Welcome back to The Deep Dive, the only place
where we take stacks of complicated financial
history, market turmoil and trillion dollar institutions
and cut right to the most fascinating essential
knowledge you need to be well informed. Today,
we are attempting to map the entire lifecycle
of a true financial behemoth, Citigroup or Citi
as most people know it. And this isn't just another
bank. No. Not at all. It's a force multiplier
in global finance. It's one of the big four U
.S. banks. It's a core bulge bracket investment
bank. And maybe most importantly, it's designated
by global regulators as systemically important.
Which is I mean, that's just the textbook definition
of too big to fail. Exactly. And when you look
at the sources, the scale is just. It's dizzying.
As of 2024, we're talking about an institution
with, what, $2 .353 trillion in assets? Trillion,
yeah. And a global workforce of around 229 ,000
employees. So like you said, this isn't just
a bank. It's this massive, interconnected, cross
-border financial machine. And when it shakes,
the whole world pays attention. Our mission today
is to really unpack this huge 200 plus year history.
We're going to try to trace its earliest origins
as a, you know, a disruptive global innovator.
Then get into that dramatic, defining 1998 mega
merger that basically defied regulators. Right.
And then, of course, its central catastrophic
role in the 2008 financial crisis, a crisis that
required, I mean, historic government intervention
and a $306 billion guarantee. And we have to
finish with what's happening right now, this
continuous, massive strategic restructuring under
its current leadership, including a dramatic
overhaul of its technology. All while, you know,
tracking this constant expensive thread of regulatory
scrutiny that seems to just perpetually haunt
its operations. It's a story of pioneering vision
that meets, well, spectacular failure, followed
by a long, painful decade of trying to shrink
back down to a manageable size. OK, so let's
start unpacking this journey. The modern company,
as we know it today, was essentially born in
1998, right? That's the moment. It was the merger
of two giants, Citicorp. which was the bank holding
company for the retail giant Citibank, and then
Travelers Group, the insurance and brokerage
conglomerate. Though the Travelers Insurance
part, that didn't stick around for long. No,
it was spun off just a few years later in 2002.
But that merger moment, that's what truly defined
the modern firm structure. Frankly, it's appetite
for risk. And for you, the listener, to sort
of grasp how Citi operates today, it's worth
noting it's two primary arms. You've got the
Institutional Clients Group, or ICG. That's the
high -level corporate and investment banking
arm, the classic Wall Street component that deals
with massive treasury services and securities
for big corporations and even governments. And
then on the other side, the consumer side, you
have Personal Banking and Wealth Management,
or PBWM. And this division includes the Citibank
that everyone sees on the street corner. Right.
The ubiquitous retail bank. Yeah. But it's also,
and this might surprise you, the third largest
issuer of credit cards in the United States.
So whether you're a global Fortune 500 company
or just paying off your monthly credit card bill,
you're interacting with Citigroup. Let's start
at the very, very beginning, tracing the roots
of what became Citicorp. This story kicks off
in the early days of American finance. It does.
The initial charter was for the City Bank of
New York, granted on June 16, 1812. Right here
in New York. 1812. That's incredible. It launched
with $2 million in capital, which was a huge
sum back then. It was specifically created to
serve a group of powerful New York merchants
and traders who were navigating that very new
American market. The early history seems to be
a masterclass in adaptation, survival, and really
seizing leadership during all that market chaos.
Absolutely. If you look at the early leadership
figures, they were a huge part of driving that
expansion. So who were the key players in those
first few decades? Well, after the infamous economic
downturn, the panic of 1837, for instance, control
of the company was acquired by a man named Moses
Taylor. Moses Taylor. Yeah, he was this really
astute New York merchant dealt mostly in shitter
and coffee. And he guided the bank through all
the volatility of the mid -19th century. But
crucially, he had the foresight to invest heavily
in U .S. government bonds during the Civil War.
Which would have stabilized the bank, right,
while others were failing. Exactly. It allowed
it to emerge stronger when other institutions
went under. So that kind of shrewd, opportunistic
leadership really set the stage. Then, as we
move toward the turn of the century, the bank
starts to hit a sort of critical mass. It really
does. Under the leadership of James Stillman,
who took over after 1891, the bank cemented its
domestic dominance. Stillman was famous for his
connections to major industrial figures like
the Rockefellers. And by combining this aggressive
lending with very robust capitalization, the
bank officially became the largest bank in the
entire U .S. by 1895. Wow. So it wasn't just
a merchant bank anymore. It was a national financial
pillar. Absolutely. But as you pointed out, that
domestic size just wasn't enough for their ambition.
The bank quickly became a pioneer in global reach.
In 1914, it inaugurated the first overseas branch
of a U .S. bank. In Buenos Aires, Argentina.
Right. But what's often missed is that their
international activity actually started even
before that formal branch. The sources note that
the bank had been sort of quietly active in supporting
plantation economies like the massive Cuban sugar
industry since the mid 19th century. So they
had this early hands on global vision. They were
embedding themselves in international trade flows.
