Chapter 1.3. Citigroup Inc
Citigroup, the entity as it exists now, emerged as the result of the merger between Citicorp and Travelers Group on 8th October 1998. The idea originated from Travelers Group CEO Sanford Weill, who sold the idea to Citicorp head John Reed.
It became possible in advance of the Gramm-Leach-Bliley act that deregulated the financial service industry in the United States and repealed the Glass-Steagall act. The latter, enacted in 1932, separated the activities of commercial banks and securities firms and prohibited commercial banks from owning brokerages. From that moment on, when the restriction were dropped, Citigroup was given a green light to build a full financial house and in less than one decade became the world’s biggest bank.
In the first year after the merger, US economy slowed down, and unrest of foreign markets brought substantial losses to both parties. Between 1998 and 1999, the company laid off more than ten thousands employees.
In 2000 Mr Reed retired and Mr Weill assumed the position CEO, which was previously shared between both of them. In this year, Citigroup acquired the investment banking business from Schroders. It also bought sub-prime lender Associates First Capital and consolidated it to its lending unit CitiFinancials. Nevertheless, This deal got attention of regulators on the Citigroup’s lending tactics.
In 2001, Citigroup became the owner of European American bank, which it purchased from ABN-AMRO. It also bought Grupo Financiero Banamex, one of the biggest Mexican consumer and corporate financial institutions. This deal was the biggest American merger in Mexico ever. Banamex’s main subsidiary, Banco Nacional de Mexico had 14 hundred branches offering services ranging from insurance to pension plans. In credit card business, Banamex owned almost 40% of Mexican market share.
In 2002, Citigroup acquired Golden State Bancorp, that time the owner of Cal Fed, third biggest US saving bank. In the same year, Citigroup was also penalised for about $215 millions. The regulators accused the company for Associates First Capital making its customers unwittingly purchase credit insurance by automatically billing for this service.
Then came year 2003 and Enron case. Regulators accused Citigroup of issuing short-term loans that were possibly used by Enron to mask its debt offshore and play with cash flow figures. Citigroup did not comment on these allegations, however it agreed to pay $100 million to victims who lost money because of Enron’s collapse.
In the same year, the SEC ruled that Citigroup issued favourable stocks ratings to companies in exchange for contracts for its investment banking divisions. Citigroup’s analyst Jack Grubman was fined $15 millions for overrating the stocks and was banned for his lifetime to work in the securities industry. Citigroup suffered much higher penalties of $400 millions in fines and $1.4 billion went as compensation to 10 brokerage firms. As the result of this scandal, Citigroup agreed to separate its rating and corporate advisory business by creating a retail brokerage and equity research division called Smith Barney and introducing a “Chinese Wall” between rating analysts and investment bankers.
Despite of these facts, Citigroup ended 2003 with $18 billion of net profits, one of the record ones in the whole history of US corporations. By having achieved this, the godfather of Citigroup, Sandy Weill, step down from his CEO position and handed it over to the head of its investment bank Chuck Prince.
In the following two years, again, Citigroup enjoyed record earnings and the status of the biggest financial institution in the whole world. Finally, in 2006 Mr Weill completely retired from Citigroup as its chairman and Mr Prince fully assumed the flagship.