such a massive bailout; 3. Other countries have regulatory oversight of these financial conglomerates too, and they may object to a U.S. takeover. This made me curious as to how much of Citigroup was a domestic commercial bank that the FDIC could take over, and how much was multinational financial stuff outside the FDIC's jurisdiction. So I took a look at the balance sheet from Citi's new 10-K. ... First, there's the division between Citigroup and Citibank. Citigroup has assets of $1.938 trillion, and liabilities of $1.797 trillion. Citibank has assets of $1.227 trillion and liabilities of $1.145 trillion. So right there, about 36% of the company's assets and liabilities are outside the bank. ... Then there's the bank itself. Its balance sheet separates deposits in U.S. offices, which are insured by the FDIC, from deposits in offices outside the U.S., which aren't. Of $755 billion in deposits, $241 billion are in the U.S. and $515 billion outside (the numbers don't add up because I'm rounding). … [I]f Citibank's overall business breaks down along domestic/foreign lines pretty much as deposits do (which probably isn't quite the case, but close enough), that gets you to $392 billion in assets and $365 billion in liabilities. That's the part of Citigroup that the FDIC has the authority to take over. I bet the FDIC could handle it, at least if it gets the new $500 billion credit line it wants from Congress. But this would leave an entity (or entities) with about $1.5 trillion in assets and $1.4 trillion in liabilities to be taken over by foreign governments or fail in pretty much the same unruly manner that Lehman Brothers did. ... To repeat: Citigroup has liabilities of $1.797 trillion. The deposits that the FDIC has some responsibility for (up to $250,000 per depositor) add up to $241 billion. So we have this reasonably sensible system for winding down troubled banks, but when it comes to the most troubled big banking company in the country, said system only covers a fraction of the overall operation. Which leads to a couple of conclusions: 1. I get why the administration is so reluctant to take over Citi completely. 2. I don't get why we all (I'm including myself in this) thought it was okay to allow the creation and growth of gigantic financial companies for which we had absolutely no plan for winding down in case of trouble.

2/25/09 Lucia Mutikani, “Bernanke says no plans to nationalize Citigroup,” Forbes.com

Federal Reserve Chairman Ben Bernanke said on Wednesday there was no plan to nationalize troubled U.S. bank Citigroup, causing stocks on Wall Street to trim losses. ... 'Nationalization to my mind is when the government seizes the bank, zeros out the shareholders and begins to manage and run the bank, and we don't plan anything like that,' Bernanke said during his semi-annual testimony to Congress.

2/20/09: Alistair Barr, “Nationalization concern dogs Citi, Bank of America,” MarketWatch (WSJ).

Senate Banking Committee Chairman Christopher Dodd said banks may have to be nationalized for a short time, according to Bloomberg News…. Banks have always operated with some level of government support, such as deposit guarantees from the Federal Deposit Insurance Corp., according to Paul McCulley, a managing director and portfolio manager at bond giant Pimco. ... "The hybrid character of banking -- always a joint venture between private capital and governmental liquidity safety nets -- is morphing more and more toward government-sponsored banking," he wrote in a note to clients Friday. ... "I know that is harsh, but sometimes the truth is harsh. Capitalism and banking may not be divorced, but certainly are engaged in some form of trial separation," he said. ... "It's not wholesale nationalization. And it's not likely to become that," McCulley added -- but that's only because the Treasury, the FDIC and the Federal Reserve "are committed to doing whatever it takes to prevent that outcome."

1/12/09: Paritosh Bansal, “DEALTALK- For Citigroup, asset sales likely to be difficult,” Reuters.

