WEBVTT 00:00:00.000 --> 00:00:02.140 Welcome back to The Deep Dive, the only place 00:00:02.140 --> 00:00:04.339 where we take stacks of complicated financial 00:00:04.339 --> 00:00:07.799 history, market turmoil and trillion dollar institutions 00:00:07.799 --> 00:00:10.800 and cut right to the most fascinating essential 00:00:10.800 --> 00:00:12.820 knowledge you need to be well informed. Today, 00:00:13.000 --> 00:00:15.300 we are attempting to map the entire lifecycle 00:00:15.300 --> 00:00:20.199 of a true financial behemoth, Citigroup or Citi 00:00:20.199 --> 00:00:22.059 as most people know it. And this isn't just another 00:00:22.059 --> 00:00:24.600 bank. No. Not at all. It's a force multiplier 00:00:24.600 --> 00:00:27.120 in global finance. It's one of the big four U 00:00:27.120 --> 00:00:29.640 .S. banks. It's a core bulge bracket investment 00:00:29.640 --> 00:00:32.060 bank. And maybe most importantly, it's designated 00:00:32.060 --> 00:00:35.159 by global regulators as systemically important. 00:00:35.479 --> 00:00:37.500 Which is I mean, that's just the textbook definition 00:00:37.500 --> 00:00:39.679 of too big to fail. Exactly. And when you look 00:00:39.679 --> 00:00:43.539 at the sources, the scale is just. It's dizzying. 00:00:43.600 --> 00:00:45.859 As of 2024, we're talking about an institution 00:00:45.859 --> 00:00:49.659 with, what, $2 .353 trillion in assets? Trillion, 00:00:49.840 --> 00:00:53.439 yeah. And a global workforce of around 229 ,000 00:00:53.439 --> 00:00:55.140 employees. So like you said, this isn't just 00:00:55.140 --> 00:00:57.679 a bank. It's this massive, interconnected, cross 00:00:57.679 --> 00:01:00.039 -border financial machine. And when it shakes, 00:01:00.159 --> 00:01:02.570 the whole world pays attention. Our mission today 00:01:02.570 --> 00:01:05.890 is to really unpack this huge 200 plus year history. 00:01:06.030 --> 00:01:08.370 We're going to try to trace its earliest origins 00:01:08.370 --> 00:01:11.230 as a, you know, a disruptive global innovator. 00:01:11.269 --> 00:01:14.230 Then get into that dramatic, defining 1998 mega 00:01:14.230 --> 00:01:16.930 merger that basically defied regulators. Right. 00:01:16.989 --> 00:01:18.829 And then, of course, its central catastrophic 00:01:18.829 --> 00:01:21.950 role in the 2008 financial crisis, a crisis that 00:01:21.950 --> 00:01:24.010 required, I mean, historic government intervention 00:01:24.010 --> 00:01:27.579 and a $306 billion guarantee. And we have to 00:01:27.579 --> 00:01:29.159 finish with what's happening right now, this 00:01:29.159 --> 00:01:32.379 continuous, massive strategic restructuring under 00:01:32.379 --> 00:01:34.780 its current leadership, including a dramatic 00:01:34.780 --> 00:01:37.909 overhaul of its technology. All while, you know, 00:01:37.909 --> 00:01:41.670 tracking this constant expensive thread of regulatory 00:01:41.670 --> 00:01:43.870 scrutiny that seems to just perpetually haunt 00:01:43.870 --> 00:01:46.730 its operations. It's a story of pioneering vision 00:01:46.730 --> 00:01:49.829 that meets, well, spectacular failure, followed 00:01:49.829 --> 00:01:52.010 by a long, painful decade of trying to shrink 00:01:52.010 --> 00:01:54.189 back down to a manageable size. OK, so let's 00:01:54.189 --> 00:01:56.090 start unpacking this journey. The modern company, 00:01:56.189 --> 00:01:58.010 as we know it today, was essentially born in 00:01:58.010 --> 00:02:01.370 1998, right? That's the moment. It was the merger 00:02:01.370 --> 00:02:04.950 of two giants, Citicorp. which was the bank holding 00:02:04.950 --> 00:02:07.730 company for the retail giant Citibank, and then 00:02:07.730 --> 00:02:10.050 Travelers Group, the insurance and brokerage 00:02:10.050 --> 00:02:11.789 conglomerate. Though the Travelers Insurance 00:02:11.789 --> 00:02:14.189 part, that didn't stick around for long. No, 00:02:14.330 --> 00:02:16.550 it was spun off just a few years later in 2002. 00:02:17.449 --> 00:02:20.210 But that merger moment, that's what truly defined 00:02:20.210 --> 00:02:23.069 the modern firm structure. Frankly, it's appetite 00:02:23.069 --> 00:02:25.430 for risk. And for you, the listener, to sort 00:02:25.430 --> 00:02:28.550 of grasp how Citi operates today, it's worth 00:02:28.550 --> 00:02:31.569 noting it's two primary arms. You've got the 00:02:31.569 --> 00:02:34.610 Institutional Clients Group, or ICG. That's the 00:02:34.610 --> 00:02:36.909 high -level corporate and investment banking 00:02:36.909 --> 00:02:39.750 arm, the classic Wall Street component that deals 00:02:39.750 --> 00:02:42.330 with massive treasury services and securities 00:02:42.330 --> 00:02:44.969 for big corporations and even governments. And 00:02:44.969 --> 00:02:46.610 then on the other side, the consumer side, you 00:02:46.610 --> 00:02:48.689 have Personal Banking and Wealth Management, 00:02:48.849 --> 00:02:52.830 or PBWM. And this division includes the Citibank 00:02:52.830 --> 00:02:54.949 that everyone sees on the street corner. Right. 00:02:55.050 --> 00:02:57.349 The ubiquitous retail bank. Yeah. But it's also, 00:02:57.449 --> 00:02:59.610 and this might surprise you, the third largest 00:02:59.610 --> 00:03:01.729 issuer of credit cards in the United States. 00:03:01.770 --> 00:03:04.550 So whether you're a global Fortune 500 company 00:03:04.550 --> 00:03:07.770 or just paying off your monthly credit card bill, 00:03:07.909 --> 00:03:10.599 you're interacting with Citigroup. Let's start 00:03:10.599 --> 00:03:13.199 at the very, very beginning, tracing the roots 00:03:13.199 --> 00:03:15.979 of what became Citicorp. This story kicks off 00:03:15.979 --> 00:03:18.539 in the early days of American finance. It does. 00:03:18.740 --> 00:03:20.800 The initial charter was for the City Bank of 00:03:20.800 --> 00:03:24.860 New York, granted on June 16, 1812. Right here 00:03:24.860 --> 00:03:28.300 in New York. 1812. That's incredible. It launched 00:03:28.300 --> 00:03:30.939 with $2 million in capital, which was a huge 00:03:30.939 --> 00:03:33.580 sum back then. It was specifically created to 00:03:33.580 --> 00:03:35.599 serve a group of powerful New York merchants 00:03:35.599 --> 00:03:39.199 and traders who were navigating that very new 00:03:39.199 --> 00:03:41.490 American market. The early history seems to be 00:03:41.490 --> 00:03:44.569 a masterclass in adaptation, survival, and really 00:03:44.569 --> 00:03:46.949 seizing leadership during all that market chaos. 00:03:47.210 --> 00:03:48.870 Absolutely. If you look at the early leadership 00:03:48.870 --> 00:03:51.030 figures, they were a huge part of driving that 00:03:51.030 --> 00:03:53.909 expansion. So who were the key players in those 00:03:53.909 --> 00:03:57.210 first few decades? Well, after the infamous economic 00:03:57.210 --> 00:04:00.810 downturn, the panic of 1837, for instance, control 00:04:00.810 --> 00:04:03.210 of the company was acquired by a man named Moses 00:04:03.210 --> 00:04:05.870 Taylor. Moses Taylor. Yeah, he was this really 00:04:05.870 --> 00:04:09.210 astute New York merchant dealt mostly in shitter 00:04:09.210 --> 00:04:12.400 and coffee. And he guided the bank through all 00:04:12.400 --> 00:04:15.219 the volatility of the mid -19th century. But 00:04:15.219 --> 00:04:17.899 crucially, he had the foresight to invest heavily 00:04:17.899 --> 00:04:20.740 in U .S. government bonds during the Civil War. 00:04:20.920 --> 00:04:22.540 Which would have stabilized the bank, right, 00:04:22.680 --> 00:04:25.000 while others were failing. Exactly. It allowed 00:04:25.000 --> 00:04:27.139 it to emerge stronger when other institutions 00:04:27.139 --> 00:04:30.660 went under. So that kind of shrewd, opportunistic 00:04:30.660 --> 00:04:34.019 leadership really set the stage. Then, as we 00:04:34.019 --> 00:04:35.839 move toward the turn of the century, the bank 00:04:35.839 --> 00:04:38.860 starts to hit a sort of critical mass. It really 00:04:38.860 --> 00:04:41.019 does. Under the leadership of James Stillman, 00:04:41.079 --> 00:04:43.959 who took over after 1891, the bank cemented its 00:04:43.959 --> 00:04:46.660 domestic dominance. Stillman was famous for his 00:04:46.660 --> 00:04:49.139 connections to major industrial figures like 00:04:49.139 --> 00:04:51.740 the Rockefellers. And by combining this aggressive 00:04:51.740 --> 00:04:54.259 lending with very robust capitalization, the 00:04:54.259 --> 00:04:56.240 bank officially became the largest bank in the 00:04:56.240 --> 00:04:59.339 entire U .S. by 1895. Wow. So it wasn't just 00:04:59.339 --> 00:05:01.779 a merchant bank anymore. It was a national financial 00:05:01.779 --> 00:05:05.439 pillar. Absolutely. But as you pointed out, that 00:05:05.439 --> 00:05:08.300 domestic size just wasn't enough for their ambition. 00:05:08.639 --> 00:05:12.500 The bank quickly became a pioneer in global reach. 00:05:12.680 --> 00:05:16.120 In 1914, it inaugurated the first overseas branch 00:05:16.120 --> 00:05:18.740 of a U .S. bank. In Buenos Aires, Argentina. 00:05:19.120 --> 00:05:21.399 Right. But what's often missed is that their 00:05:21.399 --> 00:05:23.639 international activity actually started even 00:05:23.639 --> 00:05:26.560 before that formal branch. The sources note that 00:05:26.560 --> 00:05:29.560 the bank had been sort of quietly active in supporting 00:05:29.560 --> 00:05:32.100 plantation economies like the massive Cuban sugar 00:05:32.100 --> 00:05:34.939 industry since the mid 19th century. So they 00:05:34.939 --> 00:05:37.939 had this early hands on global vision. They were 00:05:37.939 --> 00:05:40.180 embedding themselves in international trade flows. 