That is absolutely key to understanding why they
were so uniquely positioned to become a modern
day multinational financial giant. They didn't
just. follow trade, they enabled it. And it's
clear this massive global footprint was paired
with this relentless internal drive for innovation,
an image the bank really cultivated, right, as
this modern forward -thinking force. They were
true innovators, especially on the consumer side,
really making banking accessible to the average
American. Like offering compound interest. They
were the first major U .S. bank to offer compound
interest on savings way back in 1921. Compound
interest, which means you earn interest on your
interest, sounds simple now. But it was a powerful
incentive for mass saving at the time. A huge
incentive. And they pushed the boundaries on
lending, too. The unsecured personal loans. Just
seven years later, in 1928. They pioneered unsecured
personal loans. This was a radical move. Before
this, banks rarely lent money without some form
of collateral. So this action fundamentally shifted
the relationship between banks and individual
consumers. It established the model that's the
basis for most consumer credit today. Then, post
-oppression, in 1936, they were among the first
to widely offer customer checking accounts to
the general public. So these innovations were
huge steps toward mass consumer banking. But
what about the things that fundamentally changed
how money markets themselves work? That brings
us to 1961, when they launched the Negotiable
Certificate of Deposit, or CD. A negotiable CD.
The sources note this was the first new negotiable
instrument introduced into the market since 1888.
That's a staggering 73 -year gap bridged by their
innovation. For the listener who might not be
familiar with the term, why was the negotiable
CD such a seismic shift? Because before this,
CDs weren't easily sold to another party. Banks
relied mostly on these... volatile demand deposits.
The negotiable CD allowed a bank to issue a promise
to pay a fixed amount on a certain date. And
that promise could be traded on the open market.
Exactly. This gave banks a stable, reliable way
to raise very large amounts of money from corporate
depositors and institutional investors. It fundamentally
changed how money markets raised and moved liquidity.
So it was a crucial tool for an ambitious bank
that wanted to grow quickly. Absolutely essential.
And they kept pushing the envelope into the credit
card space, too. Read the everything card. They
did. In 1967, they introduced the everything
card, which, interestingly enough, would later
evolve into what we all know today as MasterCard.
So they weren't just participating in the financial
system. They were defining its products. Very
much so. And then came the technology that really
brought banking into the modern age. The ATM.
Under CEO Walter Wriston in the mid -70s. Correct.
The company, then formally renamed Citibank,
launched the Citicard. pioneering the use of
24 -hour ATMs. Think about that. 24 -hour access
to your cash. That was a truly revolutionary
concept. It changed banking from a nine -to -five,
face -to -face transaction into something instantaneous
and always on. And this was the backdrop for
the rise of John S. Reid, who took over as CEO
in 1984. The next 14 years saw Citibank become
not only the largest U .S. bank, but also the
largest issuer of credit cards and charge cards
globally, expanding its reach to over 90 countries.
So by the late 1990s, Citicorp was this consumer
banking leviathan with deep global roots. Absolutely.
Which brings us to the necessary counterparty
in that massive 1998 deal, the Travelers Group.
Right. And this was not an ancient, regulated
institution like Citicorp. This was a modern
conglomerate forged by the sheer aggressive will
of its CEO, Sandy Weil. Weil was the quintessential
dealmaker of the late 20th century. His empire
building was, well, it was aggressive and it
was rapid. It started in 1986. He took commercial
credit, a consumer finance subsidiary, private.
And then he just went on a buying spree. He acquired
Primerica Financial Services, which already owned
the major brokerage firm, Smith Barney. And his
core strategy was all about cross -selling. Precisely.
The goal was to build a financial supermarket.
He wanted to ensure that all the entities within
the parent company marketed and sold each other's
services. So if you bought insurance, you should
also buy a brokerage account. If you got a loan,
you should buy life insurance. You got it. Maximize
the revenue extracted from every single customer
relationship. The consolidation really sped up
in 1993 when he acquired the venerable but struggling
Travelers Insurance. A company that had taken
huge losses from bad real estate investments
and the devastating Hurricane Andrew. And with
that acquisition came the logo. The distinctive
Travelers red umbrella logo, which he immediately
slapped across all his businesses. It was this
powerful visual symbol of his rapidly growing
empire. And the deal added crucial property,
casualty, and life insurance underwriting capabilities
to his machine. Okay, so the final decisive piece
of the puzzle, the one that made Travelers a
true Wall Street player, came in 1997. Yes. Travelers
acquired Salomon Brothers, a major bond dealer
and investment bank in the bulge bracket category,
for a massive $9 billion. $9 billion. And that
acquisition was a stroke of strategic genius.
It was designed to complement, not just replicate.