Citigroup has considered selling its Banamex Mexican banking unit and Primerica Financial Services, people close to the matter have said. The Wall Street Journal reported on Monday that CitiFinancial, international retail-brokerage operations and the private-label credit-card businesses may also be put on the block. ... But Citigroup may not find it easy to sell other assets, and like insurer American International Group Inc, it could run into problems disposing of units amid the financial crisis, investment bankers said. Few would-be buyers have enough cash, stocks are down, financing is not easily available, and the quality of financial assets is often suspect. ... So questions about the quality of Citigroup's private-label credit card portfolio in a declining economy, for instance, could potentially be addressed by structuring a transaction where payments are made over time, with the amount depending on defaults, the banker said. ... "Whether Citigroup will be better off accepting prices today or deferring sales remains to be seen," (Marshall ) Sonenshine said. "In both cases, AIG and Citi, we are looking at the slow but inevitable disaggregation of overextended financial services companies that have demonstrated an inability to manage risk."

Recent (2009) Spinoffs Suggest Company Struggling to Stay Afloat

1/1/09 “Citi to sell $ U.S. 7.56b equity units,” Reuters

Citi is seeling up to 4.9 per cent of itself for $7.5 billion to the investment arm of the Abu Dhabi government…with the investment, Abu Dhabi will be Citi’s largest shareholder.

US Senator Charles Schumer, who opposed Dubai Ports World’s plan to purchase assets at six US ports and raised questions about Borse Dubai’s plans to swap stakes with Nasdaq, said the Citi transaction will bolster the bank’s competitiveness and “help preserve New York’s status as the world’s financial center.”

1/12/09: Paritosh Bansal, “DEALTALK- For Citigroup, asset sales likely to be difficult,” Reuters Citigroup has considered selling its Banamex Mexican banking unit and Primerica Financial Services, people close to the matter have said. The Wall Street Journal reported on Monday that CitiFinancial, international retail-brokerage operations and the private-label credit-card businesses may also be put on the block. ... But Citigroup may not find it easy to sell other assets, and like insurer American International Group Inc, it could run into problems disposing of units amid the financial crisis, investment bankers said. Few would-be buyers have enough cash, stocks are down, financing is not easily available, and the quality of financial assets is often suspect.

1/13/09, David Ellis “The incredibly shrinking Citigroup,” CNNMoney.com Citigroup watchers agree that if the company is dismantled any further, international operations will be among the first to go. …The bank has already trimmed some of its foreign assets. Last month, the company completed the sale of its German retail banking operations and an India-based outsourcing business called Citigroup Global Services Limited. ... “In this environment the only thing you can sell are the good bits of the business,” said Jonathan Monk, senior portfolio manager at Aerion Fund Management in London, whose firm does not own shares of Citigroup. …maybe the biggest fear among analysts and investors is that if Citigroup sells of reliable divisions such as Smith Barney, the company risks losing a key source of profits for the future.”

1/14/09: Liz Moyer, “How to Sell Citi,” Forbes.com Pandit will find it tough to unload any of Citi’s main operations, says David Trone of Fox-Pitt Kelton, because would-be buyers are too absorbed in their own issues with asset write-do0wns and credit losses. “Few buyers are stable enough to transact big deals,” he said. “We believe that the only option to truly split up Citi is to break it into legally separate public companies and distribute the shares to current shareholders.” Other recent asset sales include CitiStreet, a joint venture with State Street, and CitiCapital, an Indian processing operation.

1/15/09: “Buyers for a Citigroup fire sale have probably been singed, too,” New York Times. Pandit is aiming to shrink Citigroup by a third to help stanch its losses and make the company easier to manage. …But finding takers for the $600 billion worth of businesses that Citigroup hopes to shed may not be easy…For instance, Citigroup is looking to sell its private-label credit card operations at a time when many consumers, particularly those with weak credit, are struggling to pay their bills.

1/16/09: “Back to Basics: Citigroup sells majority stake in Smith Barney to Morgan Stanley for $2.7 billion, looking to downsize,” International Business Times. Citigroup has agreed to merge its retail brokerage Smith Barney with Morgan Stanley in a $2.7 billion deal.

1/17/09: Bradley Keoun and Josh Fineman, “Citigroup’s Pandit Tries to Save the Little That’s Left to Lose,” Bloomberg.com Among the businesses being moved into the “non-core category of Citi Holdings are the CitiFinancial consumer-lending business and Primerica Financial Services life-insurance unit. The company’s core businesses, to be grouped under Citicorp, will include branch banking, corporate lending, transaction processing and securities underwriting and handling trades for clients.”