00:05:40.420 --> 00:05:42.500 That is absolutely key to understanding why they 00:05:42.500 --> 00:05:44.560 were so uniquely positioned to become a modern 00:05:44.560 --> 00:05:46.699 day multinational financial giant. They didn't 00:05:46.699 --> 00:05:48.850 just. follow trade, they enabled it. And it's 00:05:48.850 --> 00:05:51.050 clear this massive global footprint was paired 00:05:51.050 --> 00:05:53.730 with this relentless internal drive for innovation, 00:05:53.949 --> 00:05:57.230 an image the bank really cultivated, right, as 00:05:57.230 --> 00:05:59.709 this modern forward -thinking force. They were 00:05:59.709 --> 00:06:02.050 true innovators, especially on the consumer side, 00:06:02.269 --> 00:06:04.610 really making banking accessible to the average 00:06:04.610 --> 00:06:07.509 American. Like offering compound interest. They 00:06:07.509 --> 00:06:10.569 were the first major U .S. bank to offer compound 00:06:10.569 --> 00:06:14.870 interest on savings way back in 1921. Compound 00:06:14.870 --> 00:06:16.850 interest, which means you earn interest on your 00:06:16.850 --> 00:06:19.449 interest, sounds simple now. But it was a powerful 00:06:19.449 --> 00:06:21.930 incentive for mass saving at the time. A huge 00:06:21.930 --> 00:06:24.029 incentive. And they pushed the boundaries on 00:06:24.029 --> 00:06:27.129 lending, too. The unsecured personal loans. Just 00:06:27.129 --> 00:06:30.819 seven years later, in 1928. They pioneered unsecured 00:06:30.819 --> 00:06:33.839 personal loans. This was a radical move. Before 00:06:33.839 --> 00:06:36.959 this, banks rarely lent money without some form 00:06:36.959 --> 00:06:39.540 of collateral. So this action fundamentally shifted 00:06:39.540 --> 00:06:41.740 the relationship between banks and individual 00:06:41.740 --> 00:06:44.000 consumers. It established the model that's the 00:06:44.000 --> 00:06:47.019 basis for most consumer credit today. Then, post 00:06:47.019 --> 00:06:50.379 -oppression, in 1936, they were among the first 00:06:50.379 --> 00:06:52.819 to widely offer customer checking accounts to 00:06:52.819 --> 00:06:54.540 the general public. So these innovations were 00:06:54.540 --> 00:06:56.779 huge steps toward mass consumer banking. But 00:06:56.779 --> 00:06:58.579 what about the things that fundamentally changed 00:06:58.579 --> 00:07:01.379 how money markets themselves work? That brings 00:07:01.379 --> 00:07:04.060 us to 1961, when they launched the Negotiable 00:07:04.060 --> 00:07:07.500 Certificate of Deposit, or CD. A negotiable CD. 00:07:07.779 --> 00:07:11.220 The sources note this was the first new negotiable 00:07:11.220 --> 00:07:14.040 instrument introduced into the market since 1888. 00:07:14.560 --> 00:07:18.759 That's a staggering 73 -year gap bridged by their 00:07:18.759 --> 00:07:20.860 innovation. For the listener who might not be 00:07:20.860 --> 00:07:23.360 familiar with the term, why was the negotiable 00:07:23.360 --> 00:07:26.519 CD such a seismic shift? Because before this, 00:07:26.680 --> 00:07:30.199 CDs weren't easily sold to another party. Banks 00:07:30.199 --> 00:07:34.310 relied mostly on these... volatile demand deposits. 00:07:34.709 --> 00:07:38.069 The negotiable CD allowed a bank to issue a promise 00:07:38.069 --> 00:07:40.730 to pay a fixed amount on a certain date. And 00:07:40.730 --> 00:07:42.529 that promise could be traded on the open market. 00:07:42.670 --> 00:07:45.990 Exactly. This gave banks a stable, reliable way 00:07:45.990 --> 00:07:48.310 to raise very large amounts of money from corporate 00:07:48.310 --> 00:07:51.389 depositors and institutional investors. It fundamentally 00:07:51.389 --> 00:07:54.149 changed how money markets raised and moved liquidity. 00:07:54.470 --> 00:07:56.750 So it was a crucial tool for an ambitious bank 00:07:56.750 --> 00:07:58.829 that wanted to grow quickly. Absolutely essential. 00:07:59.290 --> 00:08:00.889 And they kept pushing the envelope into the credit 00:08:00.889 --> 00:08:02.870 card space, too. Read the everything card. They 00:08:02.870 --> 00:08:04.970 did. In 1967, they introduced the everything 00:08:04.970 --> 00:08:07.389 card, which, interestingly enough, would later 00:08:07.389 --> 00:08:09.470 evolve into what we all know today as MasterCard. 00:08:09.649 --> 00:08:12.029 So they weren't just participating in the financial 00:08:12.029 --> 00:08:14.730 system. They were defining its products. Very 00:08:14.730 --> 00:08:17.370 much so. And then came the technology that really 00:08:17.370 --> 00:08:20.870 brought banking into the modern age. The ATM. 00:08:21.110 --> 00:08:23.970 Under CEO Walter Wriston in the mid -70s. Correct. 00:08:24.509 --> 00:08:27.290 The company, then formally renamed Citibank, 00:08:27.430 --> 00:08:30.250 launched the Citicard. pioneering the use of 00:08:30.250 --> 00:08:34.169 24 -hour ATMs. Think about that. 24 -hour access 00:08:34.169 --> 00:08:36.460 to your cash. That was a truly revolutionary 00:08:36.460 --> 00:08:39.419 concept. It changed banking from a nine -to -five, 00:08:39.419 --> 00:08:42.039 face -to -face transaction into something instantaneous 00:08:42.039 --> 00:08:44.620 and always on. And this was the backdrop for 00:08:44.620 --> 00:08:46.679 the rise of John S. Reid, who took over as CEO 00:08:46.679 --> 00:08:50.080 in 1984. The next 14 years saw Citibank become 00:08:50.080 --> 00:08:52.679 not only the largest U .S. bank, but also the 00:08:52.679 --> 00:08:54.740 largest issuer of credit cards and charge cards 00:08:54.740 --> 00:08:57.879 globally, expanding its reach to over 90 countries. 00:08:58.159 --> 00:09:00.700 So by the late 1990s, Citicorp was this consumer 00:09:00.700 --> 00:09:03.779 banking leviathan with deep global roots. Absolutely. 00:09:04.200 --> 00:09:06.220 Which brings us to the necessary counterparty 00:09:06.220 --> 00:09:09.139 in that massive 1998 deal, the Travelers Group. 00:09:09.340 --> 00:09:11.379 Right. And this was not an ancient, regulated 00:09:11.379 --> 00:09:13.980 institution like Citicorp. This was a modern 00:09:13.980 --> 00:09:16.299 conglomerate forged by the sheer aggressive will 00:09:16.299 --> 00:09:19.559 of its CEO, Sandy Weil. Weil was the quintessential 00:09:19.559 --> 00:09:22.500 dealmaker of the late 20th century. His empire 00:09:22.500 --> 00:09:25.279 building was, well, it was aggressive and it 00:09:25.279 --> 00:09:29.360 was rapid. It started in 1986. He took commercial 00:09:29.360 --> 00:09:32.899 credit, a consumer finance subsidiary, private. 00:09:33.309 --> 00:09:36.330 And then he just went on a buying spree. He acquired 00:09:36.330 --> 00:09:38.769 Primerica Financial Services, which already owned 00:09:38.769 --> 00:09:42.110 the major brokerage firm, Smith Barney. And his 00:09:42.110 --> 00:09:44.669 core strategy was all about cross -selling. Precisely. 00:09:44.710 --> 00:09:47.090 The goal was to build a financial supermarket. 00:09:47.490 --> 00:09:49.870 He wanted to ensure that all the entities within 00:09:49.870 --> 00:09:52.389 the parent company marketed and sold each other's 00:09:52.389 --> 00:09:54.289 services. So if you bought insurance, you should 00:09:54.289 --> 00:09:56.509 also buy a brokerage account. If you got a loan, 00:09:56.690 --> 00:09:59.409 you should buy life insurance. You got it. Maximize 00:09:59.409 --> 00:10:01.649 the revenue extracted from every single customer 00:10:01.649 --> 00:10:04.169 relationship. The consolidation really sped up 00:10:04.169 --> 00:10:07.649 in 1993 when he acquired the venerable but struggling 00:10:07.649 --> 00:10:09.950 Travelers Insurance. A company that had taken 00:10:09.950 --> 00:10:12.529 huge losses from bad real estate investments 00:10:12.529 --> 00:10:16.629 and the devastating Hurricane Andrew. And with 00:10:16.629 --> 00:10:19.250 that acquisition came the logo. The distinctive 00:10:19.250 --> 00:10:21.990 Travelers red umbrella logo, which he immediately 00:10:21.990 --> 00:10:24.409 slapped across all his businesses. It was this 00:10:24.409 --> 00:10:27.210 powerful visual symbol of his rapidly growing 00:10:27.210 --> 00:10:29.980 empire. And the deal added crucial property, 00:10:30.159 --> 00:10:32.679 casualty, and life insurance underwriting capabilities 00:10:32.679 --> 00:10:35.860 to his machine. Okay, so the final decisive piece 00:10:35.860 --> 00:10:37.779 of the puzzle, the one that made Travelers a 00:10:37.779 --> 00:10:42.320 true Wall Street player, came in 1997. Yes. Travelers 00:10:42.320 --> 00:10:44.919 acquired Salomon Brothers, a major bond dealer 00:10:44.919 --> 00:10:47.279 and investment bank in the bulge bracket category, 00:10:47.539 --> 00:10:52.309 for a massive $9 billion. $9 billion. And that 00:10:52.309 --> 00:10:54.389 acquisition was a stroke of strategic genius. 00:10:54.690 --> 00:10:57.190 It was designed to complement, not just replicate. 