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Citigroup Inc.
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Updated: June 4, 2010
Citigroup Inc. was formed in 1998 when the company's architect and former chief, Sanford I. Weill, merged the insurance giant Travelers Group and Citicorp, then the nation's largest bank. Mr. Weill's vision was of a financial superpower dominating global markets. What followed instead were years of lackluster results, followed by a near-death experience in 2008 as its aggressive real estate bets produced tens of billions of losses. Citigroup stayed afloat only with $45 billion in federal funds. Lagging behind the rest of Wall Street, it returned to profitability in the first quarter of 2010, as its chief executive, Vikram S. Pandit, said he would move to break up the company, leaving behind a smaller but more prudent business.
Citigroup traces its corporate roots back to 1812, when it was chartered as the City Bank of New York. In the 1970s and 80s, Citibank was an aggressive leader in many aspects of banking, some of which worked (like ATM's) and some of which didn't (like big loans to Latin America). The merger with Mr. Weill's Traveler's group marked another breaking of barriers: Mr. Weill had lobbied for years for the repeal of Glass-Steagal, the Depression-era law that had separated commercial and investment banking.
The deal brought traditional banking, insurance and Wall Street businesses, like stock underwriting, under one roof. But for the first decade of its life, the company came under repeated fire from shareholders for lackluster results. Then came the housing bust. Citigroup had been an aggressive player in the securitized mortgage market, and those chickens came home to roost in tens of billions of losses. After a change in chief executives and two federal bailouts, Citigroup announced on Jan. 16, 2009, that it would split, for management purposes, into two entities, Citicorp and Citi Holdings. A third bailout in February 2009 brought the federal government's investment to $45 billion, making taxpayers the bank's largest single shareholder. Citigroup was considered to be in the worst shape among the major banks.
In December 2009, Citigroup announced a broad program that would replace the $20 billion of remaining bailout aid with money from private investors, facilitate the sale of the government's $25 billion in bank stock and allow it to wean itself off other forms of federal assistance. But Citigroup badly misread the financial markets. While the company managed to raise $20.5 billion in the stock market and forged ahead with the repayment, the sale went so poorly that anxious Treasury officials reversed course and delayed plans to start unwinding the government's stake in the company immediately.
In March 2010, Mr. Pandit told a congressional oversight panel that he was moving to break up the bank, selling 40 percent of the company, and reining in excessive risk-taking. The month ended with the Treasury saying that it planned to sell its 7.7 billion common shares in Citigroup over the course of 2010. It will gradually reduce its 27 percent ownership position through a series of stock sales to investors.
In April, still streamlining, Citigroup agreed to sell a $4.2 billion hedge fund unit, including its fund of funds business, to SkyBridge Capital. The unit to be sold was part of Citi Holdings, a collection of businesses earmarked for sale.
Later in April, after nearly two years of being drenched in red ink, Citigroup provided strong signs that it was beginning to recover as it reported a $4.4 billion profit in the first quarter of 2010. The earnings, which handily beat analyst expectations, were the result of the resurgence in the bond market and improvements in the economy, particularly overseas. Both played to Citigroup’s strengths as a major player in fixed income and emerging markets.
Creating Citigroup
Citigroup's original leadership arrangement involved an awkward relationship in which Mr. Weill and Citicorp's head, John Reed, shared the title of o-chairmen. Mr. Weill eventually pushed Mr. Reed out and installed his longtime lawyer, Charles O. Prince, as his successor.
Under Mr. Prince, Citigroup charged aggressively into the trading of mortgage-backed securities that were the hot product on Wall Street at the time. As late as the summer of 2007, as evidence mounted of a collapse in the housing market, Mr. Prince declared that the bank was "still dancing."
Not much later, the music ended, and Mr. Prince was out in November of that year as the bank posted a $5.9 billion loss.
The Financial Crisis
The loss turned out to be the first of many. Citigroup losses for 2008 totaled $27.7 billion, among the largest in corporate history.
Citigroup's first cash infusion from the government came in October 2008 in a $25 billion capital injection from the Troubled Asset Relief Program, or TARP. The bank's breakup plan came after a stern regulatory warning it received in late November 2008, when its rapidly deteriorating share price prompted the government to give it a second cash infusion, of $20 billion. Federal regulators also leaned on Citigroup to shake up its board and on Jan. 21, Richard D. Parsons, the former Time Warner chairman, was named its new chairman.
A new strategy, put into place by its chief executive, Vikram S. Pandit, focused its executives' attention on its stronger remaining businesses while winding down its money-losing operations.
Restructuring and a Greater Government Stake
By segmenting Citigroup into Citicorp and Citi Holdings, run by separate managers, Mr. Pandit seemed to be setting the stage for a spinoff of Citigroup's stronger operations, or an eventual merger. Meanwhile, reporting the two sets of businesses separately should burnish its quarterly results by making it easier for investors to focus on its healthier operations.
On Feb. 27, 2009, Citigroup and Treasury officials reached an agreement that vastly increased government ownership of Citigroup, to 36 percent. Under the deal, the Treasury Department agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock, giving taxpayers more risk, but more potential for profit if the company recovers. The government will not put in any additional money for now, but some analysts believe Citigroup may require more down the road.
Under pressure from federal regulators, the bank reorganized its management team repeatedly, naming three new chief financial officers in four months and swapping out or pushing aside other high-level executives.
On Jan. 19, 2010, the bank announced that a loss for 2009 of about $1.6 billion. Citigroup reported a $7.6 billion loss for the fourth quarter after a $10.1 billion accounting charge tied to the repayment of its bailout money erased any chance of a profit.
The weak sale in December 2009 represented a significant setback for Mr. Pandit and his efforts to free the bank from government control. It also underscored the lingering worries over Citigroup's financial health, as well as concerns that federal officials may have let Citigroup exit the bailout program too soon.
Nonetheless, Citigroup’s first-quarter results for 2010 were surprisingly strong. The bank’s $4.4 billion profit, or 15 cents a diluted share, and net revenue was up slightly, to $25.4 billion from $24.5 billion in the quarter in 2009.
Losses in Citigroup’s domestic mortgages and credit units continued to mount — albeit at a slower pace. Citigroup Holding, which contains the bulk of most-troubled mortgage and credit card assets along with businesses marked for sale, lost $876 million. Citicorp, its core businesses, gained $5.2 billion.
In June 2010, Citigroup announced that it was closing 330 branches of its consumer finance business as part of an overhaul aimed at finding a buyer for the unit. The unit, called CitiFinancial, is a part of Citi Holdings. CitiFinancial was to be split into two parts; one offering personal, home equity and refinancing loans, and the other handling loan modifications and restructuring.
Wall Street History and Profits for the Treasury
In his congressional testimony in March 2010, Mr. Pandit sought to convince committee members that Citigroup had broken with its troubled past, saying no financial institution should be too big to fail. He advocated federal supervision and called for broader powers to allow for the orderly unwinding of large financial companies that fail.
With the Treasury's announcement on March 29 that it will sell 7.7 billion shares in 2010, the Citigroup stock sale will be among the largest in Wall Street's history. It is a major step in the bank's delicate effort to sever its ties with Washington.
The government still holds other investments in Citi, however. Both the Treasury and the Federal Deposit Insurance Corporation own trust preferred shares and warrants in the bank stemming from the bailouts. Neither agency has indicated when it will sell those securities.The government profit on the sales of its shares would be on top of $8.1 billion in interest payments and other fees it has already collected, making Citigroup one of the government's most lucrative investments of the Troubled Asset Relief Program.
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