1/19/09: “Citigroup may sell Japanese properties,” New York Times. Just a year after plowing $15 billion into bulking up its business in Japan, Citigroup appears to be considering a sale of some of its Japanese units. Control of Nikko Cordial, the third-largest brokerage in Japan, would offer a network of about 110 branches across Japan and a well-known name to retail investors.

2/5/09: Josh Fineman and Bradley Keoun, “Citigroup Sells Mortgage Rights to Wilbur Ross Unit,” Bloomberg.com Citigroup Inc. … agreed to sell the billing-and-collections rights on 185,000 mortgages to Wilbur Ross’s American Home Mortgage Servicing Unit. … The deal (worth $1.5 billion) lets Citigroup wind down Citi Residential Lending, a unit formed in September 2007.

2/20/09: Ajay Kamalakaran, “Citi to sell part of stake in Brazil’s Redecard: report,” Reuters. Executives hope the transactions will generate up to $1 billion.

2/24/09: “A third rescue would give Washington a 40% Citigroup stake,” New York Times. Nationalization, at least a partial one, seems inevitable for the troubled financial giant. ...The government has ordered Citigroup to sell businesses, shake up its board, cut its dividend and reduce its risky trading in the markets. “What is the big deal?” said Charles Geisst, a financial historian. “They are wards of the state anyway.” “A year from now, it will be more like a large financial utility,” said Michael Mayo, a Deutsche Bank analyst. “Less risk, less leverage, less growth.”

3/6/09 Junko Fujita, “Citigroup to sell stake in Japanese broker Monex”, Reuters. Citigroup plans to sell its 26 percent stake in Japanese online broker Monex Group Inc as part of the struggling U.S. bank's efforts to raise cash, the Yomiuri newspaper reported on Friday. Citigroup is also trying to sell Nikko Cordial, a bricks-and-mortar retail broker with 109 branches across Japan. ...Net income at Monex Group, formed in 2004 through a merger of Monex Inc and Nikko Beans, fell 88 percent to 687 million yen in the nine months through December from a year earlier. ... Monex had 891,257 accounts as of December, the second highest in Japan after SBI Securities, a wholly-owned unit of SBI Holdings that had 1.82 million accounts, according to a report by JPMorgan Securities.

4/26/09: Saeed Ashar, “Goldman, Citi to sell stake in Indonesia Adaro,” Reuters. Citigroup and hedge fund Farallon are looking to sell around 17 percent of Indonesian coal producer Adaro Energy to strategic investors, sources told Reuters.

6/7/09, Michael Kitchen, “Citi May Sell Stake in India’s HDFC, Report Says,” Market Watch (LA Times)'' Citigroup may soon sell of part or all of its 11.73% stake in India’s largest mortgage lender, HDFC Bank Ltd., according the Economic Times.

6/24/09: Siobhan Chapman, “Citi ‘in talks’ to sell IT assets to TCS, Wipro,” Infoworld.com Citibank is in discussions with Indian IT firms Tata Consultancy Services (TCS) and Wipro, among others, to sell some of its internal IT platforms, according to local reports. The deal, which could be valued between $60 and $100 million, includes intellectual property (IP) used for delivering equity trading services.

7/7/09: “Citigroup To Cut Italy Workforce, Sell Private Banking Unit,” Dow Jones Newswire. Citigroup will cut its Italian workforce from 1,000 to 500 by the end of 2009 and could sell its Italian private banking unit to Banco Santander.

