Citigroup Inc. is the largest financial services company in the world. For the years 2001 to 2004 it has alternated with General Electric in being the largest and most profitable corporation in the world, with a market cap of $240 billion and $1.5 trillion in assets. The formation of Citigroup was announced on April 7, 1998 through a merger of Citicorp and Travelers Group. It was the first US company to combine banking with insurance underwriting since the Great Depression. In 2003 it made 17.9 billion dollars in profit. The company has over 275,000 employees and over 200 million customer accounts in 100 countries.
Although one of the largest companies in the world, it only had a 5 percent global market share in its industry during 2003. The financial services industry is the largest industry (financial services S&P 500 weight is 20%), but also the most fragmented in terms of companies. Citigroup had a 10% share of the "capital markets & banking" (corporate and investment bank division) in 2003 (). The Thomson Financial League Tables tracks the underwriting and M&A segment of that in more detail.
2003 global (except Retail Banking) market share:
- Capital Mrkts. & Banking: 10%
- Consumer Finance: 6
- Private Client Services: 5
- US Retail Banking: 4
- Transaction Services: 2
- Private Bank: 2
The history of the corporation now known as Citigroup is primarily the history of its Chairman, Sandy Weill, who spun off a Consumer Finance company known as Commercial Credit from Control Data Systems, and used it to begin assembling a gigantic financial conglomerate. Consumer Finance is the business of lending to people with poor credit histories at high interest rates. Some critics have called this "predatory lending" or "loan sharking". After acquiring some small consumer finance companies, Commercial Credit acquired the much larger Primerica, and adopted the more well known Primerica name for the holding company.
Primerica was a conglomerate patterned after General Electric by the famous mutual fund manager Gerry Tsai . As GE was doing at the time, Tsai was trying to position Primerica heavily into the financial services realm, acquiring A L Williams , a controversial MLM insurance agency company, and Smith Barney, a large stock broker. He bought Smith Barney at the height of a bull market, and the resulting stock market crash put a tremendous strain on the overall company, forcing him to sell. Tsai had inserted lucrative golden parachutes into his contract agreements because he knew he was going to have to sell, which made the deal more expensive than Commercial Credit was willing to pay. Weill was eventually convinced to go ahead with the deal because he would then be able to use Primerica's Gulfstream G4 jet, something which the Commercial credit board of directors was not willing to pay for.
Upon acquiring the company in 1988, Weill spun off the non-financial businesses of the conglomerate, and attempted to institute the practice of "cross-selling " (also called "cross-servicing "), which he had used previously at American Express. Instead of the corporation owning a stock brokerage, insurance agency, and consumer finance company and letting them each run essentially separately, Weill was interested in each selling each others' products. For example, the insurance agents could sell Smith Barney mutual funds.
During this period Weill became interested in the Travelers Insurance company, which had come to Weill for a cash injection because of losses sustained during Hurricane Andrew. Weill also inserted management into that company to oversee operations and cost cutting. This eventually led to the acquisition of Travelers Insurance.
The Travelers Insurance acquisition added property and casualty, and life and annuities underwriting capabilities to the group. It also brought along the Travelers red umbrella logo, which Weill applied to all the businesses within the group. During this time Travelers acquired Shearson, which was a large stock brokerage Weill used to run. It then acquired Salomon Brothers, a famous Investment Bank. Weill attempted to negotiate a deal to merge with JP Morgan, but this was rejected because the JP Morgan CEO would have wanted to become CEO of the combined company. Weill was eventually successful at convincing John Reed, the CEO of Citicorp, to merge.
Citicorp was the descendant of City National Bank, founded in New York. It was one of the oldest Banks in the United States, and had the largest international branch presence of any United States headquartered bank. It specialized in large corporate banking, and was one of the largest banks in the United States at the time. The CEO at the time of the merger, John Reed, was instrumental in pushing for the acceptance and use of ATM machines, and had seen the company through a financially bleak period when it had many problems with international loans defaulting. Reed had been trying to change the corporate culture of Citicorp, for example by hiring top executives from consumer product companies, not banks. Reed felt that the chance to merge with the Travelers Group would help effect change in this area.