00:10:57.649 --> 00:10:59.690 Salomon was focused heavily on institutional 00:10:59.690 --> 00:11:02.610 fixed income products and trading, a real powerhouse 00:11:02.610 --> 00:11:04.970 in the bond markets. While Smith Barney was strong 00:11:04.970 --> 00:11:07.610 in equities and retail brokerage. Exactly. So 00:11:07.610 --> 00:11:10.090 by merging them into Salomon Smith Barney, Weill 00:11:10.090 --> 00:11:12.070 created this unified, full -service securities 00:11:12.070 --> 00:11:14.850 unit ready to compete globally. It completed 00:11:14.850 --> 00:11:17.029 all the necessary components for the massive, 00:11:17.169 --> 00:11:19.389 game -changing merger that would follow just 00:11:19.389 --> 00:11:21.980 a year later. It truly set the stage for one 00:11:21.980 --> 00:11:24.340 of the most consequential mergers in modern financial 00:11:24.340 --> 00:11:27.240 history. Now we arrive at the pivotal moment 00:11:27.240 --> 00:11:29.379 that created the financial firm we're analyzing 00:11:29.379 --> 00:11:33.240 today, the historic merger of Citicorp and Travelers. 00:11:33.279 --> 00:11:37.240 It was announced in April 1998. And it officially 00:11:37.240 --> 00:11:39.779 formed Citigroup Inc., which was at the time 00:11:39.779 --> 00:11:41.860 the world's largest financial services organization 00:11:41.860 --> 00:11:45.860 by a pretty significant margin. The scale was 00:11:45.860 --> 00:11:49.100 just immense. You're combining Citicorp's global 00:11:49.100 --> 00:11:52.220 consumer network and lending capabilities with 00:11:52.220 --> 00:11:55.259 Traveler's huge investment banking, brokerage 00:11:55.259 --> 00:11:57.820 and insurance underwriting capacity. But right 00:11:57.820 --> 00:12:00.320 away, the power structure was questioned. Oh, 00:12:00.399 --> 00:12:02.460 it was immediately fraught with tension. The 00:12:02.460 --> 00:12:04.580 leadership setup was just so fragile. You had 00:12:04.580 --> 00:12:07.399 John S. Reid, the steady hand, the operations 00:12:07.399 --> 00:12:09.460 technocrat from Citicorp. And then Sandy Weil, 00:12:09.700 --> 00:12:12.360 the aggressive. Deal -driven empire builder from 00:12:12.360 --> 00:12:14.139 Travelers. And they were named co -chairman and 00:12:14.139 --> 00:12:16.600 co -CEOs. Given their vastly different management 00:12:16.600 --> 00:12:19.379 styles, Reid focused on tech and systems while 00:12:19.379 --> 00:12:21.899 on deals and cross -selling it. It raised immediate, 00:12:22.019 --> 00:12:24.460 profound questions about the long -term viability 00:12:24.460 --> 00:12:26.940 of that shared leadership. Everyone expected 00:12:26.940 --> 00:12:29.419 a clash of titans. And they got one. As a side 00:12:29.419 --> 00:12:32.419 note, the new company kept the city brand name, 00:12:32.539 --> 00:12:35.700 but they adopted Traveler's highly recognizable 00:12:35.700 --> 00:12:38.059 red umbrella logo, right? They used it until 00:12:38.059 --> 00:12:42.190 2007. They did. But that brand drama... It really 00:12:42.190 --> 00:12:45.149 paled in comparison to the regulatory drama that 00:12:45.149 --> 00:12:47.809 defined the merger. As you mentioned, this merger 00:12:47.809 --> 00:12:51.070 was under the existing law. Well, it was essentially 00:12:51.070 --> 00:12:53.730 illegal. Precisely. This was a direct, massive 00:12:53.730 --> 00:12:55.429 challenge to the remaining provisions of the 00:12:55.429 --> 00:12:57.429 Glass -Steagall Act. Right. For the learner, 00:12:57.669 --> 00:13:00.169 Glass -Steagall was enacted back in the 1930s 00:13:00.169 --> 00:13:02.909 after the Great Depression, specifically to separate 00:13:02.909 --> 00:13:05.610 commercial banking, you know, the boring deposit 00:13:05.610 --> 00:13:08.779 -taking, loan -making business. From the riskier 00:13:08.779 --> 00:13:11.259 stuff like investment banking and insurance underwriting. 00:13:11.419 --> 00:13:13.679 So merging a commercial bank holding company 00:13:13.679 --> 00:13:16.039 like Citicorp with an insurance underwriter like 00:13:16.039 --> 00:13:18.639 Travelers was just forbidden. Expressly forbidden. 00:13:18.759 --> 00:13:20.620 So this wasn't an accidental violation. This 00:13:20.620 --> 00:13:23.200 was a deliberate, calculated, massive gamble 00:13:23.200 --> 00:13:26.059 by Weil and Reed on legislative change. They 00:13:26.059 --> 00:13:27.940 went ahead with the merger knowing they were 00:13:27.940 --> 00:13:30.299 violating the spirit, if not the letter, of the 00:13:30.299 --> 00:13:33.259 law. It was an incredible act of strategic defiance. 00:13:33.600 --> 00:13:36.879 They were operating on a regulatory clock. knowing 00:13:36.879 --> 00:13:38.700 that if the law wasn't changed, they would have 00:13:38.700 --> 00:13:41.220 between two and five years to divest any prohibited 00:13:41.220 --> 00:13:43.720 assets. So they were essentially betting that 00:13:43.720 --> 00:13:46.139 their size and influence would force Congress's 00:13:46.139 --> 00:13:49.220 hand. Absolutely. Weil publicly stated at the 00:13:49.220 --> 00:13:51.919 time that they had had enough discussions to 00:13:51.919 --> 00:13:54.039 believe this will not be a problem. And in a 00:13:54.039 --> 00:13:56.100 stunning vindication of that aggressive strategy, 00:13:56.460 --> 00:13:59.360 the gamble paid off. It did. In November 1999, 00:13:59.740 --> 00:14:02.259 the Gramm -Leach -Bliley Act was passed, and 00:14:02.259 --> 00:14:04.500 it specifically repealed the relevant sections 00:14:04.500 --> 00:14:07.240 of Glass -Steagall. Opening the door for these 00:14:07.240 --> 00:14:10.000 massive financial services conglomerates. For 00:14:10.000 --> 00:14:12.379 the first time since the 1930s, they could offer 00:14:12.379 --> 00:14:15.019 commercial banking, investment banking, and insurance 00:14:15.019 --> 00:14:18.500 all into one giant roof. Citigroup was positioned 00:14:18.500 --> 00:14:21.120 perfectly, having already done the merger, to 00:14:21.120 --> 00:14:23.700 immediately take advantage of this new deregulated 00:14:23.700 --> 00:14:25.879 environment. The timing was just breathtaking. 00:14:26.480 --> 00:14:28.759 That massive deregulation must have just further 00:14:28.759 --> 00:14:31.679 fueled their appetite for expansion. In the immediate 00:14:31.679 --> 00:14:34.460 post -merger environment, Citi wasted no time. 00:14:34.740 --> 00:14:38.019 No, in 2000, they acquired Associates First Capital 00:14:38.019 --> 00:14:42.480 Corporation for $31 .1 billion in stock. And 00:14:42.480 --> 00:14:45.480 this is where the dark side of that aggressive 00:14:45.480 --> 00:14:48.980 post -Glass -Steagall appetite immediately surfaced. 00:14:49.080 --> 00:14:52.399 It really did. Associates First Capital had already 00:14:52.399 --> 00:14:54.799 been widely criticized for predatory lending 00:14:54.799 --> 00:14:57.480 practices. The sources show that Citi basically 00:14:57.480 --> 00:14:59.580 purchased a massive headache with this acquisition. 00:14:59.820 --> 00:15:02.580 A company whose business model was built on exploiting 00:15:02.580 --> 00:15:06.059 vulnerable consumers. Right. And the legal fallout 00:15:06.059 --> 00:15:08.720 was swift and costly. It immediately stained 00:15:08.720 --> 00:15:10.799 the newly formed conglomerate. So how did that 00:15:10.799 --> 00:15:13.379 play out? Citi eventually settled with the Federal 00:15:13.379 --> 00:15:16.419 Trade Commission, agreeing to pay a record $240 00:15:16.419 --> 00:15:19.759 million in restitution to thousands of customers 00:15:19.759 --> 00:15:21.779 who were victims of these predatory practices. 00:15:22.120 --> 00:15:24.259 And what were those practices? Things like flipping 00:15:24.259 --> 00:15:27.519 mortgages. Exactly. Flipping mortgages, refinancing 00:15:27.519 --> 00:15:29.820 repeatedly over short periods to extract new, 00:15:29.960 --> 00:15:32.899 unnecessary fees, and packing them with optional 00:15:32.899 --> 00:15:35.720 expensive credit insurance that borrowers often 00:15:35.720 --> 00:15:38.090 didn't even know they were buying. So this incident 00:15:38.090 --> 00:15:40.649 early in Citi's life demonstrated an alarming 00:15:40.649 --> 00:15:44.110 tolerance for risk and ethical corner cutting 00:15:44.110 --> 00:15:47.009 in the pursuit of growth. Very much so. Yet they 00:15:47.009 --> 00:15:50.200 continued to expand globally. They acquired the 00:15:50.200 --> 00:15:53.179 European American Bank in 2001 for $1 .9 billion. 00:15:53.820 --> 00:15:57.259 And then Banamex in Mexico in August 2001 for 00:15:57.259 --> 00:16:01.559 a massive $12 .5 billion. That Banamex deal is 00:16:01.559 --> 00:16:04.039 fascinating. Why did they pay such a monumental 00:16:04.039 --> 00:16:07.039 sum for a Mexican bank at that time? That massive 00:16:07.039 --> 00:16:09.899 price tag, the $12 .5 billion, was a direct realization 00:16:09.899 --> 00:16:13.120 of that post -Glass -Steagall financial supermarket 00:16:13.120 --> 00:16:15.480 vision. Because Banamex wasn't just a retail 00:16:15.480 --> 00:16:17.799 bank. No, it was deeply embedded in the Mexican 00:16:17.799 --> 00:16:20.639 economy. It offered consumer banking, investment 00:16:20.639 --> 00:16:23.720 banking, and insurance. It gave Citi an immediate, 00:16:23.899 --> 00:16:26.720 unparalleled foothold in Latin America, a region 00:16:26.720 --> 00:16:28.960 critical for trade and corporate clients. So 00:16:28.960 --> 00:16:31.820 Weill's goal was global scale, and Banamex was 00:16:31.820 --> 00:16:34.179 a ready -made platform for extending that cross 00:16:34.179 --> 00:16:36.480 -selling model into a high -growth market. Exactly. 