Citigroup, the proclaimed financial supermarket, announced the sale of its Smith Barney brokerage division to Morgan Stanley last week in a move that is expected to mark the beginning of a break-up for the banking giant.  With a massive government bailout just a few months prior, many are asking: how did this happen to Citigroup and not to the other major banks?  The answer is one of indulgence.  But before Citigroup fell, it achieved great success under a business model that began with the dream of financial entrepreneur Sanford Weill. 

Sanford “Sandy” Weill was the owner of financial conglomerate Traveler’s Group, which merged with banking giant Citicorp in 1998 to form Citigroup.  Prior to the merger, it was illegal to combine insurance and banking businesses under the Glass-Steagall Act of 1933, however, Citigroup was allowed a two-to-five year grace period in which it could conduct business in its merged form.  When the grace period elapsed, Citigroup would have been forced to spin off its insurance businesses had Weill not worked remove the government regulations.  

Weill hired ex-President Gerald Ford and ex-Secretary of the Treasury Robert Rubin to sit on Citigroup’s Board of Directors.  With the two working in tandem to appeal to both Republicans and Democrats, the law against the combination of insurance and banking businesses was overturned.  Weill’s goal in creating Citigroup was to provide a financial one-stop shop that would cater to all of its customer’s financial needs; thus an empire was born.  

Weill retired as the Citigroup CEO in 2003 and was no longer involved except as a stockholder, but his entrepreneurial financial project continued to succeed until 2008 when the sub-prime mortgage crisis came into full swing.

Citi generated almost $25 billion a year in net earnings by reducing the capital it held in reserve for bad loans.  There were few mortgages and credit cards defaulting in the midst of the economic boom, and Citigroup assumed the good times would keep rolling.  In addition to holding less capital in reserve, Citi also invested heavily in its own capital, including subprime mortgages. 

Citi’s reserves were dangerously low, and its risky bets more than excessive, leading to the company suffering far greater losses than the other big banks (JP Morgan, Wells Fargo, Bank of America) when the economy began to sour.  Citigroup’s business model was not perfect, but it was poor decision making and greed that lead to the downfall of Sandy Weill’s vision more than ill-fated planning.  Citigroup’s rivals, as survivors of the economic downturn, are beginning to integrate financial services just as Citigroup had tried to do, and taking greater strides to master the universal banking model.  However, if not for Citigroup, it’s likely the legislation that prevented insurance and banking businesses from assimilating would still be in place. 

While Citi’s complete dismantlement is not apparent, it does need to sell off several of its pieces to remain profitable, and in doing so runs the risk of the remaining financial smorgasbord not allowing for a functional business.  It seems quite likely that Citi is done with its universal banking model based on its current condition, however, Citigroup CEO Vikram Pandit has maintained that the company’s position as a one-stop financial shop will persevere.  Citi has said some parts of it will not be sold off, such as its transaction services business that helps finance large corporate trade.  But it appears much of the company’s business ventures are on the chopping block. 

In addition to a significant restructuring ahead, it’s predicted that Citi will have poor profitability in 2009, with most analysts expecting the company to finish in the red.  Despite low expectations for Citigroup, government regulators are pushing for the company to get its affairs in order, hoping to see a return on the massive bailout Citi received in November.  It seems unlikely that Citi will ever become the financial giant it once was, but it can be hoped that it will one day be able to pay back its debt.  The Treasury Department invested $45 billion in Citigroup from its controversial TARP fund.

The future of Citigroup remains unpredictable, but it wouldn’t be wrong to say that its current condition is deserved.  Millions of businesses, families, and individuals depended on Citigroup for support, and because of malpractices on the part of the financial giant, many were let down.  Citi was one of the premier financial companies in support of sub-prime mortgages, and because they did double duty selling and investing in risky assets, they suffered twice the damage as other banking companies. 

The empire that was Citigroup is crumbling and others are capitalizing in its wake, such is the fate of many American businesses.  Despite Citi’s failings, it did assist several Americans in achieving the dream of prosperity, but at the same time let down many others.  It’s hard to know whether to feel pity or glee as the financial giant takes itself apart.

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