The merger took place in 1998. This was illegal because the remaining provisions of the Glass-Steagall Act (legislation stemming from the United States' Great Depression era) did not allow banks to merge with insurance underwriters. Chuck Prince and his team of lawyers, studying the law, found that the Federal Reserve could grant the companies a two year trial period before they would have to divest the insurance underwriting businesss. The CEOs thought that they could change the law before the expiration date. The law was finally changed in 1999 when Glass-Steagall was invalidated by the passing of the Gramm-Leach-Bliley Financial Services Modernization Act.
Post merger history
In order to convince Citicorp to merge, Weill proposed a structure of Co-CEO's, consisting of himself and John Reed. This strategy was denounced immediately by many in the press and many research analysts, as being unworkable. Conflicts within the company did eventually lead to Reed being fired. In addition, three co-CEO's (Jamie Dimon and Deryck Maughnan from Travelers, and Victor Menzes from Citicorp) were placed in charge of the corporate and investment bank, while two co-CEO's were placed in charge of the consumer group. This was dubbed "The noah's ark school of management" by the press, and did not last long.
The Traveler's management attempted to impliment its culture of cost cutting and cross selling into Citigroup. Citibank retail bankers were instructed to get securities and insurance licensed to sell mutual funds and annuities. US retail banking however, never became a major focus for the company. Todd Thompson, CFO, explained that "the retail branches are mostly a deposit gathering operation used to fund other, higher return, areas". At present time, its different consumer divisions are not as integrated as other financial institutions, with each one primarily running as a stand-alone monoline.
The corporate and investment had a more difficult time integrating. There was infighting between corporate bankers and investment bankers, as to who would be the primary relationship point of contact with a customer. Conflicts between the tri-CEO's lead to the ouster of Jamie Dimon.
The company soon acquired Associates First Capital, the largest consumer finance company, and Banamex, the largest bank in Mexico. This was contraversial in Mexico, at the time the press there were worried that Mexico's largest banks would all become "branch offices for foreign competitors". Bombs exploded in branches in protest.
The company spun off its Travelers Property and Casualty insurance underwriting business because it caused a drag on the Citigroup stock price due to its earnings being more seasonal and vunerable to large disasters. It was also difficult to sell this kind of insurance directly to customers since most industrial customers are accustomed to purchasing insurance through a broker. Citigroup retained the life insurance and annuities underwriting business. However by 2005, Citigroup decided to sell its life insurance underwriting division to MetLife for the same reasons. Citigroup still heavily sells all forms of insurance, but it does no longer manufactures (i.e. underwrites) insurance. Citigroup does today, however, retain Travelers' signature red umbrella logo as its own.
Citigroup has a culture of corruption and has been involved with many scandals. Some of these are in specific businesses and are shared amongst other businesses within that industry, while some result from a conflict or collusion between different divisions of Citigroup. This second type of scandal have caused some to call into question the "financial supermarket" aspect of Citigroup.
The first major scandal of Citigroup was when it acquired the largest Consumer Finance company Associates First Capital in 2000. Associates was already under attack for what were called "predatory lending" practices, specifically the selling of single premium credit insurance. Upon being acquired the same attacks were turned towards Citigroup, who stopped the practice of selling the single premium credit insurance, and instituted other changes. In the end the company was fined for the former practices. The present combined consumer finance division, called CitiFinancial continues to share in the general controversy over consumer finance. In May 2004, CitiFinancial was fined $70 million by the U.S. Federal Reserve, for continued predatory lending (described in detail in Inner City Press' Weekly Citigroup Watch Report).
The next major scandal was the accusation that Citigroup and other Investment Banks had stuck secret deals with companies that said that the Bank's Stock Research division would rate that company a "Buy" if it would do Investment Banking with that division. Implicated by that scandal was analyst Jack Grubman . This scandal led to some wondering if the financial services conglomerate concept would lead to conflicts of interest such as this. The premise of this question however, is considered by some to be somewhat flawed insofar as Research companies have almost always been owned by Investment Banks, even before the repeal of Glass-Steagal. The firm eventually payed the largest fine in the "global settlement" with the state, resulting from conflicts of interest between research and investment banking at Salomon Smith Barney.