00:16:36.720 --> 00:16:39.740 But that initial ambitious vision of a frictionless 00:16:39.740 --> 00:16:41.960 financial supermarket It eventually ran into 00:16:41.960 --> 00:16:43.899 some practical operational problems. You beating 00:16:43.899 --> 00:16:46.980 to a major spinoff? Yes. The core traveler's 00:16:46.980 --> 00:16:48.919 insurance underwriting business was spun off 00:16:48.919 --> 00:16:52.240 in 2002, just four years after the merger. And 00:16:52.240 --> 00:16:55.139 this decision was a powerful admission that the 00:16:55.139 --> 00:16:57.720 synergies they had bet on were just not outweighing 00:16:57.720 --> 00:16:59.559 the drawbacks. What were the main reasons for 00:16:59.559 --> 00:17:02.559 that reversal? The sources point to a few clear 00:17:02.559 --> 00:17:04.980 things. First, the insurance unit was just too 00:17:04.980 --> 00:17:07.640 volatile. Insurance earnings are seasonal. They're 00:17:07.640 --> 00:17:10.200 highly vulnerable to large disasters like the 00:17:10.200 --> 00:17:12.960 huge losses after the September 11 attacks, which 00:17:12.960 --> 00:17:14.680 had just happened. So it led to unpredictable 00:17:14.680 --> 00:17:17.180 financial results that acted as a drag on the 00:17:17.180 --> 00:17:20.079 stock price. Right. The complexity didn't match 00:17:20.079 --> 00:17:22.779 the value. And furthermore, Citigroup found it 00:17:22.779 --> 00:17:25.900 extremely difficult to successfully sell insurance 00:17:25.900 --> 00:17:28.200 directly to its customers. People were used to 00:17:28.200 --> 00:17:30.720 buying from brokers, not their bank teller. Exactly. 00:17:31.130 --> 00:17:33.549 The promised cross -selling synergies just didn't 00:17:33.549 --> 00:17:36.130 materialize on the consumer side, which made 00:17:36.130 --> 00:17:38.869 the complexity and volatility of owning a massive 00:17:38.869 --> 00:17:42.309 insurance underwriter, well, pointless. But if 00:17:42.309 --> 00:17:44.809 the synergies weren't there, doesn't that fundamentally 00:17:44.809 --> 00:17:47.710 undermine the entire justification Weil used 00:17:47.710 --> 00:17:50.109 to push for the repeal of Glass -Steagall? That 00:17:50.109 --> 00:17:52.930 is the central critique of the mega -merger era. 00:17:53.210 --> 00:17:56.250 Was the merger just about power and scale rather 00:17:56.250 --> 00:17:59.309 than actual efficiency? It's a great question. 00:18:00.240 --> 00:18:02.559 While the merger absolutely forced regulatory 00:18:02.559 --> 00:18:06.279 change, a clear power play, the subsequent spinoff 00:18:06.279 --> 00:18:08.779 suggested that combining banking, securities 00:18:08.779 --> 00:18:12.079 and insurance under one roof wasn't necessarily 00:18:12.079 --> 00:18:14.779 optimal for long term profitability or stock 00:18:14.779 --> 00:18:17.779 performance. So it was a realization that managing 00:18:17.779 --> 00:18:21.400 a truly frictionless financial supermarket was 00:18:21.400 --> 00:18:24.880 too complex, too volatile and ultimately just 00:18:24.880 --> 00:18:27.359 not worth the structural drag. I think that's 00:18:27.359 --> 00:18:29.890 right. The Travelers Insurance business eventually 00:18:29.890 --> 00:18:32.890 merged with the St. Paul Companies in 2004, forming 00:18:32.890 --> 00:18:35.130 the Travelers Companies we know today. But Citi 00:18:35.130 --> 00:18:37.250 controversially held on to that distinctive red 00:18:37.250 --> 00:18:39.309 umbrella logo for years, didn't they? They did. 00:18:39.450 --> 00:18:41.910 They kept that iconic branding until February 00:18:41.910 --> 00:18:45.230 2007, when they finally sold the logo back to 00:18:45.230 --> 00:18:47.309 the newly named Travelers Companies and officially 00:18:47.309 --> 00:18:49.690 adopted the standardized corporate Citi brand. 00:18:49.930 --> 00:18:52.410 So it took them almost a decade to fully disentangle 00:18:52.410 --> 00:18:54.349 the branding and structure of that original merger. 00:18:54.609 --> 00:18:56.900 A very long time. And here's where the narrative 00:18:56.900 --> 00:18:59.579 takes a dramatic and frankly, a terrifying turn. 00:18:59.859 --> 00:19:03.180 Despite its pioneering past, its massive global 00:19:03.180 --> 00:19:06.420 reach and the successful repeal of Glass -Steagall, 00:19:06.559 --> 00:19:09.220 Citigroup found itself catastrophically exposed 00:19:09.220 --> 00:19:12.460 as the subprime mortgage crisis began to accelerate 00:19:12.460 --> 00:19:16.410 in 2007. And the failure here. It wasn't a sudden 00:19:16.410 --> 00:19:18.970 shock. It was a slow -motion critical breakdown 00:19:18.970 --> 00:19:21.009 in risk management that had been ignored for 00:19:21.009 --> 00:19:23.670 years. The primary source of trouble was their 00:19:23.670 --> 00:19:26.990 heavy, almost reckless exposure to complex structured 00:19:26.990 --> 00:19:30.430 products. Specifically, collateralized debt obligations, 00:19:30.670 --> 00:19:34.289 or CDOs, backed by troubled mortgages. For the 00:19:34.289 --> 00:19:37.259 learner, A CDO is basically a financial instrument 00:19:37.259 --> 00:19:39.680 created by pooling various types of debt, in 00:19:39.680 --> 00:19:42.400 this case, thousands of mortgages, and then selling 00:19:42.400 --> 00:19:44.539 slices of that pool to investors. And the risk 00:19:44.539 --> 00:19:46.819 comes from the quality of the underlying mortgages. 00:19:46.980 --> 00:19:49.059 Which in Citi's case had just evaporated. And 00:19:49.059 --> 00:19:51.619 the failure here was less about bad luck and 00:19:51.619 --> 00:19:53.799 more about an internal culture that just believed 00:19:53.799 --> 00:19:55.980 they were smarter than the market. Absolutely. 00:19:56.000 --> 00:19:58.099 It was pure arrogance modeled into mathematics. 00:19:58.420 --> 00:20:01.079 The company was using these elaborate risk models 00:20:01.079 --> 00:20:04.089 to assess their exposure. But the models had 00:20:04.089 --> 00:20:07.910 a fatal centralized flaw. What was the flaw? 00:20:08.130 --> 00:20:10.349 They were based on regional data and completely 00:20:10.349 --> 00:20:12.869 failed to include the possibility of a national 00:20:12.869 --> 00:20:15.029 housing downturn. So they just didn't think it 00:20:15.029 --> 00:20:17.289 could happen everywhere at once? The models effectively 00:20:17.289 --> 00:20:20.400 dismissed. the probability of a nationwide collapse 00:20:20.400 --> 00:20:23.759 as incredibly remote, less than one hundredth 00:20:23.759 --> 00:20:26.940 of one percent. They genuinely believe diversification 00:20:26.940 --> 00:20:29.559 protected them from systemic risk. That is a 00:20:29.559 --> 00:20:33.319 stunning, willful blindness. And it clearly infected 00:20:33.319 --> 00:20:35.380 the highest levels of leadership. Oh, absolutely. 00:20:35.680 --> 00:20:38.039 Two names frequently cited as being instrumental 00:20:38.039 --> 00:20:39.880 in pushing the company toward this high risk 00:20:39.880 --> 00:20:42.200 strategy involving mortgage backed securities 00:20:42.200 --> 00:20:45.509 and CDOs were board member Robert Rubin. and 00:20:45.509 --> 00:20:48.269 the CEO, Charles Prince. Rubin, a former U .S. 00:20:48.269 --> 00:20:50.170 Treasury secretary, was known for his influence. 00:20:50.569 --> 00:20:53.349 And Prince, the CEO, he became the face of the 00:20:53.349 --> 00:20:55.470 hubris. There's that key moment of corporate 00:20:55.470 --> 00:20:58.410 overconfidence, summarized by Prince's infamous 00:20:58.410 --> 00:21:01.410 quote just before the crisis truly erupted in 00:21:01.410 --> 00:21:04.970 2007. When he was asked why Citi was still involved 00:21:04.970 --> 00:21:07.730 in these risky markets, he said, Citi Group was 00:21:07.730 --> 00:21:10.579 still dancing. The music had stopped for many, 00:21:10.640 --> 00:21:12.460 but they were determined to keep the party going 00:21:12.460 --> 00:21:14.740 because the profit margins were just so high. 00:21:15.259 --> 00:21:17.799 Exactly. But while the executives were still 00:21:17.799 --> 00:21:20.539 dancing, someone inside the building was watching 00:21:20.539 --> 00:21:22.579 the band pack up their equipment and was ringing 00:21:22.579 --> 00:21:25.920 the fire alarm. Richard M. Bowen III, the chief 00:21:25.920 --> 00:21:27.900 underwriter for Citigroup's consumer lending 00:21:27.900 --> 00:21:30.500 group, who became a critical internal whistleblower. 00:21:30.660 --> 00:21:32.980 His actions were truly extraordinary, and they 00:21:32.980 --> 00:21:35.140 demonstrate the power of internal governance, 00:21:35.380 --> 00:21:38.019 or I should say, the failure of it. So starting 00:21:38.019 --> 00:21:41.599 in June 2006, Bowen began sending weekly reports 00:21:41.599 --> 00:21:43.859 and memoranda to the board of directors about 00:21:43.859 --> 00:21:46.819 the extreme, unacceptable risks being taken on 00:21:46.819 --> 00:21:48.799 by the mortgage operation. Which was buying and 00:21:48.799 --> 00:21:51.960 selling $90 billion of residential mortgages 00:21:51.960 --> 00:21:55.059 annually. His job was quality control, and the 00:21:55.059 --> 00:21:58.279 quality was just nonexistent. What specific numbers 00:21:58.279 --> 00:22:00.779 was he seeing that were so alarming? When he 00:22:00.779 --> 00:22:04.559 first raised the alarm in 2006, 60 % of the mortgages 00:22:04.559 --> 00:22:07.480 they were dealing with were defective. 60%. And 00:22:07.480 --> 00:22:09.359 that number just kept rising. It didn't stop. 00:22:09.579 --> 00:22:13.980 It eventually exceeded 80 % by late 2007. And 00:22:13.980 --> 00:22:16.759 crucially, Bowen wasn't just noting paperwork 00:22:16.759 --> 00:22:20.000 errors. He was warning that many of these mortgages 00:22:20.000 --> 00:22:22.519 were not just defective, but the direct result 00:22:22.519 --> 00:22:25.319 of outright mortgage fraud. He didn't just warn 00:22:25.319 --> 00:22:27.900 them about financial risk. He knew the legal 00:22:27.900 --> 00:22:30.660 and regulatory implications of hiding this from 00:22:30.660 --> 00:22:33.220 the market. That's what makes his action so powerful. 