Salomon was focused heavily on institutional
fixed income products and trading, a real powerhouse
in the bond markets. While Smith Barney was strong
in equities and retail brokerage. Exactly. So
by merging them into Salomon Smith Barney, Weill
created this unified, full -service securities
unit ready to compete globally. It completed
all the necessary components for the massive,
game -changing merger that would follow just
a year later. It truly set the stage for one
of the most consequential mergers in modern financial
history. Now we arrive at the pivotal moment
that created the financial firm we're analyzing
today, the historic merger of Citicorp and Travelers.
It was announced in April 1998. And it officially
formed Citigroup Inc., which was at the time
the world's largest financial services organization
by a pretty significant margin. The scale was
just immense. You're combining Citicorp's global
consumer network and lending capabilities with
Traveler's huge investment banking, brokerage
and insurance underwriting capacity. But right
away, the power structure was questioned. Oh,
it was immediately fraught with tension. The
leadership setup was just so fragile. You had
John S. Reid, the steady hand, the operations
technocrat from Citicorp. And then Sandy Weil,
the aggressive. Deal -driven empire builder from
Travelers. And they were named co -chairman and
co -CEOs. Given their vastly different management
styles, Reid focused on tech and systems while
on deals and cross -selling it. It raised immediate,
profound questions about the long -term viability
of that shared leadership. Everyone expected
a clash of titans. And they got one. As a side
note, the new company kept the city brand name,
but they adopted Traveler's highly recognizable
red umbrella logo, right? They used it until
2007. They did. But that brand drama... It really
paled in comparison to the regulatory drama that
defined the merger. As you mentioned, this merger
was under the existing law. Well, it was essentially
illegal. Precisely. This was a direct, massive
challenge to the remaining provisions of the
Glass -Steagall Act. Right. For the learner,
Glass -Steagall was enacted back in the 1930s
after the Great Depression, specifically to separate
commercial banking, you know, the boring deposit
-taking, loan -making business. From the riskier
stuff like investment banking and insurance underwriting.
So merging a commercial bank holding company
like Citicorp with an insurance underwriter like
Travelers was just forbidden. Expressly forbidden.
So this wasn't an accidental violation. This
was a deliberate, calculated, massive gamble
by Weil and Reed on legislative change. They
went ahead with the merger knowing they were
violating the spirit, if not the letter, of the
law. It was an incredible act of strategic defiance.
They were operating on a regulatory clock. knowing
that if the law wasn't changed, they would have
between two and five years to divest any prohibited
assets. So they were essentially betting that
their size and influence would force Congress's
hand. Absolutely. Weil publicly stated at the
time that they had had enough discussions to
believe this will not be a problem. And in a
stunning vindication of that aggressive strategy,
the gamble paid off. It did. In November 1999,
the Gramm -Leach -Bliley Act was passed, and
it specifically repealed the relevant sections
of Glass -Steagall. Opening the door for these
massive financial services conglomerates. For
the first time since the 1930s, they could offer
commercial banking, investment banking, and insurance
all into one giant roof. Citigroup was positioned
perfectly, having already done the merger, to
immediately take advantage of this new deregulated
environment. The timing was just breathtaking.
That massive deregulation must have just further
fueled their appetite for expansion. In the immediate
post -merger environment, Citi wasted no time.
No, in 2000, they acquired Associates First Capital
Corporation for $31 .1 billion in stock. And
this is where the dark side of that aggressive
post -Glass -Steagall appetite immediately surfaced.
It really did. Associates First Capital had already
been widely criticized for predatory lending
practices. The sources show that Citi basically
purchased a massive headache with this acquisition.
A company whose business model was built on exploiting
vulnerable consumers. Right. And the legal fallout
was swift and costly. It immediately stained
the newly formed conglomerate. So how did that
play out? Citi eventually settled with the Federal
Trade Commission, agreeing to pay a record $240
million in restitution to thousands of customers
who were victims of these predatory practices.
And what were those practices? Things like flipping
mortgages. Exactly. Flipping mortgages, refinancing
repeatedly over short periods to extract new,
unnecessary fees, and packing them with optional
expensive credit insurance that borrowers often
didn't even know they were buying. So this incident
early in Citi's life demonstrated an alarming
tolerance for risk and ethical corner cutting
in the pursuit of growth. Very much so. Yet they
continued to expand globally. They acquired the
European American Bank in 2001 for $1 .9 billion.
And then Banamex in Mexico in August 2001 for
a massive $12 .5 billion. That Banamex deal is
fascinating. Why did they pay such a monumental
sum for a Mexican bank at that time? That massive
price tag, the $12 .5 billion, was a direct realization
of that post -Glass -Steagall financial supermarket
vision. Because Banamex wasn't just a retail
bank. No, it was deeply embedded in the Mexican
economy. It offered consumer banking, investment
banking, and insurance. It gave Citi an immediate,
unparalleled foothold in Latin America, a region
critical for trade and corporate clients. So
Weill's goal was global scale, and Banamex was
a ready -made platform for extending that cross
-selling model into a high -growth market. Exactly.
