Can a Serially Troubled Wall Street Bank Grow By Shrinking?

By Pam Martens and Russ Martens: January 10, 2018

Citigroup's Magic Hat TrickOn Monday, Institutional Investor’s Jonathan Kandell wrote a fascinating profile of Citigroup. He tried in every conceivable way to be kind to the company but the facts just kept getting in his way.

Interestingly, the official name of the behemoth bank holding company, Citigroup, appears just once in the article. Its homey, cuddly moniker, “Citi,” appears 84 times. As the bank’s public relations legions attempt to erase the stain of Citigroup’s performance during the 2008 financial crisis and its Frankenbank birth in 1998 in violation of the Glass-Steagall Act and Bank Holding Act of 1956, changing the bank’s name is likely in the cards.

When Sandy Weill and John Reed proposed to merge the disparate parts of Weill’s Travelers Group, which owned an insurance firm (Travelers), investment bank (Salomon Brothers) and retail brokerage (Smith Barney) with Reed’s Citicorp, parent of the FDIC insured Citibank in 1998 to form Citigroup, it forced the hand of Congress to repeal the consumer-protection legislation known as the Glass-Steagall Act the following year. That 1933 legislation barred Wall Street’s brokerage and investment banks from combining with FDIC insured banks to prevent a replay of the 1929 Wall Street crash and Great Depression.

The Citigroup merger also forced the gutting of the provision in the Bank Holding Company Act of 1956 that prohibited insurance companies from merging with insured depository banks. Removing those necessary banking walls proved lethal to the U.S. taxpayer, the U.S. economy, the U.S. housing market and the U.S. stock market. Just nine years after the repeal of Glass-Steagall, Citigroup was on taxpayer life support, receiving the largest bailout in U.S. history. The U.S. Treasury infused $45 billion in capital into Citigroup; the Federal government guaranteed over $300 billion of Citigroup’s assets; the Federal Deposit Insurance Corporation (FDIC) guaranteed $5.75 billion of its senior unsecured debt and $26 billion of its commercial paper and interbank deposits; the Federal Reserve secretly funneled $2.5 trillion in almost zero-interest loans to units of Citigroup between 2007 and 2010.

And that was what happened at just one Frankenbank. Bear Stearns collapsed and was absorbed by JPMorgan Chase with Federal support. Wachovia was in a state of collapse and was taken over by Wells Fargo. The century old Merrill Lynch teetered into the arms of Bank of America while Lehman Brothers filed bankruptcy. AIG, the giant insurer, was quietly backing tens of billions of dollars of credit default swaps at the Wall Street banks in 2008 and needed a $185 billion taxpayer bailout. We could go on.

There are two things notable about the Institutional Investor article. First, the title “Can Citi Return to Its Pre-Crisis Glory?” begs the question: did Citigroup ever have “glory” days or was it all a big fantasy propped up by accounting gimmickry and a trillion dollars of off balance sheet “assets”.   A company doesn’t lose 90 percent of its stock market value in a year if it’s built on a solid foundation.

The Citigroup merger made Weill a billionaire and Reed a multi millionaire while costing the taxpayer a bundle and helping to bring down the whole of Wall Street.

The second notable aspect of the article is that management’s plan to restore the luster to Citigroup appears to be based on massive shrinkage of the company’s footprint or to put it simply: it’s going to grow by shrinking. According to Institutional Investor’s Kandell, here’s what Citigroup has done:

Citigroup’s head count has dropped from a peak of 357,000 before the crash to 213,000 today;

Citigroup “has reduced the number of countries in which it does retail banking from 50 to 19”;

Within the past four years, Citigroup has closed 30 percent of its retail bank branches and “reduced its real estate footprint by a quarter.”

Kandell also profiles Citigroup’s CEO, Michael Corbat, who took the helm in 2012. At Wall Street On Parade, we have been keeping track of the charges brought against Citigroup under the leadership of Corbat. Below is just a sampling:

December 4, 2013: Citigroup admits to participating in the Yen Libor financial derivatives cartel to the European Commission and accepts a fine of $95 million.

July 14, 2014: The U.S. Department of Justice announces a $7 billion settlement with Citigroup for selling toxic mortgages to investors. Attorney General Eric Holder called the bank’s conduct “egregious,” adding, “As a result of their assurances that toxic financial products were sound, Citigroup was able to expand its market share and increase profits.”

November 2014: Citigroup pays more than $1 billion to settle civil allegations with regulators that it manipulated foreign currency markets. Other global banks settled at the same time.

May 20, 2015: Citicorp, a unit of Citigroup becomes an admitted felon by pleading guilty to a felony charge in the matter of rigging foreign currency trading, paying a fine of $925 million to the Justice Department and $342 million to the Federal Reserve for a total of $1.267 billion. The prior November it paid U.S. and U.K. regulators an additional $1.02 billion.

July 12, 2016: The Securities and Exchange Commission fined Citigroup Global Markets Inc. $7 million for failure to provide accurate trading records over a period of 15 years. According to the SEC: “CGMI failed to produce records for 26,810 securities transactions comprising over 291 million shares of stock and options in response to 2,382 EBS requests made by Commission staff, between May 1999 and April 2014, due to an error in the computer code for CGMI’s EBS response software. Despite discovering the error in late April 2014, CGMI did not report the issue to Commission staff or take steps to produce the omitted data until nine months later on January 27, 2015. CGMI’s failure to discover the coding error and to produce the missing data for many years potentially impacted numerous Commission investigations.”

January 4, 2018: Citibank is fined $70 million by the Office of the Comptroller of the Currency for failing to abide by its 2012 cease and desist order involving money laundering.

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