Citigroup

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. FNCB, which changed its name to 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 position as the leading crusader for financial deregulation was assumed--though with a somewhat more subdued manner--by John Reed, who took over Citicorp 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" industry.

At the beginning of the 1990s one thing that Citicorp could not be indifferent to was the deterioration of the bank's financial condition. Although Reed had bitten the bullet on the third world debt problem in 1987 by adding $3 billion to the bank's loan loss reserves, by 1990 Citicorp was facing a rising level of non-performing assets both at home and abroad.

Reed responded to the pressure by cutting the company's dividend, eliminating thousands of jobs and slashing expenses. Reed also began scouring the world for several billion dollars in capital. He found one taker in 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 measure of 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 continued to zoom past 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, but Travelers was not a stodgy insurance carrier. Its 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.