But that initial ambitious vision of a frictionless
financial supermarket It eventually ran into
some practical operational problems. You beating
to a major spinoff? Yes. The core traveler's
insurance underwriting business was spun off
in 2002, just four years after the merger. And
this decision was a powerful admission that the
synergies they had bet on were just not outweighing
the drawbacks. What were the main reasons for
that reversal? The sources point to a few clear
things. First, the insurance unit was just too
volatile. Insurance earnings are seasonal. They're
highly vulnerable to large disasters like the
huge losses after the September 11 attacks, which
had just happened. So it led to unpredictable
financial results that acted as a drag on the
stock price. Right. The complexity didn't match
the value. And furthermore, Citigroup found it
extremely difficult to successfully sell insurance
directly to its customers. People were used to
buying from brokers, not their bank teller. Exactly.
The promised cross -selling synergies just didn't
materialize on the consumer side, which made
the complexity and volatility of owning a massive
insurance underwriter, well, pointless. But if
the synergies weren't there, doesn't that fundamentally
undermine the entire justification Weil used
to push for the repeal of Glass -Steagall? That
is the central critique of the mega -merger era.
Was the merger just about power and scale rather
than actual efficiency? It's a great question.
While the merger absolutely forced regulatory
change, a clear power play, the subsequent spinoff
suggested that combining banking, securities
and insurance under one roof wasn't necessarily
optimal for long term profitability or stock
performance. So it was a realization that managing
a truly frictionless financial supermarket was
too complex, too volatile and ultimately just
not worth the structural drag. I think that's
right. The Travelers Insurance business eventually
merged with the St. Paul Companies in 2004, forming
the Travelers Companies we know today. But Citi
controversially held on to that distinctive red
umbrella logo for years, didn't they? They did.
They kept that iconic branding until February
2007, when they finally sold the logo back to
the newly named Travelers Companies and officially
adopted the standardized corporate Citi brand.
So it took them almost a decade to fully disentangle
the branding and structure of that original merger.
A very long time. And here's where the narrative
takes a dramatic and frankly, a terrifying turn.
Despite its pioneering past, its massive global
reach and the successful repeal of Glass -Steagall,
Citigroup found itself catastrophically exposed
as the subprime mortgage crisis began to accelerate
in 2007. And the failure here. It wasn't a sudden
shock. It was a slow -motion critical breakdown
in risk management that had been ignored for
years. The primary source of trouble was their
heavy, almost reckless exposure to complex structured
products. Specifically, collateralized debt obligations,
or CDOs, backed by troubled mortgages. For the
learner, A CDO is basically a financial instrument
created by pooling various types of debt, in
this case, thousands of mortgages, and then selling
slices of that pool to investors. And the risk
comes from the quality of the underlying mortgages.
Which in Citi's case had just evaporated. And
the failure here was less about bad luck and
more about an internal culture that just believed
they were smarter than the market. Absolutely.
It was pure arrogance modeled into mathematics.
The company was using these elaborate risk models
to assess their exposure. But the models had
a fatal centralized flaw. What was the flaw?
They were based on regional data and completely
failed to include the possibility of a national
housing downturn. So they just didn't think it
could happen everywhere at once? The models effectively
dismissed. the probability of a nationwide collapse
as incredibly remote, less than one hundredth
of one percent. They genuinely believe diversification
protected them from systemic risk. That is a
stunning, willful blindness. And it clearly infected
the highest levels of leadership. Oh, absolutely.
Two names frequently cited as being instrumental
in pushing the company toward this high risk
strategy involving mortgage backed securities
and CDOs were board member Robert Rubin. and
the CEO, Charles Prince. Rubin, a former U .S.
Treasury secretary, was known for his influence.
And Prince, the CEO, he became the face of the
hubris. There's that key moment of corporate
overconfidence, summarized by Prince's infamous
quote just before the crisis truly erupted in
2007. When he was asked why Citi was still involved
in these risky markets, he said, Citi Group was
still dancing. The music had stopped for many,
but they were determined to keep the party going
because the profit margins were just so high.
Exactly. But while the executives were still
dancing, someone inside the building was watching
the band pack up their equipment and was ringing
the fire alarm. Richard M. Bowen III, the chief
underwriter for Citigroup's consumer lending
group, who became a critical internal whistleblower.
His actions were truly extraordinary, and they
demonstrate the power of internal governance,
or I should say, the failure of it. So starting
in June 2006, Bowen began sending weekly reports
and memoranda to the board of directors about
the extreme, unacceptable risks being taken on
by the mortgage operation. Which was buying and
selling $90 billion of residential mortgages
annually. His job was quality control, and the
quality was just nonexistent. What specific numbers
was he seeing that were so alarming? When he
first raised the alarm in 2006, 60 % of the mortgages
they were dealing with were defective. 60%. And
that number just kept rising. It didn't stop.
It eventually exceeded 80 % by late 2007. And
crucially, Bowen wasn't just noting paperwork
errors. He was warning that many of these mortgages
were not just defective, but the direct result
of outright mortgage fraud. He didn't just warn
them about financial risk. He knew the legal
and regulatory implications of hiding this from
the market. That's what makes his action so powerful.