00:22:33.599 --> 00:22:37.750 On November 3rd, 2007, he sent an email. a formal 00:22:37.750 --> 00:22:39.829 record to the chairman Robert Rubin, the CFO, 00:22:39.990 --> 00:22:41.910 the head auditor, and the chief risk management 00:22:41.910 --> 00:22:44.730 officer explicitly warning them. Warning them 00:22:44.730 --> 00:22:47.190 about what specifically? That concealing this 00:22:47.190 --> 00:22:49.529 information from shareholders violated the Sarbanes 00:22:49.529 --> 00:22:52.890 -Oxley Act, or SOX. Let's pause quickly to define 00:22:52.890 --> 00:22:54.970 that for the listener. What were the SOX implications 00:22:54.970 --> 00:22:57.349 here? Well, the Sarbanes -Oxley Act, passed after 00:22:57.349 --> 00:23:00.630 Enron and WorldCom, requires CEOs and CFOs to 00:23:00.630 --> 00:23:02.450 personally certify that their financial statements 00:23:02.450 --> 00:23:04.769 and internal controls are accurate and reliable. 00:23:05.240 --> 00:23:08.079 So for CEO Charles Prince to sign these certifications 00:23:08.079 --> 00:23:11.099 while Bowen was sending weekly, documented warnings 00:23:11.099 --> 00:23:14.380 that 60 to 80 percent of the assets were defective. 00:23:14.480 --> 00:23:16.720 It meant the bank was legally exposed to massive 00:23:16.720 --> 00:23:20.119 fraud charges and executive accountability. Bowen 00:23:20.119 --> 00:23:22.759 requested an outside investigation. It was ignored. 00:23:23.000 --> 00:23:25.220 He was subsequently stripped of his responsibilities. 00:23:25.599 --> 00:23:27.720 Wow. Talk about a failure of senior management 00:23:27.720 --> 00:23:31.319 to heed a profound warning. It's textbook. The 00:23:31.319 --> 00:23:33.279 market started reacting even as these internal 00:23:33.279 --> 00:23:36.460 warnings were being dismissed. April 2007, Citi 00:23:36.460 --> 00:23:40.019 announces 17 ,000 job cuts. They continued to 00:23:40.019 --> 00:23:42.140 underestimate their risk, only to announce another 00:23:42.140 --> 00:23:44.779 massive cut of 5 to 10 percent of their workforce 00:23:44.779 --> 00:23:48.660 in early 2008. And the deterioration was stunningly 00:23:48.660 --> 00:23:51.559 fast. It was irreversible. By November 2008, 00:23:52.000 --> 00:23:54.279 Citigroup was technically insolvent, despite 00:23:54.279 --> 00:23:56.960 having already received $25 billion in initial 00:23:56.960 --> 00:23:59.059 government TARP funds. In just two years, the 00:23:59.059 --> 00:24:01.920 company's market cap plummeted from $244 billion 00:24:01.920 --> 00:24:05.700 down to a mere $20 .5 billion. Shares were trading 00:24:05.700 --> 00:24:08.359 well below a dollar on the NYSE, an unthinkable 00:24:08.359 --> 00:24:10.240 collapse for one of America's largest, oldest 00:24:10.240 --> 00:24:13.690 banks. And the final job toll was horrific. The 00:24:13.690 --> 00:24:16.349 sources indicate that staff cuts eventually totaled 00:24:16.349 --> 00:24:19.529 over 100 ,000 employees globally as the banks 00:24:19.529 --> 00:24:21.970 just scrambled to shed capacity and stem the 00:24:21.970 --> 00:24:24.589 bleeding. Which led directly to the massive historic 00:24:24.589 --> 00:24:27.170 government intervention in late November 2008. 00:24:27.630 --> 00:24:30.430 A bailout package that was unprecedented in scale 00:24:30.430 --> 00:24:32.369 and complexity. Right. The government provided 00:24:32.369 --> 00:24:35.869 an additional $20 billion in TARP funds, bringing 00:24:35.869 --> 00:24:40.539 the total cash injection to $45 billion. The 00:24:40.539 --> 00:24:43.599 defining element was the $306 billion guarantee. 00:24:44.720 --> 00:24:47.269 Analysts often call it ring fencing. Let's delve 00:24:47.269 --> 00:24:49.410 into that ring of fencing mechanism. It's what 00:24:49.410 --> 00:24:51.450 truly confirmed the too -big -to -fail status. 00:24:51.769 --> 00:24:54.049 How did that guarantee actually work? The U .S. 00:24:54.049 --> 00:24:56.589 Treasury, the Fed, and the FDIC agreed to cover 00:24:56.589 --> 00:25:00.130 90 % of the losses on a portfolio of $335 billion 00:25:00.130 --> 00:25:03.329 of toxic assets that Citi held. After Citi absorbed 00:25:03.329 --> 00:25:06.309 the first $29 billion in losses themselves. Right. 00:25:06.369 --> 00:25:08.109 This was essentially the government writing a 00:25:08.109 --> 00:25:10.809 catastrophic insurance policy for the bank. The 00:25:10.809 --> 00:25:12.690 assets technically remained on Citi's balance 00:25:12.690 --> 00:25:14.710 sheet, but the risk of catastrophic loss was 00:25:14.710 --> 00:25:16.470 overwhelmingly transferred to the bank. the taxpayer. 00:25:16.710 --> 00:25:18.849 Without that guarantee, the bank would have been 00:25:18.849 --> 00:25:21.569 instantly liquidated. Instantly. So why did the 00:25:21.569 --> 00:25:23.609 government feel the need to step in with such 00:25:23.609 --> 00:25:25.509 overwhelming force for Citigroup specifically, 00:25:26.130 --> 00:25:29.009 even more than for some other struggling institutions? 00:25:29.509 --> 00:25:31.950 The justification provided by the former CEO 00:25:31.950 --> 00:25:35.369 Vikram Pandit, it really highlights Citi's unique 00:25:35.369 --> 00:25:38.500 systemic risk. It extended far beyond the typical 00:25:38.500 --> 00:25:40.880 definition of a domestic commercial bank. He 00:25:40.880 --> 00:25:43.380 argued that a failure of Citi would have triggered 00:25:43.380 --> 00:25:47.279 worldwide chaos and panic, right? He did, because 00:25:47.279 --> 00:25:49.519 of the potential collapse of its global transaction 00:25:49.519 --> 00:25:53.240 services, or TTS, division. That's a strong claim. 00:25:53.539 --> 00:25:56.619 What exactly is TTS and why would its collapse 00:25:56.619 --> 00:26:00.240 cause global chaos? TTS is Citi's backbone for 00:26:00.240 --> 00:26:03.150 moving money globally. It provides critical treasury 00:26:03.150 --> 00:26:05.769 services, foreign exchange and trade solutions 00:26:05.769 --> 00:26:09.190 for massive multinational corporations and critically 00:26:09.190 --> 00:26:11.390 for major governments and central banks around 00:26:11.390 --> 00:26:13.670 the world. So it's not about loans. It's about 00:26:13.670 --> 00:26:16.470 the plumbing of international finance. Precisely. 00:26:16.970 --> 00:26:19.289 Pandit claimed that if Citigroup were allowed 00:26:19.289 --> 00:26:22.650 to unravel into bankruptcy, 100 governments around 00:26:22.650 --> 00:26:24.829 the world would be trying to figure out how to 00:26:24.829 --> 00:26:27.519 pay their employees. That speaks to how deeply 00:26:27.519 --> 00:26:30.819 embedded Citi was and remains in the actual operating 00:26:30.819 --> 00:26:33.359 mechanics of global commerce and state finance. 00:26:33.660 --> 00:26:36.019 They were too central to the global payment system 00:26:36.019 --> 00:26:38.779 to fail. Absolutely. But the government intervention 00:26:38.779 --> 00:26:41.299 came with serious strings attached, reflecting 00:26:41.299 --> 00:26:43.579 all the public and political outrage. It was 00:26:43.579 --> 00:26:46.480 a temporary, partial nationalization. Indeed. 00:26:46.910 --> 00:26:49.269 Executive salaries were capped, bonuses were 00:26:49.269 --> 00:26:51.730 restricted until 2010, and the government initially 00:26:51.730 --> 00:26:54.670 obtained a massive 36 % stake in the common stock, 00:26:54.950 --> 00:26:57.230 giving it wide powers over banking operations 00:26:57.230 --> 00:26:59.789 and a seat at the table. Despite the outrage 00:26:59.789 --> 00:27:02.569 over bonuses, with hundreds of millions paid 00:27:02.569 --> 00:27:04.670 out even after they got the initial TARC funds, 00:27:05.029 --> 00:27:07.250 the ultimate financial conclusion for the taxpayer 00:27:07.250 --> 00:27:10.390 was surprisingly positive. It was a very unusual 00:27:10.390 --> 00:27:13.789 conclusion. By December 2010, Citi had repaid 00:27:13.789 --> 00:27:16.190 the aid in full, and it generated a significant... 00:27:19.500 --> 00:27:22.720 The sources note that this profit was aided by 00:27:22.720 --> 00:27:26.619 a special IRS tax exception. It was. But financially, 00:27:26.779 --> 00:27:29.000 the government recouped its funds and then some. 00:27:29.480 --> 00:27:32.519 Regardless, the reputational damage and the imposition 00:27:32.519 --> 00:27:36.099 of that too -big -to -fail label, that was permanent. 00:27:36.299 --> 00:27:38.880 Yeah. The immediate aftermath of the crisis forced 00:27:38.880 --> 00:27:42.039 Citigroup to undertake this drastic multi -year 00:27:42.039 --> 00:27:44.650 strategic overhaul. It was all designed to shed 00:27:44.650 --> 00:27:47.829 risk, complexity, and the vast array of non -core 00:27:47.829 --> 00:27:50.710 assets it had accumulated during its merger spree. 