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History Citigroup formed on April 7, 1998 following the $140 billion merger of Citicorp and Travelers Group to create the world's largest financial services organisation. The history of the company is thus divided into the history of several firms that over time amalgamated into Citicorp - a multinational banking corporation operating in nearly 100 countries; or Travelers Group, whose businesses covered credit services, consumer finance, brokerage and insurance. As such, the company history dates back to the founding of Citibank (or its predessor, the First National City Bank of New York) in 1812, Bank Handlowy in 1870, Smith Barney in 1873, Banamex in 1884, and Salomon Brothers in 1910. Citicorp Citicorp was the descendant of First National City Bank, founded in New York City. It was one of the oldest banks in the United States (founded in 1812), and had the largest international branch presence of any United States headquartered bank. In the 1960s and 1970s, chairman Walter Wriston led the bank into sovereign debt and loan syndication. It was Writsen who led the technology of ATM cards before the the banks. He also spearheaded the name change to Citibank in the late 1970s. 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 ATMs, 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. Travelers Group Travelers Group, at the time of merger, was a diverse group of financial concerns that had been brought together under CEO Sandy Weill. Its roots came from Commercial Credit, a subsidiary of Control Data Systems that was taken private by Weill in November 1986 after taking charge of the company earlier that year. Two years later, Weill mastered the buyout of Primerica - a conglomerate that had already bought life insurer A L Williams as well as stock broker Smith Barney. The new company took the Primerica name, and spun-off its non-financial businesses. Employing a "cross-selling" strategy, each of the entities within the parent company aimed to sell each other's services. In September 1992 Travelers Insurance, who had suffered from poor real estate investments and sustained significant losses in the aftermath of Hurricane Andrew[citation needed], formed a strategic alliance with Primerica that would lead to its amalgamation into a single company in December 1993. With the acquisition, the group became Travelers Inc. and property and casualty, and life and annuities underwriting capabilities were added to the business. Meanwhile, the distinctive Travelers red umbrella logo, which was also acquired in the deal, was applied to all the businesses within the newly named organization. During this period, Travelers acquired Shearson Lehman - a retail brokerage and asset management firm that was headed by Weill until 1985 - and merged it with Smith Barney. Finally, in November 1997, Travelers Group (which had been renamed again in April 1995), made the $9 billion deal to purchase Salomon Brothers, a major bond trader and investment bank. Citicorp/Travelers Merger At the time of the merger between Citicorp and Travelers, Sandy Weill was the chairman of Travelers and John Reed was the Chairman of Citicorp. Under the auspices of creating a one-stop shop for insurance and banking products, the merger became a takeover by Travelers shortly thereafter. The two CEOs could not have been more different in management style and their paths to the top. Initially setup as co-CEOs, within two years of the merger John Reed was no longer with Citigroup. Of note, roughly at the time of the merger, Sandy Weill's compensation was on the top 10 list for CEOs, while John Reed's compensation was considered one of the top 10 for being the most accurate reflection of performance for pay. 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 business. 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 Act. Ironically, Citigroup eventually did, of its own will, divest almost all its insurance underwriting businesses presumably due to the failed extraction of synergies from the two companies' merger. 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. Former Treasury Secretary Robert Rubin was brought in as a moderating influence between Weill and Reed, but conflicts within the company eventually led to Reed being forced out (though Rubin remains). In addition, three co-CEO's (Jamie Dimon and Deryck Maughan from Travelers, and Victor Menezes 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 Travelers' management attempted to implement its culture of cost cutting and cross selling into Citigroup. Citibank retail bankers were instructed to get securities and insurance licensed in order 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 the 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 (including a drunken skirmish between Dimon and Maughan at a company retreat) led to the ousting of Jamie Dimon. The company soon acquired Associates First Capital, the largest consumer finance company, and Banamex, the largest bank in Mexico. This was controversial in Mexico: at the time the press there were worried that Mexico's largest banks would all become "branch offices for foreign competitors". Bombs were placed in branches in violent protest. Travelers spin off The company spun off its Travelers Property and Casualty insurance underwriting business. The spin off was prompted by the insurance unit's drag on Citigroup stock price because Traveler's earnings were more seasonal and vulnerable 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. The Travelers Property Casualty Corporation merged with The St. Paul Companies Inc. in 2004 forming The St. Paul Travelers Companies[citation needed]. 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 no longer underwrites insurance. Despite their divesting Traveler's Insurance, Citigroup retained Travelers' signature red umbrella logo as its own until February 2007, when Citigroup agreed to sell the logo back to St. Paul Travelers, which renamed itself Travelers Companies. Citigroup also decided to adopt the corporate brand "Citi" for itself and virtually all its subsidiaries, except Primerica and Banamex. Market share 2003 global (except Retail Banking) market share: Capital Mrkts. & Banking: 10%
Business model 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 acquisitions. Much of the efforts were focused in the stock brokerage and investment banking areas, and most of the acquisitions were 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 (merger) 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, but no longer underwrites it. This focus on selling almost all kinds of financial products, but not necessarily "manufacturing them", is also what prompted Citigroup to recently trade its mutual fund business to Legg Mason in return for more stockbrokers. Real estate Citigroup's most famous office building is the Citigroup Center, a diagonal-roof skyscraper located in East Midtown, Manhattan, New York City, which despite popular belief is not the company's headquarters building and is actually not owned by Citigroup. Citigroup has its headquarters across the street in an anonymous-looking building at 399 Park Avenue (the site of the original location of the City National Bank). The headquarters is 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. 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. Strategically, all of Citigroup's New York City real estate, excluding the company's Smith Barney division and Wall Street trading division, lies along the New York City Subway's IND Queens Boulevard Line, served by the E and V trains. Consequently, the company's Midtown buildings—including 666 Fifth Avenue, 399 Park Avenue, 485 Lexington, 153 East 53rd Street (Citigroup Center), and Citicorp Building in Long Island City, Queens, are all no more than two stops away from each other. In fact, every company building lies above or right across the street from a subway station served by the E or V.