7/17/09 Michael de la Merced, “Behind the Profits Lies Troubles for 2 Bank Giants,” NYTimes. Citigroup is selling off its prized Smith Barney asset-management arm to a joint venture with Morgan Stanley reaping an $11.1 billion pretax gain in the process. … Citigroup plans to continue selling or winding down what it considers noncore assets, having split itself internally into two divisions. … [B]oth banks are deeply entrenched in traditional services like consumer and commercial lending, and as unemployment and wage numbers continue to worsen and households fall behind on bills, loan and credit card losses are piling up. Small corporations are increasingly defaulting on loans as the business environment remains stagnant — as evidenced by the turmoil at the commercial lender CIT. The outlook is murkiest at Citigroup, long considered to be in the worst shape along the major banks.

7/20/09 Heather Landy, “Right Direction, But Small Steps,” American Banker "We think Citi's ability to sell assets apportioned to Citi Holdings is critical to [the] success of company," Stuart Plesser, an analyst with Standard & Poor's Equity Research, wrote in a note to clients. ...Citi Holdings got a boost from the gain on the Smith Barney transaction, along with higher valuations for certain securities that are accounted for on a mark-to-market basis. Its revenue, tempered by sharply higher credit costs, jumped from $2.1 billion in last year's second quarter, to $15.8 billion.

7/30/09: Citigroup agrees to sell its 64 percent stake in Nikko Asset Management to Sumitomo Trust & Banking Co. for $795 million.

8/2/09, Michael J. Moore, “Citigroup’s Future Asset Sales Will Be Smaller, Corbat Says,” Bloomberg.com''' Michael Corbat (interim CEO of Citi Holdings) … may have a harder time selling large pieces of the unit’s consumer-lending business, which faces rising losses and delinquencies in credit cards and mortgages. ... “The longer they hold onto this stuff, the longer they are going to have to bear the brunt of this, and it’s going to eat into their capital structure,” said Alan Villalon, senior research analyst at FAF Advisors Inc. “From a shareholder perspective, you want his done as quickly as possible, but it’s a buyer’s market these days.” ...Corbat said the brokerage and asset-management pieces, which have less consumer concentration,” are ones that naturally come to the top of the list based on buyer interest.” 8/5/09 “Citi plans to sell 20 consumer finance businesses,” Reuters.

History

Citigroup is the result of the 1998 megamerger of banking giant Citicorp and insurance/brokerage giant Travelers Corp.

Citicorp had its origins in the early 19th Century in the period after the demise of the First Bank of the United States. A group led by Samuel Osgood, the nation’s first postmaster general, took over the New York City branch of the First Bank and reorganized it as the City Bank of New York in 1812. Although City Bank was designed mainly as a kind of credit union for its merchant-owners, it began doing considerable business with the federal government.

In the following decades, City Bank passed through several sets of owners, and after the Civil War it switched from a state to a national charter. It was not until the 1890s that the bank, which had taken the name National City Bank, became a major financial force, thanks to the close ties it developed with the Rockefellers and their Standard Oil empire.

By the early years of the 20th Century, National City Bank was very much a financial institution for big business. It had set up a foreign exchange department and had built a network of correspondent banks overseas to help in providing foreign trade financing for its customers. It also served as the leading depository of federal government funds.

After becoming the country’s largest single bank, National City used an affiliate to buy up shares in other banks around the country and become the largest bank holding company as well. This brought about an uproar over the creation of a "money trust," which prompted National City to reduce its domestic holdings, but not its foreign bank interests.

The creation of the Federal Reserve System reduced the dominance of National City over the country's banking system, but it freed the bank to enter new lines of business. It solicited corporate customers from around the country, moved further into investment banking, and began to build an international branch network, aided by the acquisition of a majority interest in the International Banking Corp. in 1915.

During the 1920s, National City’s growth was aided by changes in federal banking law, culminating in the McFadden Act of 1927, which allowed national banks to open new branches in their home town. By the end of 1929, National City had opened 37 branches in New York City, while its trust business was strengthened by a merger with Farmers' Loan and Trust Co.

The stock market collapse and the ensuing Depression halted the expansion of National City's financial supermarket. The bank had to write off tens of millions of dollars in loans, and its securities business all but evaporated. National City was weak, but other banks were weaker. One of these was the Bank of America. In 1931 National City purchased Bank of America's 32 branches in New York, ending up with the largest retail network in the city.