On November 3rd, 2007, he sent an email. a formal
record to the chairman Robert Rubin, the CFO,
the head auditor, and the chief risk management
officer explicitly warning them. Warning them
about what specifically? That concealing this
information from shareholders violated the Sarbanes
-Oxley Act, or SOX. Let's pause quickly to define
that for the listener. What were the SOX implications
here? Well, the Sarbanes -Oxley Act, passed after
Enron and WorldCom, requires CEOs and CFOs to
personally certify that their financial statements
and internal controls are accurate and reliable.
So for CEO Charles Prince to sign these certifications
while Bowen was sending weekly, documented warnings
that 60 to 80 percent of the assets were defective.
It meant the bank was legally exposed to massive
fraud charges and executive accountability. Bowen
requested an outside investigation. It was ignored.
He was subsequently stripped of his responsibilities.
Wow. Talk about a failure of senior management
to heed a profound warning. It's textbook. The
market started reacting even as these internal
warnings were being dismissed. April 2007, Citi
announces 17 ,000 job cuts. They continued to
underestimate their risk, only to announce another
massive cut of 5 to 10 percent of their workforce
in early 2008. And the deterioration was stunningly
fast. It was irreversible. By November 2008,
Citigroup was technically insolvent, despite
having already received $25 billion in initial
government TARP funds. In just two years, the
company's market cap plummeted from $244 billion
down to a mere $20 .5 billion. Shares were trading
well below a dollar on the NYSE, an unthinkable
collapse for one of America's largest, oldest
banks. And the final job toll was horrific. The
sources indicate that staff cuts eventually totaled
over 100 ,000 employees globally as the banks
just scrambled to shed capacity and stem the
bleeding. Which led directly to the massive historic
government intervention in late November 2008.
A bailout package that was unprecedented in scale
and complexity. Right. The government provided
an additional $20 billion in TARP funds, bringing
the total cash injection to $45 billion. The
defining element was the $306 billion guarantee.
Analysts often call it ring fencing. Let's delve
into that ring of fencing mechanism. It's what
truly confirmed the too -big -to -fail status.
How did that guarantee actually work? The U .S.
Treasury, the Fed, and the FDIC agreed to cover
90 % of the losses on a portfolio of $335 billion
of toxic assets that Citi held. After Citi absorbed
the first $29 billion in losses themselves. Right.
This was essentially the government writing a
catastrophic insurance policy for the bank. The
assets technically remained on Citi's balance
sheet, but the risk of catastrophic loss was
overwhelmingly transferred to the bank. the taxpayer.
Without that guarantee, the bank would have been
instantly liquidated. Instantly. So why did the
government feel the need to step in with such
overwhelming force for Citigroup specifically,
even more than for some other struggling institutions?
The justification provided by the former CEO
Vikram Pandit, it really highlights Citi's unique
systemic risk. It extended far beyond the typical
definition of a domestic commercial bank. He
argued that a failure of Citi would have triggered
worldwide chaos and panic, right? He did, because
of the potential collapse of its global transaction
services, or TTS, division. That's a strong claim.
What exactly is TTS and why would its collapse
cause global chaos? TTS is Citi's backbone for
moving money globally. It provides critical treasury
services, foreign exchange and trade solutions
for massive multinational corporations and critically
for major governments and central banks around
the world. So it's not about loans. It's about
the plumbing of international finance. Precisely.
Pandit claimed that if Citigroup were allowed
to unravel into bankruptcy, 100 governments around
the world would be trying to figure out how to
pay their employees. That speaks to how deeply
embedded Citi was and remains in the actual operating
mechanics of global commerce and state finance.
They were too central to the global payment system
to fail. Absolutely. But the government intervention
came with serious strings attached, reflecting
all the public and political outrage. It was
a temporary, partial nationalization. Indeed.
Executive salaries were capped, bonuses were
restricted until 2010, and the government initially
obtained a massive 36 % stake in the common stock,
giving it wide powers over banking operations
and a seat at the table. Despite the outrage
over bonuses, with hundreds of millions paid
out even after they got the initial TARC funds,
the ultimate financial conclusion for the taxpayer
was surprisingly positive. It was a very unusual
conclusion. By December 2010, Citi had repaid
the aid in full, and it generated a significant...
The sources note that this profit was aided by
a special IRS tax exception. It was. But financially,
the government recouped its funds and then some.
Regardless, the reputational damage and the imposition
of that too -big -to -fail label, that was permanent.
Yeah. The immediate aftermath of the crisis forced
Citigroup to undertake this drastic multi -year
strategic overhaul. It was all designed to shed
risk, complexity, and the vast array of non -core
assets it had accumulated during its merger spree.