00:27:50.750 --> 00:27:52.849 And this began with the creation of what was 00:27:52.849 --> 00:27:55.529 essentially an internal bad bank. That was the 00:27:55.529 --> 00:27:59.210 formation of Citi Holdings in January 2009. Citigroup 00:27:59.210 --> 00:28:01.230 was formally split into two distinct operating 00:28:01.230 --> 00:28:03.990 units. Citicorp, which has the core profitable 00:28:03.990 --> 00:28:06.269 businesses. And Citi Holding. Which was the dumping 00:28:06.269 --> 00:28:08.529 ground. It contained all the non -core assets 00:28:08.529 --> 00:28:11.710 intended for disposition and winding down, predominantly 00:28:11.710 --> 00:28:14.190 toxic North American mortgages and other consumer 00:28:14.190 --> 00:28:16.869 loan portfolios. The division initially represented 00:28:16.869 --> 00:28:20.450 about $156 billion of GAAP assets. So the managers 00:28:20.450 --> 00:28:23.430 were tasked not with growth, but with the difficult, 00:28:23.609 --> 00:28:26.230 politically sensitive job of winding down these 00:28:26.230 --> 00:28:29.990 businesses responsibly. Did that slow, painful 00:28:29.990 --> 00:28:33.049 strategy of the bad bank ultimately work? It 00:28:33.049 --> 00:28:36.299 took seven years, but yes. City Holdings finally 00:28:36.299 --> 00:28:39.359 achieved its goal of breaking even in 2015. Meaning 00:28:39.359 --> 00:28:41.440 it was no longer dragging down the firm's core 00:28:41.440 --> 00:28:44.140 profitability. Right. And it was officially eliminated 00:28:44.140 --> 00:28:48.240 in April 2016. That date marked a key structural 00:28:48.240 --> 00:28:50.819 milestone in their de -risking and simplification 00:28:50.819 --> 00:28:53.599 strategy. Beyond the bad assets, they also started 00:28:53.599 --> 00:28:55.920 dismantling parts of the merged giant, including 00:28:55.920 --> 00:28:58.240 the legendary Salomon Smith Barney brokerage 00:28:58.240 --> 00:29:00.339 unit. Shedding Smith Barney was a huge move. 00:29:00.420 --> 00:29:03.779 The unit held, what, $1 .562 trillion in client 00:29:03.779 --> 00:29:06.140 assets across nearly 10 million domestic accounts. 00:29:06.299 --> 00:29:08.779 So what did they do with it? In 2009, Citi merged 00:29:08.779 --> 00:29:11.039 it into a joint venture with Morgan Stanley Wealth 00:29:11.039 --> 00:29:13.900 Management. This was a phased exit. Citi initially 00:29:13.900 --> 00:29:17.519 got $2 .7 billion and kept a 49 % stake. And 00:29:17.519 --> 00:29:19.799 then by 2013, they sold the remaining stake. 00:29:19.980 --> 00:29:23.740 For a massive $13 .5 billion, completing their 00:29:23.740 --> 00:29:25.640 exit from the high net worth retail brokerage 00:29:25.640 --> 00:29:28.440 business. This era was also heavily defined by 00:29:28.440 --> 00:29:30.900 new regulation designed to prevent another crisis, 00:29:31.099 --> 00:29:33.980 specifically the Volcker Rule. Right. The Volcker 00:29:33.980 --> 00:29:37.339 Rule. Passed as part of Dodd -Frank limits bank 00:29:37.339 --> 00:29:40.200 ownership in proprietary trading operations and 00:29:40.200 --> 00:29:43.079 hedge funds, which were deemed excessively risky. 00:29:43.259 --> 00:29:46.079 So to comply, Citi had to spin off its hedge 00:29:46.079 --> 00:29:49.180 fund unit, Citi Capital Advisors. Correct. This 00:29:49.180 --> 00:29:52.240 move created Napier Park Global Capital in 2013, 00:29:52.660 --> 00:29:55.160 effectively shedding another layer of complex 00:29:55.160 --> 00:29:57.359 proprietary risk from the bank's balance sheet. 00:29:57.500 --> 00:29:59.779 So if the first decade of the 21st century was 00:29:59.779 --> 00:30:02.519 about growth and merger, the second and third 00:30:02.519 --> 00:30:04.880 have been about strategic. contraction and retreat, 00:30:05.119 --> 00:30:07.819 particularly from mass consumer banking globally. 00:30:08.140 --> 00:30:11.519 It's a complete, profound strategic pivot away 00:30:11.519 --> 00:30:14.279 from that original wild vision of being a global 00:30:14.279 --> 00:30:17.299 consumer supermarket. The first wave hit in October 00:30:17.299 --> 00:30:20.180 2014 when Citi announced its exit from consumer 00:30:20.180 --> 00:30:22.220 banking in 11 markets, including established 00:30:22.220 --> 00:30:25.400 operations in Japan, Peru and Hungary. Then came 00:30:25.400 --> 00:30:28.240 a second and arguably more shocking wave announced 00:30:28.240 --> 00:30:31.410 in April 2021. and exit from 13 more consumer 00:30:31.410 --> 00:30:33.730 markets, including major high -potential centers 00:30:33.730 --> 00:30:36.380 like Australia, China, India, and Vietnam. That 00:30:36.380 --> 00:30:39.259 signals a complete philosophical shift. Citi 00:30:39.259 --> 00:30:41.660 is now concentrating on institutional clients 00:30:41.660 --> 00:30:44.079 in these regions. Viewing mass consumer banking, 00:30:44.240 --> 00:30:47.200 it's just too complex, too low margin and too 00:30:47.200 --> 00:30:49.559 regulated outside of their core hubs. Those are 00:30:49.559 --> 00:30:51.839 enormous markets to leave. What kind of deals 00:30:51.839 --> 00:30:54.680 did those divestitures generate? They were massive 00:30:54.680 --> 00:30:57.480 transactions, netting billions, but also illustrating 00:30:57.480 --> 00:30:59.880 the depth of the retreat. For example, the consumer 00:30:59.880 --> 00:31:02.259 businesses in four Asian markets, Indonesia, 00:31:02.640 --> 00:31:05.259 Malaysia, Thailand and Vietnam, were sold to 00:31:05.259 --> 00:31:08.819 U .S. will be for about $4 .9 billion in 2022. 00:31:09.640 --> 00:31:11.920 And their Taiwan consumer business was acquired 00:31:11.920 --> 00:31:16.359 by DBS Bank for $706 million in 2023. Right. 00:31:16.460 --> 00:31:18.759 So what's left of the global consumer empire? 00:31:19.140 --> 00:31:21.440 Citi is aiming to operate consumer banking only 00:31:21.440 --> 00:31:23.539 in a highly concentrated set of regions. The 00:31:23.539 --> 00:31:26.319 U .S., Canada, Europe, Hong Kong, Singapore, 00:31:26.579 --> 00:31:29.380 London, and the UAE. They're targeting high net 00:31:29.380 --> 00:31:31.859 worth customers in specific urban centers, not 00:31:31.859 --> 00:31:34.279 mass markets. And crucially, they also announced 00:31:34.279 --> 00:31:36.640 plans to exit their massive Mexican consumer 00:31:36.640 --> 00:31:39.539 banking operation, Banamex, in January. 2022, 00:31:39.799 --> 00:31:42.640 a major piece of the Weill acquisition era coming 00:31:42.640 --> 00:31:45.339 undone. Exactly. And this period of dramatic 00:31:45.339 --> 00:31:47.839 downsizing has coincided with new leadership. 00:31:48.059 --> 00:31:51.400 Jane Frazier became CEO in March 2021, the first 00:31:51.400 --> 00:31:55.319 female CEO of a big four bank. And she is overseeing 00:31:55.319 --> 00:31:57.700 a dramatic modernization and reorientation of 00:31:57.700 --> 00:31:59.980 the firm. She has initiated what is internally 00:31:59.980 --> 00:32:03.640 known as Project Bora Bora, an aggressive top 00:32:03.640 --> 00:32:06.960 to bottom corporate overhaul. The goal is simplification 00:32:06.960 --> 00:32:09.240 and aggressive streamlining. Which includes the 00:32:09.240 --> 00:32:11.960 announcement of 20 ,000 job cuts, or at least 00:32:11.960 --> 00:32:15.519 10 % of the entire workforce, planned for 2024. 00:32:15.920 --> 00:32:17.779 The core message is that the structure is still 00:32:17.779 --> 00:32:20.220 too complex and needs to be radically simplified. 00:32:20.650 --> 00:32:22.609 And the most fascinating part of this modernization 00:32:22.609 --> 00:32:25.170 is the shift in their technology strategy, which 00:32:25.170 --> 00:32:27.930 is a direct response to massive regulatory failures. 00:32:28.150 --> 00:32:30.650 This is a direct linkage between compliance and 00:32:30.650 --> 00:32:33.569 corporate strategy. Citi has faced massive regulatory 00:32:33.569 --> 00:32:36.829 fines, including a staggering $400 million fine 00:32:36.829 --> 00:32:40.130 in 2020 over longstanding failures in risk management 00:32:40.130 --> 00:32:43.529 and technology. And another $136 million fine 00:32:43.529 --> 00:32:45.930 specifically cited for persistent data issues. 00:32:46.250 --> 00:32:48.710 So the new strategy is to cut their reliance 00:32:48.710 --> 00:32:52.190 on external IT. contractors by 20 to 50 percent 00:32:52.190 --> 00:32:55.509 and instead hire 50 ,000 full -time technology 00:32:55.509 --> 00:32:58.849 employees internally. Hiring 50 ,000 internal 00:32:58.849 --> 00:33:01.869 tech employees is a phenomenal commitment. Is 00:33:01.869 --> 00:33:04.589 this primarily a defensive move against regulators 00:33:04.589 --> 00:33:07.349 or a move toward gaining a competitive technological 00:33:07.349 --> 00:33:10.769 advantage? It is fundamentally a defensive, compliance 00:33:10.769 --> 00:33:13.890 -driven move. It's aimed at improving risk management 00:33:13.890 --> 00:33:16.650 and data governance by bringing core technical 00:33:16.650 --> 00:33:19.869 expertise and control in -house. Because regulators 00:33:19.869 --> 00:33:21.930 hammered them for not being able to track their 00:33:21.930 --> 00:33:24.309 own data reliably. Exactly. That led to risk 00:33:24.309 --> 00:33:27.180 failures. By centralizing control... the technology, 00:33:27.460 --> 00:33:29.980 the actual plumbing of the bank. They're trying 00:33:29.980 --> 00:33:32.019 to prove to regulators that they can finally 00:33:32.019 --> 00:33:34.500 monitor, manage, and prevent compliance breaches 00:33:34.500 --> 00:33:36.619 and systemic failures. It transforms technology 00:33:36.619 --> 00:33:39.460 from a cost center into a core component of systemic 00:33:39.460 --> 00:33:42.420 survival. Very much so. We've also seen Citigroup 00:33:42.420 --> 00:33:44.700 taking very public positions on major social 00:33:44.700 --> 00:33:47.240 and political issues, which reflects the pressure 00:33:47.240 --> 00:33:49.920 faced by major corporations today. Two recent 00:33:49.920 --> 00:33:53.140 examples really illustrate this. In 2018, under 00:33:53.140 --> 00:33:56.240 then -CEO Michael Corbat, Citi changed its credit 00:33:56.240 --> 00:33:58.740 card policies to restrict the sale of guns to 00:33:58.740 --> 00:34:01.859 individuals under 21. They also placed restrictions 00:34:01.859 --> 00:34:04.420 on certain firearm -related transactions for 00:34:04.420 --> 00:34:06.519 their business customers. That was a response 00:34:06.519 --> 00:34:08.619 to public pressure for banks to take a stand 00:34:08.619 --> 00:34:10.739 on gun control. And more recently, in December 00:34:10.739 --> 00:34:14.320 2024, Citigroup, along with Bank of America, 00:34:14.559 --> 00:34:17.599 announced they were exiting the Net Zero Banking 00:34:17.599 --> 00:34:20.780 Alliance, or NZBA. A global initiative focused 00:34:20.780 --> 00:34:23.780 on climate neutrality. And this pivot was reportedly 00:34:23.780 --> 00:34:26.280 driven by political pressure in the U .S. against 00:34:26.280 --> 00:34:28.719 banks perceived as limiting fossil fuel investment. 