To help put investors at ease, Citigroup hired one of its most outspoken critics, Sallie Krawcheck, to head Smith Barney (now a pure stock brokerage division), which was separated from the investment bank within the corporate structure. It dropped the "Salomon" from the name, as this name historically denoted investment banking.
Primerica is now the brand name given to Citigroups Multi-Level-Marketing insurance and other financial services sales force. This division was formerly known as A L Williams. Critics call it a cult, or criticize its sales practices. Historically A L Williams was the major force in popularizing Term Life Insurance . See the Primerica article for more details.
Enron, and Parmalat
Citigroup was also accused of helping Enron and other companies hide their losses by loaning money to those companies in a special way that would reduce liabilities visible on the balance sheet. In May 2004 the company agreed to pay $2.65 billion, or $1.64 billion after tax , to settle a class action lawsuit brought on behalf of purchasers of WorldCom securities.
Japan Private Banking Scandal Citigroup removed three senior executives in the wake of a banking scandal in Japan. The scandal involved the Private Bank, the division that deals with very wealthy customers. It was alleged that the Private Bank failed to follow certain anti-money laundering procedures, that it used deceptive sales tactics, and that it assisted a customer in doing transactions which disrupted the financial markets or were fraudulent. This caused the Japan regulators to shut down the Private Bank.
Deryck Maughan , a Citigroup vice chairman and head of Citigroup International, Thomas W. Jones , chairman and chief executive of the global investment management division, and Peter K. Scaturro , head of Citi's private bank, will be leaving the company. Maughan had been with Citigroup and its predecessor Salomon Brothers since 1983. Jones and Scaturro were both members of the Citigroup management committee. A memo from Chief Executive Charles Prince said that Citigroup President Robert B. Willumstad would take charge of the businesses run by the three departing executives.
Citigroup Proprietary Government Bond Trading Scandal Citigroup was critized by the European Financial Governmence institutes for disrupting the European bond market by rapidly selling €11 billion worth of bonds on August 2, 2004 on the MTS Group trading platform, driving down the price, and then buying it back at cheaper prices. An investigation is pending. Relatedly, the U.S. Federal Reserve refused to rule on Citigroup's application to acquire First American Bank in Texas, from September 2004 through March 2005 (described in detail in Inner City Press' Weekly Citigroup Watch Report).
Improper Assessment of Late Fees Also in 2001 Citibank settled a lawsuit for improperly asessing late fees. The class action lawsuit was for 45 million dollars. Following this Citibank lobbied in Congress (who they give huge donations too), to pass legislation that would limit class action lawsuits to 5 million dollars unless they were initiated on a federal level. Many consumer advocate websites report that Citibank is still improperly accessing late fees.
Citigroup and its predecessor companies use the "diversified financial services business model" first invented by Prudential in the late seventies. Simply put, this model attempts to conglomerate many types of finance companies, such as stock brokers, banks, insurance companies, and others. This is done because each of those businesses do better or worse at different times of the business cycle, and so owning all of them balances things out and creates in theory less earnings volatility. This is also done because customers usually use many different kinds of financial products and attempting to convince them to use more products from the same company sells more products more cheaply, compared to those separate companies strictly selling products on their own.
During the era of Sandy Weill, much of Citigroup and predecessor's efforts were focused on aquistisions. Much of the efforts were focused in the stock brokerage and investment banking areas, and most of the acquisitions were of companies which had recently had problems and were selling at a low price. After the acquisition, the management team would usually engage in aggressive cost cutting to build up cash for the next deal.
The present CEO, Chuck Prince, has said "the day of the transformative deal (meger) is over". This is thought to refer to mega deals like the Citicorp/Travelers merger, as Citigroup continues to acquire. The focus of the company though, is said to have changed to organic revenue growth, that is selling more products instead of focusing on acquisitions and cost cutting alone to increase profit.
Citigroup's 2005 sale of the remainder of Travelers Insurance to MetLife was described by the press as the death knell of the bank-insurance cross-selling model. This is a false analysis though as citigroup continues to cross sell insurance, it just doesn't underwrite it.
