Faculty of Mathematics and Statistics

Essay on the course

Citigroup

Student's Name: Tan Ni, Student's Name: Dai Jiaojiao, Student's Name: Lu Sijiao, Student's Name: Wu Ping 

December 17, 2024

Table of Contents

Introduction (Foreword) .......................................................

Background...............................................................

Crisis Development Process ........................................................

4. Causes of the development of the crisis ........................................................

5. Revelation ...............................................................

Bibliography .............................................................

One. introduction

Citigroup, headquartered in New York City, is the third largest bank holding company in the United States

(by assets), its predecessor was the City Bank of New York, which was founded in 1812. In April 1998, Citigroup announced its merger with the Travelers Group to form Citigroup, becoming the first truly multinational financial group in U.S. history. At present, Citigroup is positioned to provide leading financial services to the world's largest multinational enterprises and investors, and to provide the best consumer finance banking services to high-quality consumers in the world's largest cities.

Two. The back of the Citi group

(1) Citigroup's organizational structure

Citibank has gone through nearly 200 years of developmentA series of mergers and acquisitions and business expansionIt has become a large and complete Citigroup today The model can be summed up as the "5I" model and the organizational structure of the four business segments. The so-called "5I" model is institutional banking, individual banking, investment banking, information technology and insurance.Its four major business segments are: Consumer Finance Group, including card business, Citigroup Financebusiness, traveler's property insurance business; Xinxing Market includes Citibank and CitigroupBank of China All-Ball Coupon Service, Citibank Electricitysub-merchants; Corporate Business & Investment Banking Business PackageIncluding the whole ball stock rights service, the whole ball solidFixed-income benefit bond business, global investmentBank of China and Global Interbank Banking Business； Global investment management and private bankingBusiness

These include Citigroup Asset Management, Global Retirement Services, Traveler Life and Annuity Services.

(2) Citigroup's business expansion

1∙ Expansion of retail financial business

The profitability of the retail business is much lower than that of the wholesale banking business, but its stable source of income is conducive to the long-term development of the bank. Citigroup's retail business was characterized by zero margins, low risk, and a stable customer base, followed by an expansion of Citibank's total assets, customer base and branches, and in recent years, Citigroup's retail banking business has grown at a rate of up to 20%, making it the fastest growing division within Citigroup. Consumer finance, for example, can generate more than half of the bank's revenue.

While Citigroup has achieved rapid growth in both business and scale, it has also brought risks to itself. Taking the expansion of the credit card business as an example, Citigroup pioneered the credit card service business in 1967 and then expanded rapidly. Citigroup's promotional credit card model does not require the cardholder's ability to repay debts and personal credit, and there is no collateral for assets. Balancing risk and return management is a core skill of bank management and the key to successful retail business development. However, in practice, Citigroup does not need to guarantee the application of credit cards for customers, and only pays attention to bank returns and ignores risks, and fails to achieve a balanced management of risks and returns. At the same time, Citigroup is aggressively expanding through the acquisition of other credit card companies. In 2003, Citigroup acquired Sears Credit Card Company, becoming the world's largest issuer of credit card products, with 14.5 billion customers, including more than 100 million international credit card accounts. The large customer base formed through aggressive expansion increases the risk of credit default.

2. Expansion of financial services in batches

Citigroup has always been committed to investment banking and is a leader in financial innovation in the banking industry, especially in the 200 years of MBS (mortgage-backed securities) and ABS (asset-backed securities). After 0 years, the Federal Reserve entered a cycle of interest rate cuts, and in order to improve the level of profitability, banks created a variety of complex and sophisticated derivative financial products, such as mortgaged loan securities, mortgaged debt equity, credit default swaps, synthetic CDOs, etc. Citi is deeply involved in the financial derivatives market. In the first quarter of 2006, Citigroup accounted for more than 9% of the global equity and bond underwriting market, ranking first among the world's major investment banks, which also led to Citigroup's "subprime mortgage" when it fell into bankruptcy crisis"Bad debts amounted to $40billion. However, the process of innovation is also "a creative process of destruction", that is, "innovation = innovation."

Constructive destruction ». These financial derivatives instruments are amplified by high-risk leverage, bringing high profits to investors, and major financial institutions underwrite or hold a large number of subprime mortgage loan bonds. Financial innovation has changed the original distribution pattern of financial institutions in the capital market, and the continuous development of financial innovation has caused the securities business and insurance business to continue to crowd out the traditional business of commercial banks.