National City won praise for the Bank of America takeover, but it was soon at the receiving end of criticism over its banking practices. Congressional hearings were held, during which National City president Charles Mitchell was grilled by Senators who sought to paint the bank’s wheeling and dealing in the 1920s as a primary cause of the Crash.

The bank reforms passed during the Roosevelt Administration forced National City to liquidate its securities operation, but federal deposit insurance and other protective measures restored public confidence in the whole banking system.

Yet the major expansion of the foreign as well as domestic operations of the bank did not come until after the end of the Second World War. National City took full advantage of the new position of the United States as the pre-eminent capitalist power in the world and the dollar as the dominant currency. During the 1950s it participated in the credit boom and built up its asset base by merging with a smaller New York rival called First National Bank. The combined institution took the name First National City Bank (FNCB).

When a shortage of deposits emerged in the late 1950s, FNCB moved into the growing Eurodollar market and introduced innovative financial instruments such as the negotiable certificate of deposit. It also greatly expanded what was already the largest foreign branch system of any U.S. bank. The Overseas Division was at the time led by Walter Wriston, who would later rise to the top of the bank's executive hierarchy. Between 1960 and 1967 the bank opened some 85 new foreign branches, located everywhere from Paraguay to Singapore. Wriston was determined to make the bank indispensable to U.S. companies that were themselves branching out across the globe.

FNCB was just as active developing domestic business. It expanded its New York City branch network, led the commercial banks into the residential mortgage business, and cautiously moved into the new field of credit cards. Wriston, who rose to the presidency in 1967, took advantage of a loophole in federal law to create a one-bank holding company, which could enter new businesses and not be subject to the same body of regulations as a bank.

Once a number of banks began to take this step, Congress moved to restrict the loophole, but Wriston managed to enter fields such as equipment leasing, data processing services, mortgage banking, travel services and financial counseling. This was part of his grand plan to make FNCB into a global financial services company. Wriston emerged as a leading advocate of greater freedom for banks.

During the 1970s he was also a proponent of another controversial cause. In the wake of the sharp rises in oil prices, banks like FNCB found themselves awash with deposits from oil-producing countries. Wriston led the way in recycling these petrodollars by aggressively lending to third world countries. When concerns began to be raised about the ability of these nations to repay the debt, Wriston argued that there was nothing to worry about, since countries, unlike corporations and individuals, could not go bankrupt. Maybe so, but Wriston's bank latter felt the consequences of the spread of problem loans in the third world.

At home Citicorp (the new name adopted by FNCB's holding company in 1974) weathered the financial instability brought on by failures of such companies as Penn Central and Franklin National Bank. Citibank was doing so well compared with the rest of the industry that, according to Fortune, some officials as the Federal Reserve were referring to the bank as "Fat City."

During the early 1980s Citicorp was able to pursue its expansionary goals when regulators began to permit out-of-state commercial banks to take over ailing savings and loan associations. In 1982 Citicorp, the first bank to exploit this new policy, entered the lucrative California market by taking over Fidelity Savings of San Francisco.

Wriston's successor as the leading crusader for financial deregulation and head of Citi was was John Reed, who took over upon Wriston's retirement in 1984. The Federal Reserve rebuffed Citicorp's attempt to enter the insurance business, but Reed pushed the legal limits on commercial bank involvement in investment banking, and he got into the financial information business by taking over Quotron Systems. Citicorp, which purchased Diners Club and Carte Blanche and was one of the most aggressive issuers of Visa and MasterCard credit cards, became the leader of the "plastic" banking industry.

By 1990 Citicorp was facing a rising level of non-performing assets both at home and abroad. Reed responded to the resulting pressure by cutting the company's dividend, eliminating thousands of jobs and slashing expenses. He found a new backer: Saudi Prince Al-Waleed bin Talal, who invested $590 million in Citicorp in 1991 through the purchase of special convertible preferred stock. A few weeks later Citicorp sold another $600 million in preferred stock to a group of several dozen institutional investors.