Divisions Citigroup is divided into three major business groups: Global Consumer, Global Wealth Management, and Corporate and Investment Banking. It also includes one stand-alone business, Citigroup Alternative Investments. The Global Consumer Group comprises 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, stores, and global reach 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 the third 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 Corporate and Investment Banking (CIB) division consists of three subgroups: Global Markets, Global Banking, and Global Transaction Services (GTS). This division essentially handles large corporate cash management, trade, lending, and investment banking services. Citigroup's investment bank is one of the largest, frequently topping many league tables. CIB does not engage in as much proprietary trading (stock and bond speculation) as other investment banks do. The Global Wealth Management division is composed of The Citigroup Private Bank, Smith Barney, and Citigroup Investment Research. The Citigroup Private Bank provides banking and investment services to high net worth individuals, private institutions, and law firms. Smith Barney is the second largest stock broker in the world. The Citigroup Alternative Investments (CAI) group is an alternative investments platform that manages assets across five classes: private equity, hedge funds, structured products, managed futures, and real estate. Essentially it offers various funds or separate accounts that utilize alternative investment strategies, as opposed to the mainstream mutual funds that it recently sold to Legg Mason. These kinds of funds are not as commoditized as normal mutual funds, and products such as "structured products" are hybrid debt/equity/derivative issuances underwritten by its Investment Banking division. It offers over eighty investment products to institutions and qualified individual investors. Around half the group's profits come from Citigroup Venture Capital International (CVCI), a subdivision of CAI. Business Issues Citigroup has experienced several significant business issues. 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. Associates Citigroup 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). Biased research Citigroup and other investment banks were accused of having struck 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 paid 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. Enron and Parmalat Citigroup was 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. Some of the accusations included sales of complex securities to the unwary elderly that would likely not mature in their lifetime, violating the SEC regulations as well as business ethics. This caused the Japanese 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, left 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 CEO 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 criticized 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. 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). Brasil Telecom and Brazilian pension funds Citigroup is a major shareholder of Brasil Telecom through an investment partnership in Brazil, and was implicated in charges revolving around a highly controversial deal executed with pension funds of Brazilian state-owned companies, by which these funds would have a put option against them for a value deemed far above arm's-length market levels. After public outcry in Brazil, the deal was partly annulled by a federal court and the matter is being investigated by a panel of Brazilian congresspeople, with Citibank's president in Brazil Mr. Gustavo Marin having been heard in October 2005. Improper assessment of late fees In 2001, Citibank settled a lawsuit for improperly assessing late fees. The class action lawsuit was for 45 million dollars. Following this Citibank lobbied in Congress, to pass legislation that would limit class action lawsuits to 5 million dollars unless they were initiated on a federal level (Class Action Fairness Act of 2005). Many consumer advocate websites report that Citibank is still improperly assessing late fees. Recent poor stock performance Citigroup has been criticized by certain investors for poor stock performance over the past 5 years, returning a negative 1 percent while other large financial institutions have returned 55% and more, despite Citigroup's strong performance in its investment banking and retail banking sectors. The main weakness lies within corporate expenditures, and CEO Chuck Prince has pledged to devote his efforts to lowering expenditures in 2007 to mitigate this problem. Some believe Citigroup should be broken up into various spin-offs to improve stockholder return. This is thought to improve return in two ways: one by making each spun off company easier to manage, and two increasing the stock price relative to the profits of each company, since investors may pay a higher price relative to profits of certain parts of the company. There have been many proposals as to how to break up Citigroup. For example, Sam Advisors LLC has gone on CNBC and advocated Citigroup being broken up into an investment bank, an international bank, and a domestic bank. Others have advocated different solutions. The debate is intensified by the fact that Citigroup is the result of a great deal of mergers with components that are still run separately. For example, the subprime lending division, Citifinancial, has followed the business model of the company that Citigroup acquired, Associates First Capital. This model involves expanding into new countries and essentially inventing or reinventing the consumer finance business model in that country. This has often been very profitable for the company, although it has led to major problems as well (particularly in Japan and Argentina). The synergies between consumer finance and retail banking in any country remain to be seen however, causing some to advocate a spin off of the consumer finance franchise from the retail banking franchise. (The retail banking franchise itself is very different in each country it occupies. For example, Citibank in the United States has a relatively small branch network with midtier technological ability, and is distinguished by an aggressive effort to cross sell investment and insurance products to all customer segments. On the other hand, Citibank in Mexico (Banamex) is the largest bank in Mexico with a more mass market customer base and unique product set.) Sponsorships Presenting sponsor of the Rose Bowl college football game, part of the Bowl Championship Series |
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