Its most famous office building is the Citigroup Center, a diagonal-roof skyscraper located in New York City's Midtown Manhattan, although it barely has any office presence in there as its headquarters moved across the block to an anonymous building on 399 Park Avenue (the site of the original location of the City National Bank). Smith Barney leases a building in the Tribeca neighborhood in Manhattan, the former headquarters of the Travelers Group and famous for its red umbrella sculpture. The new headquarters was outfitted with nine luxury dining rooms, with a team of private chefs preparing a different menu for each day. The management team is on the third and fourth floors above a Citibank branch.
Citigroup is divided into different divisions, each which contain many areas of business. The main divisions are Global Consumer, Global Corporate and Investment Bank, Private Client Services, and Global Investment management.
The Global Consumer Group is comprised of three sub-divisions, Cards (credit cards), Consumer Finance, and Retail Banking . The credit card business on average delivers about 40% of the profits of this group. Citigroup is the largest provider of credit cards in the world, a position long held by Citicorp, and increased by many acquisitions of card portfolios. It provides credit cards in many countries even where it doesn't have branches, and advertises directly on TV and by direct mail. The Consumer Finance Division (called Citifinancial) accounts for about 20% of the consumer group's profits. This division engages in the controversial practice of high interest rate lending to people with bad credit histories, called "loan sharking" or "predatory lending" by critics. Although this was the core of the corporation from which other divisions were acquired, most of the size and stores of this division came from the takeover of Associates First Capital . Citifinancial is now the largest consumer finance company in the world.
The final division is the retail bank. This division consists of the normal retail branch system that banks are most known for. This goes by the brand name "Citibank". Citibank is about the fifth largest retail bank in the United States, and it has branches in countries throughout the world. The biggest part of retail banking however is Banamex, the largest bank in Mexico, which Citigroup owns. Overall the Global Consumer group contributes more than half of all the profits for Citigroup. If it were a separate company, it would still be in the top ten most profitable companies in the world.
The Global Corporate and Investment bank consists of two subdivisions, capital markets & banking, and global transaction services. This division essentially handles large corporate lending, and Investment Banking. Citigroup's investment bank is one of the largest, frequently topping many League Tables . It does not engage in as much proprietary trading (stock and bond speculation) as do other investment banks. Most of the largest scandals of Citigroup have been from this division.
Investment Management is composed of businesses whose outcome depends strongly on the investment decisions of the managers of that business. This division is also probably organized to divide up the labor equally amongst executive management. Included in this group is Life Insurance & Annuities (Travelers Insurance), Asset Management (mutual funds), and the Private Bank. Life Insurance & Annuities goes under the brand name Travelers Insurance, and sells those services wholesale through insurance agents and brokers around the world. Asset Management mutual funds are also sold primarily wholesale, under the brand names Salomon Brothers and Smith Barney. The Private Bank is a high end boutique bank designed to distribute financial products to the very wealthy. Citigroup runs the Private Bank in many countries where it doesn't have normal bank branches.
The final division is called Private Client Services, a euphemism for a stock brokerage . This division is branded "Smith Barney", and is the second largest stock broker in the world. It usually contributes however, only around 6% of Citigroup's profits.
Citibank, provinding consumer banking products.
- Citimortage , Mortgage Lender
Citifinancial, Consumer finance aka sub-prime lending
Diner's Club International, credit cards.
- Grupo Financiero Banamex , largest Mexico bank
Primerica, engages in multi-level-marketing of financial services
SmithBarney, investment services , both retail full service brokerage, private client services , and formerly the brand name used for the Investment bank
- Travelers Life & Annuity , insurance services.
- City Bank of New York 1812 (founded)
- Farmers’ Fire Insurance Loan Company 1822
- Merchants Exchange Bank in the City of New York 1829
- First National Bank of the City of New York 1863
- The Travelers Life and Accident Insurance Company 1864
Kuhn, Loeb & Co. 1867
- Charles D. Barney & Co. 1873
- Ferdinand Salomon 1880
- Hayden Stone & Co. 1892
- Rhoades & Co. 1898
- Shearson Hammill & Co. 1902
- E.F. Hutton & Co. 1904
- Commercial Credit 1912
- Carter, Berlind, Potoma & Weill 1960
See SEC - Company Information: CITIGROUP INC
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