These infusions of capital provided some stability, but Citicorp's once lofty position at the top of the U.S. banking industry continued to weaken. Mergers among its domestic rivals (such as Chemical Bank and Manufacturers Hanover Trust in New York) created more formidable rivals. On the international stage, Japanese and European banks grew larger than Citicorp in size; by 1990 it was no longer among the world's top 20 bank holding companies. A further embarrassment came in August 1991, when a leading member of Congress described Citicorp as "technically insolvent."

The merger with Travelers Group was seen by Citicorp as a way out of its difficulties, as well as a way to restore its dominance in the industry. Travelers chairman, Sanford Weill, had pieced together a financial powerhouse from brokerage houses Smith Barney and Shearson, the Travelers insurance business and later investment bank Salomon Brothers. After the merger it was clear that Weill was in charge, and Reed was left with no choice but to retire.

In 2000 Citigroup got into the subprime lending business with the acquisition of Associates First Capital, and the next year it bought New York-based European American Bank. This was followed by the purchase of Golden State Bancorp, parent of one of the country’s largest thrifts, which greatly increased Citi’s presence in California. The latter deal was financed in part from the spinoff of Traveler’s property/casualty business.

The past five or six years have been a difficult time for Citigroup. It became embroiled in the Enron and WorldCom scandals and was one of the Wall Street firms whose analysts were accused of giving favorable stock ratings to companies in order to lure their investment banking business. More recently, the company has had to write off billions of subprime mortgage-related securities and had to get $20 billion in capital infusions from sources such as the Abu Dhabi Investment Authority to shore up its balance sheet.

Other Information:

After announcing a staggering fourth-quarter (2007) loss of $9.83 billion, Citi continued to go hat-in-hand to foreign and domestic investors for an infusion of cash. The company's record loss was caused by write-downs from soured mortgage-backed securities and reserves for current and future bad credit card, auto and home loans totaling $23.2 billion. Gary L. Crittenden, the company's chief financial officer, "acknowledged the bank's losses appeared to be accelerating month after month."

Foreign Backers

Citigroup raised $7.5 billion from the Abu Dhabi Investment Authority on November 26, 2007.

On January 15, 2008, the bank announced it had obtained a total of $12.5 billion from the Government of Singapore; the Kuwait Investment Authority; Capital Research and Management; ex-CEO Sanford Weill; the New jersey Division of Investment; and Prince Alwaleed bin Talal.

Financial information

Stock ticker symbol:

Fiscal year:

2007

Fiscal year:

2007

Additional descriptive data

Link to full list of subsidiaries:

Citi subsidiaries list

Geographic breakdown of revenues (sales and profits), assets, employees:

In 2006 the company reported that its revenues broke down as follows: U.S.: 56% Asia: 15% Mexico: 10% EMEA: 13% Latin America: 4% Japan: 2%

Specialized Information

Major units/subsidiaries/affiliates:

To understand how Citi is organized, go here and here

Summary data on executive compensation and director compensation:

According to the AFLCIO's Executive Paywatch, CEO Vikram Pandit "raked in $38,237,437 in total compensation" in 2008.

New York Attorney General Andrew Cuomo reported that despite reporting massive losses in 2008 (over $27 billion - $5.59/share) and after receiving $45 billion dollars through a taxpayer-funded bailout (TARP), Citi gave out $5.33 billion in bonuses, with 738 employees receiving over $1 million. (See "No Rhyme or Reason: The 'Heads I Win, Tails You Lose' Bank Culture"). After looking at historical pay data, Cuomo concluded that "the bonus incentive system does not appear to have been tethered to any consistent principles tying compensation to performance risk metrics." Bull market compensation rose to $20-30 billion before 2007, when the recession hit and compensation pay-outs remained over $30 billion.

On March 7, 2008, the House Committee on Oversight and Government Reform examined pay practices at Citigroup and other banks. (transcript).

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