00:34:29.230 --> 00:34:31.289 The narrative of Citigroup is defined as much 00:34:31.289 --> 00:34:33.750 by its strategic moves as it is by the sheer 00:34:33.750 --> 00:34:36.710 overwhelming volume and dollar amount of regulatory 00:34:36.710 --> 00:34:39.670 penalties, lawsuits and fines that date back 00:34:39.670 --> 00:34:41.909 decades. I mean, you have to use these figures 00:34:41.909 --> 00:34:44.650 to illustrate the immense continuous cost of 00:34:44.650 --> 00:34:47.389 repeated compliance failures. The fallout from 00:34:47.389 --> 00:34:49.510 the subprime mortgage crisis alone generated 00:34:49.510 --> 00:34:51.730 billions in penalties, confirming the issues 00:34:51.730 --> 00:34:55.489 ran deep. Starting in 2010, Citi settled several 00:34:55.489 --> 00:34:58.719 charges for $75 million. And they had to admit 00:34:58.719 --> 00:35:01.699 that its exposure to subprime mortgages was over 00:35:01.699 --> 00:35:05.500 $50 billion, not the $13 billion it had previously 00:35:05.500 --> 00:35:07.900 stated to investors. That admission of lying 00:35:07.900 --> 00:35:10.460 to the market was a huge blow to investor trust 00:35:10.460 --> 00:35:13.420 and a warning shot. A big one. There was also 00:35:13.420 --> 00:35:15.559 the issue of deliberately false certification 00:35:15.559 --> 00:35:18.920 of loan quality correctly impacting government 00:35:18.920 --> 00:35:22.460 -insured programs. Right. In February 2012, Citi 00:35:22.460 --> 00:35:26.139 paid $158 .3 million to settle claims that its 00:35:26.139 --> 00:35:28.260 Citi mortgage unit had falsely certified the 00:35:28.260 --> 00:35:30.840 quality of loans so they would qualify for federal 00:35:30.840 --> 00:35:33.380 housing administration insurance. And this action 00:35:33.380 --> 00:35:35.480 was notably brought initially by a Citi mortgage 00:35:35.480 --> 00:35:38.579 employee, Sherry Hunt. So this wasn't just misleading 00:35:38.579 --> 00:35:40.900 investors. This was defrauding a government program 00:35:40.900 --> 00:35:43.510 designed to protect housing stability. And Citi 00:35:43.510 --> 00:35:46.269 was one of the five largest mortgage servicers 00:35:46.269 --> 00:35:48.429 that participated in that multibillion -dollar 00:35:48.429 --> 00:35:51.349 national mortgage settlement in 2012. Yes, to 00:35:51.349 --> 00:35:53.889 provide relief to distressed homeowners. But 00:35:53.889 --> 00:35:55.809 the largest crisis -related fine, the one that 00:35:55.809 --> 00:35:58.230 truly stands out, came in 2014. That was the 00:35:58.230 --> 00:36:00.949 staggering $7 billion settlement with the Department 00:36:00.949 --> 00:36:03.530 of Justice. To resolve claims that Citi had misled 00:36:03.530 --> 00:36:06.449 investors about shoddy mortgage -backed securities 00:36:06.449 --> 00:36:09.530 in the lead -up to the crisis, Attorney General 00:36:09.530 --> 00:36:13.500 Eric Holder called the bank's misconduct He said 00:36:13.500 --> 00:36:15.760 that the bank systematically expanded its market 00:36:15.760 --> 00:36:18.559 share and increased profits by knowingly assuring 00:36:18.559 --> 00:36:20.960 investors that these toxic financial products 00:36:20.960 --> 00:36:23.780 were sound, even as their own internal model 00:36:23.780 --> 00:36:26.420 showed the risk was catastrophic. It just confirmed 00:36:26.420 --> 00:36:29.119 that the firm prioritized profit over truth. 00:36:29.280 --> 00:36:31.559 And beyond the housing crisis, Citigroup was 00:36:31.559 --> 00:36:33.860 deeply entangled in the major corporate accounting 00:36:33.860 --> 00:36:37.179 scandals of the early 2000s, like Enron, WorldCom 00:36:37.179 --> 00:36:39.900 and Global Crossing. Oh, their investment banking 00:36:39.900 --> 00:36:42.050 arm was providing services and... selling stock 00:36:42.050 --> 00:36:44.309 while these companies were collapsing under fraud. 00:36:44.510 --> 00:36:47.210 The involvement resulted in massive payouts that 00:36:47.210 --> 00:36:49.110 spanned years. What were some of the numbers? 00:36:49.369 --> 00:36:52.590 They paid a total of $3 .66 billion to settle 00:36:52.590 --> 00:36:55.570 Enron claims. For WorldCom, they paid $2 .65 00:36:55.570 --> 00:36:58.449 billion pre -tax to settle lawsuits concerning 00:36:58.449 --> 00:37:00.610 their role in selling stocks and bonds for the 00:37:00.610 --> 00:37:04.099 company. And they also paid $75 million to settle 00:37:04.099 --> 00:37:07.159 lawsuits related to global crossing for issuing 00:37:07.159 --> 00:37:10.139 exaggerated research reports and failing to disclose 00:37:10.139 --> 00:37:12.900 conflicts of interest. Right. These fines really 00:37:12.900 --> 00:37:15.519 illustrate the pervasive role of bulge bracket 00:37:15.519 --> 00:37:19.000 banks in enabling large -scale corporate malfeasance. 00:37:19.320 --> 00:37:21.980 And it wasn't just accounting fraud. The investment 00:37:21.980 --> 00:37:25.179 banking and trading side also saw major scandals 00:37:25.179 --> 00:37:27.559 linked to proprietary maneuvers. Yeah, look at 00:37:27.559 --> 00:37:30.139 the 2004 proprietary government bond trading 00:37:30.139 --> 00:37:32.679 scandal. handle. Citigroup was heavily criticized 00:37:32.679 --> 00:37:35.820 for disrupting the European bond market by rapidly 00:37:35.820 --> 00:37:39.000 selling 11 billion euros worth of bonds on the 00:37:39.000 --> 00:37:41.380 MTS trading platform, driving down the price 00:37:41.380 --> 00:37:43.380 and then buying them back cheaper, netting a 00:37:43.380 --> 00:37:46.280 large profit. The mechanism was complex, but 00:37:46.280 --> 00:37:48.519 the intent was to manipulate the market for quick 00:37:48.519 --> 00:37:51.539 gain. It highlights the immense conflict of interest 00:37:51.539 --> 00:37:53.559 that existed when a bank could both trade for 00:37:53.559 --> 00:37:55.900 itself and service clients. And more recently, 00:37:56.000 --> 00:37:58.219 they engaged in a prohibited practice called 00:37:58.219 --> 00:38:01.469 spoofing. In 2017, they were fined $25 million 00:38:01.469 --> 00:38:05.530 by the CFTC for order spoofing in U .S. Treasury 00:38:05.530 --> 00:38:08.349 futures markets. Spoofing is basically placing 00:38:08.349 --> 00:38:10.949 large fake orders for securities that are canceled 00:38:10.949 --> 00:38:13.070 before they execute. It's done to trick other 00:38:13.070 --> 00:38:15.449 traders into thinking supplier demand is about 00:38:15.449 --> 00:38:17.469 to change. Right. It moves the market price, 00:38:17.650 --> 00:38:19.750 allowing the spoofer to execute a real trade 00:38:19.750 --> 00:38:22.449 at a better price. Citi was found to have placed 00:38:22.449 --> 00:38:25.369 and canceled fake orders more than 2 ,500 times. 00:38:26.010 --> 00:38:28.530 This pattern of misconduct extends deeply into 00:38:28.530 --> 00:38:31.570 consumer operations and basic compliance suggesting 00:38:31.570 --> 00:38:34.190 a chronic failure to monitor internal processes 00:38:34.190 --> 00:38:37.150 even in simple transactions. The evidence of 00:38:37.150 --> 00:38:39.469 consumer compliance failures is extensive and 00:38:39.469 --> 00:38:42.460 costly. In 2015, they were fined $70 million 00:38:42.460 --> 00:38:45.679 in order to refund a staggering $700 million 00:38:45.679 --> 00:38:48.539 to customers. For what? For illegal marketing 00:38:48.539 --> 00:38:51.039 and sales of unnecessary add -on credit card 00:38:51.039 --> 00:38:53.019 products like credit monitoring and debt protection. 00:38:53.199 --> 00:38:55.500 This is a direct result of aggressive illegal 00:38:55.500 --> 00:38:58.019 practices aimed at boosting revenue from their 00:38:58.019 --> 00:39:00.099 massive credit card base. Practices that regulators 00:39:00.099 --> 00:39:02.500 deemed manipulative. And the largest warning 00:39:02.500 --> 00:39:05.800 shot came with a 2020 fine from U .S. regulators 00:39:05.800 --> 00:39:09.139 that directly targeted internal controls. That 00:39:09.139 --> 00:39:12.300 $400 million fine, that was the critical moment 00:39:12.300 --> 00:39:14.579 that defined Jane Frazier's subsequent strategy. 00:39:14.980 --> 00:39:18.300 It was explicit. The fine was issued over longstanding 00:39:18.300 --> 00:39:21.239 failures to establish effective risk management 00:39:21.239 --> 00:39:25.059 and update technology, citing unsafe and unsound 00:39:25.059 --> 00:39:28.119 banking practices. Regulators noted Citi had 00:39:28.119 --> 00:39:31.219 failed to correct problems known for years. Suggesting 00:39:31.219 --> 00:39:33.900 a deep systemic cultural issue that prioritized 00:39:33.900 --> 00:39:36.780 legacy systems and cost cutting over robust controls. 