Impact on Citibank

Categories: BankBankingBusiness

Citibank – the largest commercial bank in the United States

Citibank, along with majors like Lehman Brothers, Merrill Lynch, Morgan Stanley, AIG, Fannie Mae and Fannie Mac, has been devastated by the deflation in the housing market.

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Known for its aggressive growth strategies, Citi, the largest commercial bank in the United States, had taken enormous exposure in the real estate boom through off balance sheet investment entities.

These affiliated but off balance sheet entities, which include structured investment vehicles (SIVs), collateralized debt obligations (CDOs) and conduits had invested heavily in sub-prime and other home mortgage securities, have lost much of their value during the progression of the crisis (Hoar, 2008).

The bank had tens of billions of dollars in such off-balance-sheet entities that are nominally independent but are in fact closely tied to the bank. Estimates put these figures at the beginning of the crisis at USD 83 billion in seven SIVs, USD 41 billion in CDOs, and USD 73 billion in conduits.

It has most heavily employed SIVs, CDOs, and conduits to gamble on the housing market. Such entities allowed for the making of significant sums of money by a thin and restricted layer of bank executives, investors, and rating agencies, who profited off the need for housing of the working population, including its poorest segments; many of whom did not have the monetary resources to give practical shape to their dreams. The mechanism, which continued to work as long as the market went up, was built on shaky foundations and began to disintegrate with market deflation (Hoar, 2008).

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The collapse of the market

Whilst the collapse of the market has led to the revelation of these speculative investment entities, which were structured primarily to disguise the risks assumed by the bank, the bank has also taken a severe hit by billions of dollars in direct lending related with real estate (Hoar, 2008). In addition to the huge problems associated with its off-balance-sheet entities and direct mortgage defaults, the banking group also faces significant risks from credit card and other debt defaults, as the crisis continues to envelope greater numbers of Americans

A few decades back, American banks used to work on debt leverage, (total liabilities divided by shareholders equity) which used to range from 6 to 8 times of that of equity. Leverage figures have since then continued to increase dramatically, fuelled by the banking industry’s insatiable urge to grow continuously. Leverage crossed 10 in the 1990s, and to more than 20 times during the heady years of the real estate boom. The challenges that Citi is facing today is obviously an outcome of the astonishing amount of speculation that was being undertaken by American banks.

The revocation of the Glass-Steagall Act

The deregulation of the financial sector and the revocation of the Glass-Steagall Act in 1999, broke barriers between investment and commercial banking, encouraged the closer integration of the banking system with Wall Street and gave rise to conglomerates like Citigroup possible (Engdahl, 2008). Most of the ways devised by banks like Citi, to get around government regulations on capitalization ratios, occurred after the repealing of the Glass-Steagall Act. At Citibank, where leverage needed to be controlled even more strictly because of its much larger size, the management allowed it to grow from 12.3 times in 2005 to more than 18 times in 2007.

Whilst this picture is by itself controllable, analysts feel that if intangible assets and goodwill, the worth of which may be debatable in present circumstances, are removed from the computation of equity, the leverage goes up to a phenomenal +41, implying that tangible equity to tangible assets is as low as 2.3 %. James Turk, founder of reported (2008) that this position, which existed in December 2007, was practically equal to a condition of insolvency.

“This 2.3% number is vitally important to determine whether Citi is solvent. And here is where we get into the inevitable subjective judgements. The “invisibility cloak” that commercial banks use to conceal assets makes it impossible to determine the quality of those assets. But there is one inescapable cold, hard fact. Given that Citi’s tangible equity to tangible assets is 2.3%, we know that if the value of those assets is 2.3% less than their reported value, then Citi is insolvent. Citi may continue operating because it is liquid, but it would be operating as an insolvent.” (Turk, 2008)

It needs to be understood that this condition was one that existed a year ago and the situation has worsened sharply since then with billions of dollars of losses being reported every quarter. The Citi share has also been rapidly going down, touching a low of less than 5 USD in the third week of November, 2008. The CEO, Vikram Pandit, who joined the bank a year ago with huge expectations from Wall Street, is himself under threat and the media is rife with speculation about his proposed ouster.