And this began with the creation of what was
essentially an internal bad bank. That was the
formation of Citi Holdings in January 2009. Citigroup
was formally split into two distinct operating
units. Citicorp, which has the core profitable
businesses. And Citi Holding. Which was the dumping
ground. It contained all the non -core assets
intended for disposition and winding down, predominantly
toxic North American mortgages and other consumer
loan portfolios. The division initially represented
about $156 billion of GAAP assets. So the managers
were tasked not with growth, but with the difficult,
politically sensitive job of winding down these
businesses responsibly. Did that slow, painful
strategy of the bad bank ultimately work? It
took seven years, but yes. City Holdings finally
achieved its goal of breaking even in 2015. Meaning
it was no longer dragging down the firm's core
profitability. Right. And it was officially eliminated
in April 2016. That date marked a key structural
milestone in their de -risking and simplification
strategy. Beyond the bad assets, they also started
dismantling parts of the merged giant, including
the legendary Salomon Smith Barney brokerage
unit. Shedding Smith Barney was a huge move.
The unit held, what, $1 .562 trillion in client
assets across nearly 10 million domestic accounts.
So what did they do with it? In 2009, Citi merged
it into a joint venture with Morgan Stanley Wealth
Management. This was a phased exit. Citi initially
got $2 .7 billion and kept a 49 % stake. And
then by 2013, they sold the remaining stake.
For a massive $13 .5 billion, completing their
exit from the high net worth retail brokerage
business. This era was also heavily defined by
new regulation designed to prevent another crisis,
specifically the Volcker Rule. Right. The Volcker
Rule. Passed as part of Dodd -Frank limits bank
ownership in proprietary trading operations and
hedge funds, which were deemed excessively risky.
So to comply, Citi had to spin off its hedge
fund unit, Citi Capital Advisors. Correct. This
move created Napier Park Global Capital in 2013,
effectively shedding another layer of complex
proprietary risk from the bank's balance sheet.
So if the first decade of the 21st century was
about growth and merger, the second and third
have been about strategic. contraction and retreat,
particularly from mass consumer banking globally.
It's a complete, profound strategic pivot away
from that original wild vision of being a global
consumer supermarket. The first wave hit in October
2014 when Citi announced its exit from consumer
banking in 11 markets, including established
operations in Japan, Peru and Hungary. Then came
a second and arguably more shocking wave announced
in April 2021. and exit from 13 more consumer
markets, including major high -potential centers
like Australia, China, India, and Vietnam. That
signals a complete philosophical shift. Citi
is now concentrating on institutional clients
in these regions. Viewing mass consumer banking,
it's just too complex, too low margin and too
regulated outside of their core hubs. Those are
enormous markets to leave. What kind of deals
did those divestitures generate? They were massive
transactions, netting billions, but also illustrating
the depth of the retreat. For example, the consumer
businesses in four Asian markets, Indonesia,
Malaysia, Thailand and Vietnam, were sold to
U .S. will be for about $4 .9 billion in 2022.
And their Taiwan consumer business was acquired
by DBS Bank for $706 million in 2023. Right.
So what's left of the global consumer empire?
Citi is aiming to operate consumer banking only
in a highly concentrated set of regions. The
U .S., Canada, Europe, Hong Kong, Singapore,
London, and the UAE. They're targeting high net
worth customers in specific urban centers, not
mass markets. And crucially, they also announced
plans to exit their massive Mexican consumer
banking operation, Banamex, in January. 2022,
a major piece of the Weill acquisition era coming
undone. Exactly. And this period of dramatic
downsizing has coincided with new leadership.
Jane Frazier became CEO in March 2021, the first
female CEO of a big four bank. And she is overseeing
a dramatic modernization and reorientation of
the firm. She has initiated what is internally
known as Project Bora Bora, an aggressive top
to bottom corporate overhaul. The goal is simplification
and aggressive streamlining. Which includes the
announcement of 20 ,000 job cuts, or at least
10 % of the entire workforce, planned for 2024.
The core message is that the structure is still
too complex and needs to be radically simplified.
And the most fascinating part of this modernization
is the shift in their technology strategy, which
is a direct response to massive regulatory failures.
This is a direct linkage between compliance and
corporate strategy. Citi has faced massive regulatory
fines, including a staggering $400 million fine
in 2020 over longstanding failures in risk management
and technology. And another $136 million fine
specifically cited for persistent data issues.