00:39:37.000 --> 00:39:39.300 Exactly. And money laundering has also been a 00:39:39.300 --> 00:39:42.019 persistent regulatory problem, especially involving 00:39:42.019 --> 00:39:44.139 their lucrative operations in Mexico and Latin 00:39:44.139 --> 00:39:46.780 America. The problem stretches back to the 90s 00:39:46.780 --> 00:39:48.880 when a general accounting office report criticized 00:39:48.880 --> 00:39:51.679 Citibank's handling of funds for Raul Salinas 00:39:51.679 --> 00:39:54.079 de Gortari, the brother of Mexico's former president. 00:39:54.280 --> 00:39:57.320 Right. It noted that bank facilitated the transfer 00:39:57.320 --> 00:39:59.500 of millions of dollars through complex transactions 00:39:59.500 --> 00:40:02.139 and failed to adhere to its know your customer 00:40:02.139 --> 00:40:05.400 policy. In 2017, they settled allegations that 00:40:05.400 --> 00:40:08.300 their Benamex USA unit was used by drug smugglers 00:40:08.300 --> 00:40:11.239 to move dark money. And most recently. In June 00:40:11.239 --> 00:40:15.039 2024, agents from the DEA publicly cited investigations 00:40:15.039 --> 00:40:18.159 into the Sinaloa cartel, stating that money launderers 00:40:18.159 --> 00:40:20.900 continually found ways to exploit Citibank's 00:40:20.900 --> 00:40:23.679 lax controls. The issue isn't just that it happened 00:40:23.679 --> 00:40:26.840 once. It's the persistent decade after decade 00:40:26.840 --> 00:40:29.039 nature of the failure. And finally, one of the 00:40:29.039 --> 00:40:31.519 most surprising and frankly shocking failures 00:40:31.519 --> 00:40:33.840 involved outright discrimination against consumers 00:40:33.840 --> 00:40:36.420 based on their ethnicity. That happened in 2023. 00:40:37.190 --> 00:40:39.130 The Consumer Financial Protection Bureau ordered 00:40:39.130 --> 00:40:42.929 Citigroup to pay $24 .5 million in fines and 00:40:42.929 --> 00:40:46.369 $1 .4 million in restitution to Armenian Americans. 00:40:46.690 --> 00:40:49.449 The CFPB alleged that Citi employees had used 00:40:49.449 --> 00:40:51.489 the presence of the surnames ending in Sinen 00:40:51.489 --> 00:40:54.550 or Yan, which are common in Armenian surnames, 00:40:54.650 --> 00:40:56.789 as an indicator for enhanced screening processes 00:40:56.789 --> 00:40:59.469 for credit card applications. That level of failure 00:40:59.469 --> 00:41:01.909 in internal control and ethics that they were 00:41:01.909 --> 00:41:04.070 using ethnic indicators to flag people is just 00:41:04.070 --> 00:41:06.329 astonishing for a systemically important bank. 00:41:06.480 --> 00:41:08.320 in the 21st century. It speaks volumes about 00:41:08.320 --> 00:41:10.820 the lack of oversight. The CFPB noted that employees 00:41:10.820 --> 00:41:13.760 deliberately avoided mentioning this discriminatory 00:41:13.760 --> 00:41:16.400 screening method in emails, suggesting management 00:41:16.400 --> 00:41:18.679 knew it was illegal and attempted to conceal 00:41:18.679 --> 00:41:21.679 it. This wasn't a technological glitch. It was 00:41:21.679 --> 00:41:24.670 a profound ethical and control failure. That 00:41:24.670 --> 00:41:27.429 cost the bank millions and severely damaged its 00:41:27.429 --> 00:41:30.030 reputation. Absolutely. And throughout this whole 00:41:30.030 --> 00:41:31.829 history, of course, there's the political context, 00:41:32.090 --> 00:41:35.010 the lobbying power of such a massive firm. Between 00:41:35.010 --> 00:41:38.809 1998 and 2014, Citigroup spent nearly $100 million 00:41:38.809 --> 00:41:42.070 lobbying the federal government. to influence 00:41:42.070 --> 00:41:44.190 the very regulations they were struggling to 00:41:44.190 --> 00:41:46.489 comply with. And their political contributions 00:41:46.489 --> 00:41:49.130 have historically been highly balanced, contributing 00:41:49.130 --> 00:41:52.750 49 percent to Democrats and 51 percent to Republicans. 00:41:52.989 --> 00:41:56.289 This political dexterity ensures access and influence 00:41:56.289 --> 00:41:59.030 across the entire political spectrum, regardless 00:41:59.030 --> 00:42:01.900 of which party is in control. An ability to navigate 00:42:01.900 --> 00:42:04.159 the political landscape that is absolutely essential 00:42:04.159 --> 00:42:06.679 for a company that constantly finds itself staring 00:42:06.679 --> 00:42:09.400 down regulatory investigations. So looking back 00:42:09.400 --> 00:42:12.099 at this 200 -year timeline, the central narrative 00:42:12.099 --> 00:42:15.000 of Citigroup is truly defined by extremes. It 00:42:15.000 --> 00:42:17.519 really is. They started as radical innovators, 00:42:17.559 --> 00:42:19.920 pioneering everything from consumer loans to 00:42:19.920 --> 00:42:23.010 ATMs and the negotiable CD. And this innovation 00:42:23.010 --> 00:42:25.949 fueled massive, unprecedented growth through 00:42:25.949 --> 00:42:29.769 mergers, culminating in that 1998 Citicorp Travelers 00:42:29.769 --> 00:42:33.349 mega deal that successfully challenged and dismantled 00:42:33.349 --> 00:42:35.829 Glass -Steagall. But that success was immediately 00:42:35.829 --> 00:42:39.030 overshadowed by an existential crisis fueled 00:42:39.030 --> 00:42:41.829 by massive, poorly managed exposure to subprime 00:42:41.829 --> 00:42:44.449 mortgages, ignored internal warnings from people 00:42:44.449 --> 00:42:47.170 like Richard Bowen, and a catastrophic breakdown 00:42:47.170 --> 00:42:49.559 in controls. Which required the U .S. government 00:42:49.559 --> 00:42:51.760 to step in with the largest bailout package of 00:42:51.760 --> 00:42:55.079 any U .S. bank, including that infamous $306 00:42:55.079 --> 00:42:58.219 billion ring fencing guarantee, cementing its 00:42:58.219 --> 00:43:01.039 status as the epitome of too big to fail. Right. 00:43:01.369 --> 00:43:03.409 And the result has been a painful decade plus 00:43:03.409 --> 00:43:05.949 of continuous strategic contraction. They shed 00:43:05.949 --> 00:43:07.989 the non -core assets via city holdings. They 00:43:07.989 --> 00:43:10.170 got rid of huge businesses like Smith Barney. 00:43:10.230 --> 00:43:12.469 And they dramatically pulled back from mass consumer 00:43:12.469 --> 00:43:15.190 banking across Asia, Europe and Latin America. 00:43:15.449 --> 00:43:17.769 They are actively trying to become a smaller, 00:43:17.889 --> 00:43:20.530 more focused and crucially a less complex entity. 00:43:20.809 --> 00:43:23.269 The key takeaway for you, the learner, is this. 00:43:24.190 --> 00:43:27.179 Despite shedding. Hundreds of thousands of staff 00:43:27.179 --> 00:43:30.139 and billions in consumer businesses, Citi remains 00:43:30.139 --> 00:43:32.719 one of the world's most powerful financial institutions. 00:43:33.039 --> 00:43:35.539 And the firm today is intensely focused on the 00:43:35.539 --> 00:43:37.760 institutional clients group and global wealth 00:43:37.760 --> 00:43:40.500 management. Actively attempting to shed the systemic 00:43:40.500 --> 00:43:43.280 complexity and retail risk that nearly destroyed 00:43:43.280 --> 00:43:46.159 it in 2008 and has plagued its regulatory record 00:43:46.159 --> 00:43:48.679 ever since. Which brings us to our final provocative 00:43:48.679 --> 00:43:51.179 thought. The source material highlights that 00:43:51.179 --> 00:43:54.460 the persistent, massive regulatory fines, specifically 00:43:54.460 --> 00:43:57.159 for the failure to establish effective risk management 00:43:57.159 --> 00:44:00.039 and data governance, have resulted in Jane Frazier's 00:44:00.039 --> 00:44:03.260 current plan to transition from external IT contractors 00:44:03.260 --> 00:44:06.659 to hiring 50 ,000 full -time technology employees. 00:44:07.179 --> 00:44:10.119 So given the bank's history of catastrophic internal 00:44:10.119 --> 00:44:13.219 control failures, what does this massive internal 00:44:13.219 --> 00:44:15.599 shift say about the future of risk and compliance 00:44:15.599 --> 00:44:18.840 in too -big -to -fail banking? It signals a profound 00:44:18.840 --> 00:44:21.019 shift. This is not just a technology upgrade. 00:44:21.139 --> 00:44:23.179 It's an attempt to centralize and internalize 00:44:23.179 --> 00:44:25.760 control over the very data and systems that failed 00:44:25.760 --> 00:44:28.780 regulators in 2008 and again in 2020. So the 00:44:28.780 --> 00:44:31.699 question is, will making technology governance 00:44:31.699 --> 00:44:35.360 a core internal function finally allow Citi to 00:44:35.360 --> 00:44:38.099 move past the continuous cycle of massive fines 00:44:38.099 --> 00:44:40.659 and regulatory failure that has defined the last 00:44:40.659 --> 00:44:43.340 two decades? And how will this huge commitment 00:44:43.340 --> 00:44:45.920 to internal tech staff impact their core structure 00:44:45.920 --> 00:44:48.050 and performance moving forward? in an industry 00:44:48.050 --> 00:44:50.550 that relies on agility. That transition from 00:44:50.550 --> 00:44:52.710 a financial conglomerate to a financial technology 00:44:52.710 --> 00:44:54.730 governance company is the question that will 00:44:54.730 --> 00:44:56.849 define the next chapter for Citi and for every 00:44:56.849 --> 00:44:58.849 other bank deemed too big to fail.