They call them the Big Four in American banking: JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. When you talk about banks that are “too big to fail,” this is exactly who you’re dealing with; banks this size work with world governments and giant business conglomerates. They’ll get bailed out when necessary.
That’s exactly what happened to Citigroup in 2008. Thanks to the subprime mortgage crisis, and the failed takeover of Nikko Asset Management, Citigroup was declared insolvent that November. Their market cap plunged from $300 billion in 2006 to around $6 billion, prompting the federal government to step in and make up the difference in loans and securities – plus $20 billion in direct investment and another $20 billion in Troubled Asset Relief Program (TARP) funds.
It wasn’t until 2010 that Citigroup became profitable again. The decade-plus since then has been a laundry list of problems for Citi, but finally, there appears to be some light at the end of the tunnel; shares in Citigroup Inc. were trading at US$65.14 on July 15, up fairly steadily from $38.34 last October.
Is Citigroup truly on the good foot now? Let’s dig deep, peel back the layers, and see what the business odds might have in store for America’s third-largest banking company.
Who Is Citigroup?
Citigroup Inc. traces its roots back to the 1812 launch of City Bank of New York, although the company proper was formed in 1998 by the merger of Citicorp and Travelers, creating what at the time was the world’s largest financial institution. Citicorp was the holding company for Citibank; Travelers (short for The Travelers Companies) was founded as Saint Paul Fire and Marine Insurance Co. in 1853, and was spun off in 2002 following this merger.
Citigroup has weathered pretty much every financial storm over the past 200 years, from the Panic of 1837 to the Great Recession of 2007-09. After becoming the largest bank in New York following the Panic of 1893, then the largest bank in the U.S. two years later, Citigroup opened its first overseas branch in Buenos Aires in 1914. By 1929, they had become the largest bank in the world, thanks in no small part to debts incurred by Haiti during the American occupation from 1915 to 1934.
Where Did Citigroup Go Wrong?
It’s all about risk versus reward. For decades now, Citigroup has been criticized for its poor risk management, which came to a head after the subprime mortgage crisis. By 2007, over 80% of Citigroup’s mortgages were considered defective, up from 60% the year before.
The bank tried to recover by slashing 17,000 jobs, then another 23,000 in 2008, but otherwise stuck their head in the sand, refusing to acknowledge how risky their assets were. Another 52,000 cuts were made after Citigroup became insolvent; company stock fell from $244 billion in value to $20.5 billion, and then the Fed stepped in to make things right.
There’s still some work to do on that front. Citigroup continues to make colossal errors, like the billion-dollar “fat-finger” error in 2021 that saw the bank accidentally wire $900 million instead of $8 million while acting as a loan agent for cosmetics company Revlon. About $500 million of that amount went up in smoke.
Where Did Citigroup Get It Right?
It looks like their March 2021 hire of Jane Fraser as CEO might have been an accidental masterstroke. Seen at the time as a “glass cliff” hire that made Fraser the first woman ever to run a Wall Street bank, Fraser’s September 2023 plan to reorganize Citigroup has helped trim their bloated bureaucracy and make their business more transparent.
The risk management part remains an issue. Citi was fined a total of $135.6 million last week by the Fed and the Office of the Comptroller of the Currency, for failure to hew to a 2020 consent order regarding their risk control problems. That’s after paying $400 million when the order was first issued.
US regulators fine Citi $136 million for failing to fix longstanding data issues https://t.co/hZW8V3cWZz pic.twitter.com/auHaH3LU9W
— Reuters Business (@ReutersBiz) July 11, 2024
Fraser admits that Citigroup has been a bit slow to adapt on the risk front, but otherwise, her efforts have made Citi stock more profitable this year than both JPMorgan Chase and Bank of America. Place your bets and investments accordingly.
