Citigroup (1998-2009) R.I.P.

January 15th, 2009 by Phil Mattera

Citigroup was born illegitimate and, having recently become a ward of the federal government, is now in the process of being dismembered. It’s amazing what a difference a decade makes. In April 1998 financial wheeler dealer Sandy Weill (photo) defied federal laws preventing marriages among banks, brokerage houses and insurance companies and pushed through a then-astounding $70 billion merger between his Travelers Group and commercial banking giant Citicorp. Weill won his bet that Glass-Steagall restrictions would fall, and he created what was then the world’s largest financial institution.

The deal was a desperate attempt to achieve the 1990s dream of the financial supermarket—institutions that would meet the public’s every monetary need, from checking accounts and business loans to mutual funds, homeowners insurance and credit cards. It was also a reach for supposed greatness by Weill and his Citicorp counterpart John Reed. As Business Week put it at the time: “In addition to chutzpah, Reed, 59, and Weill, 65, are propelled by their shared desire to go out in a blaze of glory.”

“Glory” is not exactly the way to describe the subsequent ten years of controversy, scandal and unwise investment and lending practices. Weill and Reed, each with the title of co-chief executives, bickered openly with each other. The company’s private banking operation was caught up in a money laundering investigation. Its credit card operations had to pay $45 million to settle lawsuits charging that consumers were improperly charged late fees. The bank was accused of enabling some of Enron’s accounting fraud. It was also embroiled in the WorldCom accounting scandal and had to pay $2.65 billion to settle lawsuits brought by investors in the failed telecommunications company.

But one of the worst moves was the decision in 2000 to acquire Associates First Capital, a pioneer in the subprime lending market that would later help to weaken the entire banking system. The acquisition, like the creation of Citigroup itself, was part of the mindset of trying to cover all corners of the financial services industry and of pumping up business even when transactions were excessively risky. The company touted plans to clean up the disreputable subprime business, but even that was a sham. According to the Wall Street Journal (7/18/02), branch offices were notified ahead of time when undercover “mystery shoppers” were being sent in to investigate loan origination practices.

Chuck Prince, who was named CEO in 2003, tried to clean up Citigroup in part by selling off pieces of the supermarket such as the Travelers life insurance business. Ultimately, though, Prince himself was disposed of as well. Yet the leviathan’s problems continued. Now his successor, Vikram Pandit, is taking a similar approach of lopping off parts of the company in the vain hope this will do the trick.

The just-announced decision to spin off the Smith Barney brokerage business into a joint venture with Morgan Stanley will bring in a much needed cash infusion of $2.7 billion. Yet it appears Citi is still living in a state of denial. It put out a press release headlined “Morgan Stanley and Citi to Form Industry-Leading Wealth Management Business Through Joint Venture.” What it really should have said is: “we screwed up royally, and despite getting tens of billions of taxpayer dollars, we’ve got to sell off some of our assets that are still worth something.” We’ll see how long the bravado continues as the company is forced to cut off more of its many limbs.

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