So the new strategy is to cut their reliance
on external IT. contractors by 20 to 50 percent
and instead hire 50 ,000 full -time technology
employees internally. Hiring 50 ,000 internal
tech employees is a phenomenal commitment. Is
this primarily a defensive move against regulators
or a move toward gaining a competitive technological
advantage? It is fundamentally a defensive, compliance
-driven move. It's aimed at improving risk management
and data governance by bringing core technical
expertise and control in -house. Because regulators
hammered them for not being able to track their
own data reliably. Exactly. That led to risk
failures. By centralizing control... the technology,
the actual plumbing of the bank. They're trying
to prove to regulators that they can finally
monitor, manage, and prevent compliance breaches
and systemic failures. It transforms technology
from a cost center into a core component of systemic
survival. Very much so. We've also seen Citigroup
taking very public positions on major social
and political issues, which reflects the pressure
faced by major corporations today. Two recent
examples really illustrate this. In 2018, under
then -CEO Michael Corbat, Citi changed its credit
card policies to restrict the sale of guns to
individuals under 21. They also placed restrictions
on certain firearm -related transactions for
their business customers. That was a response
to public pressure for banks to take a stand
on gun control. And more recently, in December
2024, Citigroup, along with Bank of America,
announced they were exiting the Net Zero Banking
Alliance, or NZBA. A global initiative focused
on climate neutrality. And this pivot was reportedly
driven by political pressure in the U .S. against
banks perceived as limiting fossil fuel investment.
The narrative of Citigroup is defined as much
by its strategic moves as it is by the sheer
overwhelming volume and dollar amount of regulatory
penalties, lawsuits and fines that date back
decades. I mean, you have to use these figures
to illustrate the immense continuous cost of
repeated compliance failures. The fallout from
the subprime mortgage crisis alone generated
billions in penalties, confirming the issues
ran deep. Starting in 2010, Citi settled several
charges for $75 million. And they had to admit
that its exposure to subprime mortgages was over
$50 billion, not the $13 billion it had previously
stated to investors. That admission of lying
to the market was a huge blow to investor trust
and a warning shot. A big one. There was also
the issue of deliberately false certification
of loan quality correctly impacting government
-insured programs. Right. In February 2012, Citi
paid $158 .3 million to settle claims that its
Citi mortgage unit had falsely certified the
quality of loans so they would qualify for federal
housing administration insurance. And this action
was notably brought initially by a Citi mortgage
employee, Sherry Hunt. So this wasn't just misleading
investors. This was defrauding a government program
designed to protect housing stability. And Citi
was one of the five largest mortgage servicers
that participated in that multibillion -dollar
national mortgage settlement in 2012. Yes, to
provide relief to distressed homeowners. But
the largest crisis -related fine, the one that
truly stands out, came in 2014. That was the
staggering $7 billion settlement with the Department
of Justice. To resolve claims that Citi had misled
investors about shoddy mortgage -backed securities
in the lead -up to the crisis, Attorney General
Eric Holder called the bank's misconduct He said
that the bank systematically expanded its market
share and increased profits by knowingly assuring
investors that these toxic financial products
were sound, even as their own internal model
showed the risk was catastrophic. It just confirmed
that the firm prioritized profit over truth.
And beyond the housing crisis, Citigroup was
deeply entangled in the major corporate accounting
scandals of the early 2000s, like Enron, WorldCom
and Global Crossing. Oh, their investment banking
arm was providing services and... selling stock
while these companies were collapsing under fraud.
The involvement resulted in massive payouts that
spanned years. What were some of the numbers?
They paid a total of $3 .66 billion to settle
Enron claims. For WorldCom, they paid $2 .65
billion pre -tax to settle lawsuits concerning
their role in selling stocks and bonds for the
company. And they also paid $75 million to settle
lawsuits related to global crossing for issuing
exaggerated research reports and failing to disclose
conflicts of interest. Right. These fines really
illustrate the pervasive role of bulge bracket
banks in enabling large -scale corporate malfeasance.
And it wasn't just accounting fraud. The investment
banking and trading side also saw major scandals
linked to proprietary maneuvers. Yeah, look at
the 2004 proprietary government bond trading
scandal. handle. Citigroup was heavily criticized
for disrupting the European bond market by rapidly
selling 11 billion euros worth of bonds on the
MTS trading platform, driving down the price
and then buying them back cheaper, netting a
large profit. The mechanism was complex, but
the intent was to manipulate the market for quick
gain. It highlights the immense conflict of interest
that existed when a bank could both trade for
itself and service clients. And more recently,
they engaged in a prohibited practice called
spoofing. In 2017, they were fined $25 million
by the CFTC for order spoofing in U .S. Treasury
futures markets. Spoofing is basically placing
large fake orders for securities that are canceled
before they execute. It's done to trick other
traders into thinking supplier demand is about
to change. Right. It moves the market price,
allowing the spoofer to execute a real trade
at a better price. Citi was found to have placed
and canceled fake orders more than 2 ,500 times.
This pattern of misconduct extends deeply into
consumer operations and basic compliance suggesting
a chronic failure to monitor internal processes
even in simple transactions. The evidence of
consumer compliance failures is extensive and
costly. In 2015, they were fined $70 million
in order to refund a staggering $700 million
to customers. For what? For illegal marketing
and sales of unnecessary add -on credit card
products like credit monitoring and debt protection.
This is a direct result of aggressive illegal
practices aimed at boosting revenue from their
massive credit card base. Practices that regulators
deemed manipulative. And the largest warning
shot came with a 2020 fine from U .S. regulators
that directly targeted internal controls. That
$400 million fine, that was the critical moment
that defined Jane Frazier's subsequent strategy.