“Vikram Pandit may thank the TINA (There Is No Alternative) factor for still being in job as Citigroup CEO, as the US government reportedly did not push for his ouster in its rescue package for the troubled bank partly because there was no “obvious” successor. In the run-up to the federal rescue plan that guaranteed 306 billion dollars of toxic assets of Citi and multi-billion dollar capital infusion in lieu of shares, media was rife with the reports that Pandit was on the verge of losing his job as he had failed to deliver on the mandate to revive the bank.” (Vikram Pandit … 2008)

The Future With the financial crisis

The Future With the financial crisis being the most debated and discussed topic of current times, the most important question on the issue is the survival or disintegration of Citigroup. Will it survive and grow or will it follow the route taken by Bear Sterns? Whilst such a question would have been preposterous even towards the beginning of 2007, this is not the first time the bank is facing a crisis of mammoth proportions.

The banking crisis of 1991, involving a Savings and Loan crisis and a subsequent crash of the real estate market, was potentially ruinous for Citigroup, the bank being saved only by a USD 590 million investment by Saudi Prince Al-Waleed bin Talal (Engdahl, 2008). The crisis being far bigger this time, analysts estimate that Citi will need more than 50 billion USD (i. e. it will have to double its share capital) to bring its leverage back to about 4.5. Speculation also abounds about the possibility of the bank being broken up into different entities or being bought up by other institutions, maybe Bank of America.

Citi, on its own, has announced its intention of reducing its staff strength by nearly 14 %, i. e. about 53,000 employees. New hiring, as per the bank website is at around 100 advertised jobs in a few locations, is down to a trickle. “Citibank is slashing 50,000 more jobs all over the world. Vikram Pandit, Citigroup Chief Executive made this announcement at a meeting of employees in London. Citibank has already axed 23,000 jobs this year in an attempt to offset losses of about USD 20 billion. Citigroup, which has over 3 lakh employees, plans to cut 14% of its workforce. ” (Citibank …, 2008)

Citi’s announcement to sack one-sixth of its employees in early November, 2008 elicited hardly any reaction from the market and its share price kept moving south all through the month. Most observers believe that the bank by itself will be unable to extricate itself from its self created mess and will need external help. The US government, which had previously announced a USD 800 billion plan to bail out the American financial sector, has announced further plans that specifically aim to salvage Citi. Both of these plans should directly and indirectly help Citi to regain some lost ground.

The Emergency Economic Stabilization Act

Taking up the general bailout plan first for discussion first, President Bush’s administration proposed the enactment of the Emergency Economic Stabilization Act of 2008, wherein the United States Treasury becomes authorized to spend up to USD 700 billion dollars to purchase distressed assets like mortgage backed securities and provide capital infusions to banks in severe difficulty, the rationale behind the decision being the need to stabilize the economy, improve liquidity, restore investor confidence, and safeguard the GDP from plunging drastically (Herszenhorn, 2008).

Whilst the bill has met with support and opposition, it has in effect arranged a blanket source of financial relief for beleaguered banks and financial institutions, which was previously given in a selective manner; provided to Fannie May and Fannie Mac and refused to Lehman Brothers. Apart from the USD 700 billion plan, which will hopefully help in stabilizing the US financial sector, the US Federal Reserve unveiled a specific plan for Citi on November 23, 2008 to help it overcome the crisis; its provisions being as under:

  • The plan proposed to support a gigantic financial organization whose disintegration would inflict destruction on the already crippled financial system and the U. S. economy. It aims to arrest a collapse of confidence in the company, whose shares have crashed substantially in November 2008 on apprehensions about its financial condition.
  • The plan included taking a USD 20 billion stake in Citigroup, as well as guaranteeing hundreds of billions of dollars in perilous assets.
  • The infusion of USD 20 billion by the Treasury Department will come from the USD 700 billion financial bailout package for the banking system. This injection will be in addition to the earlier support of USD 25 billion to Citigroup, in return of which the government obtained an ownership stake in the organization. • The Treasury and the FDIC will also guarantee against the “possibility of unusually large losses” up to USD 306 billion of risky loans and securities, which are backed by commercial and residential mortgages.
  • Citigroup will assume the first USD 29 billion in losses on the risky pool of assets.
  • Beyond that amount, the government shall absorb 90 percent of the remaining losses, and Citigroup 10 percent.
  • Money from the $700 billion bailout and funds from the FDIC would cover the government’s segment of potential losses. The Federal Reserve would back the remaining assets with a loan to Citigroup. • Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years without obtaining permission from three federal agencies.
  • Restrictions have also been placed on executive compensation, including bonuses. (Citibank Bailout …2008)

Things are finally turning around for Citigroup after a torrid year of continual losses and share hammering. With Uncle Sam going out of his way to support the group, like he did with Fannie May and Fannie Mac, it is unlikely that Citi will collapse, and will over time regain its lost stability, albeit at the cost of lost reputation and the ignominy of forfeiture of working independence.

Even Vikram Pandit, the CEO of Citi appears to have saved his job, though the same cannot be said of the 50,000 employees who are being sacked because of the results of actions with which they had little association. “Vikram Pandit may thank the TINA (There Is No Alternative) factor for still being in job as Citigroup CEO, as the US government reportedly did not push for his ouster in its rescue package for the troubled bank partly because there was no “obvious” successor.

A day after the mega rescue plan, it has now come out that the authorities discussed whether to replace Pandit as Citi CEO, but there was an disagreement over the issue. Separately, British daily the Financial Times reported that the US regulators during their talks have decided against Pandit’s replacement as they could not find an obvious successor for him. Further the WSJ report stated that, Pandit may not be in an immediate danger of losing his job as the government did not push for his ouster as part of the agreement, as it did with the CEO of American International Group when it bailed out that company.” (Citibank …, 2008)


Whilst the future of Citigroup again looks secure, it is obvious that the last card is yet to be played. With the US government stepping in to rescue its shattered financial institutions, Critics are apprehensive, perhaps rightly so that such actions could jeopardize billions of dollars collected from taxes and moreover encourage financial companies to engage in excessive risk in the belief that the government will bail them out of when they dirty their clothes.

Economists from the developing world are also asking why such double standards emerge when the litmus needs to be tested, and why the US government, which until now has insisted that developing world governments should strictly avoid supporting business, is now showing feet of clay when confronted by a crisis in its own house. Citigroup has brought the crisis upon itself; its executives have taken great risks, possibly egged on by the lure of huge performance bonuses, thereby putting not just their bank hundreds of thousands of Americans and the global economy at risk.

The main lesson to be learnt from the episode is the impossibility of neo liberalism to succeed without strict regulation.


  1. “‘$300Bn More in Losses to Come from Subprime Crisis'” The Evening Standard (London, England) 24 Jan. 2008
  2. “Analyst Admits ‘It Looks like We’re in Recession’ USA. ” The Birmingham Post (England) 5 Apr. 2008
  3. “Breaking Glass-Steagall” The Nation 15 Nov. 1999
  4. “Business Options; Financial Crisis Domino” Manila Bulletin 26 Feb. 2008
  5. “Citigroup bailout: Feds offer massive rescue package to financial giant” New York Times 23 November 2008
  6. “Fed to the Rescue in Subprime Crisis” USA Today (Society for the Advancement of Education) Nov. 2007
  7. “Citibank to slash 50,000 jobs more globally”, Moneycontrol November 18 2008
  8. Engdahl, F, “Financial Crisis: Asset Securitization– The Last Tango”, Global Researcher February 2008

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Impact on Citibank. (2020, Jun 02). Retrieved from

Impact on Citibank

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