Restructuring Citigroup: The Bank in Trouble
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Case Code: BSTR330 Case Length: 19 Pages Period: 2000-2009 Pub Date: 2009 Teaching Note: Not Available |
Price: Rs.300 Organization: Citigroup Industry: Banking & Financial Services Countries: US Themes: Business Restructuring, Financial Restructuring, Risk Management |
Abstract Case Intro 1 Case Intro 2 Excerpts
"If you're an entity of this size, if you don't have controls, if you don't have the right culture and you don't have people accountable for the risks that they are taking, you're Citigroup."
- Lynn Turner, Former Chief Accountant, Securities and Exchange Commission, US, in November 2008.
"We had a market-risk lens looking at those products, not the credit-risk lens looking at those products. When it in fact was a credit event, the bank was caught off guard. Next time, it hopes to take a more integrated approach."
- Gary Crittenden, CFO, Citigroup, in March 2009.
Introduction
On February 20, 2009, Citigroup (Citi) shares crashed by over 22% to close at US$ 1.95, the lowest price seen since January 1991 (Refer to Exhibit I for the Stock Price Chart of Citigroup from January 1990 and April 2009).
Strong rumors that the bank would be nationalized led to widespread panic in the equity market, resulting in a major sell-off in Citi shares. Due to the sell-off, the market capitalization of the bank came down to about US$ 10 billion. Till then, the US government had infused US$ 45 billion into Citi in exchange for the bank's preferred stock.
Citi had also issued US$ 7 billion worth of preferred stock to the US Fed in return for the Fed guaranteeing its US$ 301 billion worth of mortgages, junk grade loans, and sub-prime securities. It was reported that executives from Citi had approached the US Treasury Department (Treasury) to convert some of its preferred stock into common equity. This move would enable Citi to increase its tangible common equity (TCE) which, investors felt, was an important indicator of the bank's financial health. However, Barack Obama's administration announced on February 23, 2009, that it favored leaving banks in private hands as of that date but that it was keeping all its options open for future actions that could include short term nationalization of banks in case the economic scenario demanded such action.
Citi, once the largest bank in the US in terms of assets, faced major trouble after the sub-prime crisis emerged in the US (Refer to Exhibit II for a note on sub-prime crisis). The sub-prime crisis which resulted in huge losses for Citi led to the exit of its CEO and Chairman Charles O. Prince (Prince) in November 2007. Robert E Rubin (Rubin) was made the interim Chairman and Sir Win Bischoff (Bischoff), the interim CEO. In December 2007, Citi's investment bank and alternative investment groups head - Vikram Pandit (Pandit) was made the CEO (Refer to Exhibit III for Pandit's Background)...
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