It was explicit. The fine was issued over longstanding
failures to establish effective risk management
and update technology, citing unsafe and unsound
banking practices. Regulators noted Citi had
failed to correct problems known for years. Suggesting
a deep systemic cultural issue that prioritized
legacy systems and cost cutting over robust controls.
Exactly. And money laundering has also been a
persistent regulatory problem, especially involving
their lucrative operations in Mexico and Latin
America. The problem stretches back to the 90s
when a general accounting office report criticized
Citibank's handling of funds for Raul Salinas
de Gortari, the brother of Mexico's former president.
Right. It noted that bank facilitated the transfer
of millions of dollars through complex transactions
and failed to adhere to its know your customer
policy. In 2017, they settled allegations that
their Benamex USA unit was used by drug smugglers
to move dark money. And most recently. In June
2024, agents from the DEA publicly cited investigations
into the Sinaloa cartel, stating that money launderers
continually found ways to exploit Citibank's
lax controls. The issue isn't just that it happened
once. It's the persistent decade after decade
nature of the failure. And finally, one of the
most surprising and frankly shocking failures
involved outright discrimination against consumers
based on their ethnicity. That happened in 2023.
The Consumer Financial Protection Bureau ordered
Citigroup to pay $24 .5 million in fines and
$1 .4 million in restitution to Armenian Americans.
The CFPB alleged that Citi employees had used
the presence of the surnames ending in Sinen
or Yan, which are common in Armenian surnames,
as an indicator for enhanced screening processes
for credit card applications. That level of failure
in internal control and ethics that they were
using ethnic indicators to flag people is just
astonishing for a systemically important bank.
in the 21st century. It speaks volumes about
the lack of oversight. The CFPB noted that employees
deliberately avoided mentioning this discriminatory
screening method in emails, suggesting management
knew it was illegal and attempted to conceal
it. This wasn't a technological glitch. It was
a profound ethical and control failure. That
cost the bank millions and severely damaged its
reputation. Absolutely. And throughout this whole
history, of course, there's the political context,
the lobbying power of such a massive firm. Between
1998 and 2014, Citigroup spent nearly $100 million
lobbying the federal government. to influence
the very regulations they were struggling to
comply with. And their political contributions
have historically been highly balanced, contributing
49 percent to Democrats and 51 percent to Republicans.
This political dexterity ensures access and influence
across the entire political spectrum, regardless
of which party is in control. An ability to navigate
the political landscape that is absolutely essential
for a company that constantly finds itself staring
down regulatory investigations. So looking back
at this 200 -year timeline, the central narrative
of Citigroup is truly defined by extremes. It
really is. They started as radical innovators,
pioneering everything from consumer loans to
ATMs and the negotiable CD. And this innovation
fueled massive, unprecedented growth through
mergers, culminating in that 1998 Citicorp Travelers
mega deal that successfully challenged and dismantled
Glass -Steagall. But that success was immediately
overshadowed by an existential crisis fueled
by massive, poorly managed exposure to subprime
mortgages, ignored internal warnings from people
like Richard Bowen, and a catastrophic breakdown
in controls. Which required the U .S. government
to step in with the largest bailout package of
any U .S. bank, including that infamous $306
billion ring fencing guarantee, cementing its
status as the epitome of too big to fail. Right.
And the result has been a painful decade plus
of continuous strategic contraction. They shed
the non -core assets via city holdings. They
got rid of huge businesses like Smith Barney.
And they dramatically pulled back from mass consumer
banking across Asia, Europe and Latin America.
They are actively trying to become a smaller,
more focused and crucially a less complex entity.
The key takeaway for you, the learner, is this.
Despite shedding. Hundreds of thousands of staff
and billions in consumer businesses, Citi remains
one of the world's most powerful financial institutions.
And the firm today is intensely focused on the
institutional clients group and global wealth
management. Actively attempting to shed the systemic
complexity and retail risk that nearly destroyed
it in 2008 and has plagued its regulatory record
ever since. Which brings us to our final provocative
thought. The source material highlights that
the persistent, massive regulatory fines, specifically
for the failure to establish effective risk management
and data governance, have resulted in Jane Frazier's
current plan to transition from external IT contractors
to hiring 50 ,000 full -time technology employees.
So given the bank's history of catastrophic internal
control failures, what does this massive internal
shift say about the future of risk and compliance
in too -big -to -fail banking? It signals a profound
shift. This is not just a technology upgrade.
It's an attempt to centralize and internalize
control over the very data and systems that failed
regulators in 2008 and again in 2020. So the
question is, will making technology governance
a core internal function finally allow Citi to
move past the continuous cycle of massive fines
and regulatory failure that has defined the last
two decades? And how will this huge commitment
to internal tech staff impact their core structure
and performance moving forward? in an industry
that relies on agility. That transition from
a financial conglomerate to a financial technology
governance company is the question that will
define the next chapter for Citi and for every
other bank deemed too big to fail.