What Went Wrong in Citigroup
Citigroup’s tale is considered to be a case of bad market conditions and not necessarily of a bad model. It admits that its own internal risk management team and other executives never understood what it takes to succeed as an integrated financial supermarket. Reports indicate that its past acquisitions were not properly integrated, cultures were disparate, and risk management failed.
Under the regime of its former CEO, Chuck Prince, Citi invested in toxic derivative products by assuming good returns. However, as the market suffered losses, its reserves fell drastically, leave alone profits. Besides, Citi’s retail banking business in the US has a small reach with over 800 domestic branches and just 2% of US deposits. In contrast, Bank of America operates over 6,000 branches across the US and controls 14% of deposits.
Indeed, Citi could build the largest global retail network through its deals in Mexico and Turkey, but it typically ranked 3rd or below in a national market. The reason: its economies of scale are considered to be lower than those of its national competitors, as the costs for processing checks, loans and credit cards are very high. Ken Lewis, CEO, Bank of America, referring to both Citi’s US and international retail businesses, said that “Citi’s problem is being unimportant in many places.” In general, experts believe Citigroup crisis or bank crisis is an emblem of capital crisis and not liquidity crisis. It is a glaring spotlight that could be applied to dozens of other banks as well. Because big banks such as Citigroup always held that problematic markets, not their poor balance sheets, were to blame for falling share prices. Many believe that if all its Structured Investment Vehicles (SIVs) were brought back on the balance sheet and marked to market, it could have pointed out the lack of capital. Citigroup is one such example. Bank analysts say that since Citigroup’s tangible common equity is now even lower as a percentage of total equity, it is tough to run a bank with common equity that is too low. This is one big reason why Citigroup is in such a dire shape today.
Goodbye supermodel
The focus is on segregating all the `core’ and `non-core’ operations into separate lines and scaling it back to a manageable size. While Citicorp focuses on universal banking operations, Citi Holdings emphasizes on riskiest investment assets. Citi has also decided to hive off its consumer finance business, including credit cards and consumer banking. It has already pledged to separate its proprietary trading desk which bought the toxic real-estate securities. Expectations are that more focus could shift towards traditional advisory and lending practices. Citi could most likely keep its attractive retail-banking operations in Mexico and South Korea. It is also on the hunt for a `strong manager’ to head Citi Holdings. John Havens, a former top Morgan Stanley executive, has been named head of the global institutional bank at Citicorp.
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