3∙ Expansion of mergers and acquisitions between banks

Western financial institutions generally expand in two ways: one is the expansion of their business on their own; The second is to expand through mergers and acquisitions between financial institutions. Mergers and acquisitions allow banks to enter new financial business areas and geographies. In the years following its merger with the Travelers Group, Citibank quickly consolidated its operations, rapidly acquired related businesses and institutions, and in 2001 acquired Bank of Europe and America to expand its overseas business; In 2002, it acquired Golden State Bank and entered the South American market; In 2003, the acquisition of private label assets of a home storage company expanded into new business; Acquired Sears Credit Card Business in 2003 to become the largest single-brand credit card issuer.

Citigroup has expanded rapidly over the past decade to become the largest bank in the global credit card and mortgage markets, but its neglect of market systemic risk and its own internal risks has plunged it into a credit crisis. In 2007, the subprime mortgage crisis in the United States broke out. Subprime mortgages, also known as subprime mortgages, are home mortgage loans for individuals with poor credit status, no proof of income and repayment ability, and other heavy debts. Subprime mortgage loans provided by lenders to people with low credit scores, lack of proof of income, and heavy debts can be sold to institutions for asset securitization without having to be held at maturity, packaged into different grades of technical mortgage securities and sold to institutional investors or individuals. With the reversal of interest rates, many subprime borrowers in the middle and late stages of repayment could not afford to repay their obligations after the sharp increase in interest rates, so they had no choice but to default, and non-performing loans accumulated rapidly, and the subprime mortgage crisis began to emerge and intensify. As a result of the involvement of many institutional investors, the subprime debt crisis continued to spread to global financial markets, and Citibank, once the world's largest bank, was hit by bankruptcy.

Citigroup has suffered heavy losses from its holdings of high-risk assets such as credit default swaps and asset-backed securities based on residential mortgages. With deposits lost and investors siphoned off their securities accounts, Citibank was caught in the midst of a crisis.

Three. Citigroup's crisis development process

Rapid expansion and high-risk investments before the crisis

As mentioned earlier, Citigroup's rapid expansion in the past decade has led to the fact that in 2007, Citigroup's assets were already in size

It has grown rapidly from $200 billion to $2.2 trillionYuan Yiyi became the largest bank in the United StatesIf you look at the picture next to you, this is the 2006-2009 operating income of the big four banks in the United States, and we can see the 2006 of CitigroupIn 2007, the net income was compared to the other threeThe individual banks are still relatively highAt the same time, the expansion of assets has enabled Citigroup not only to develop its traditional banking business, but also to increase its investment business, especially high-risk investment products such as subprime mortgages and derivatives, and it is reported that as of the fourth quarter of 2007 , Citi's credit business income for capital markets reached $98.9 billion, an increase over the same period last year

88%。 This is the rapid expansion and high-risk investment before the crisis

The outbreak of the subprime mortgage crisis and the deterioration of asset quality

And then there's the damage caused by these subprime mortgages and risky investments, and Citigroup reportedly lost $32.1 billion in 2008, especially in '07 and '08, with net income losses of 109 each 100 million yuan and 24.3 billion yuan are much lower

In 2005 and 2006, the average profit level of 9 billion yuan also decreased, and the proportion of credit-related assets also decreasedOnly 35% and high-risk investment business accounts for as much as 50% We can look at this chart The red above represents Citigroup, and the non-performing loan ratio is much higher than that of other banks, so the middle stage of the crisis is the outbreak of the subprime mortgage crisis and the asset quality is bad

Change. In 2006, with the outbreak of the subprime mortgage crisis and the ensuing bankruptcy of the "two houses" and the collapse of Lehman Brothers, Citibank's business took a sharp turn for the worse. From November 16 to 21, 2008 , Citi's share price fell sharply in one week

up to 68%. From the 2007 high of $35, it plummeted left and right to 3.77 on the 21st Dollar. After that, Citibank's stock price continued to fall. Therefore, with the deterioration of the credit environment during the subprime mortgage crisis, Citigroup experienced a rapid deterioration of credit asset quality for about 2~3 years, and the non-performing loan ratio peaked around 2009, which was 6~15 times that of the non-performing loan ratio before the crisis , and then gradually fall back. Citibank had the highest non-performing loan ratio among the four banks, reaching 5.37% in 2009As a result, he suffered huge investment losses. At the same time, the 2008 global financial crisis also quietly contributed to the outbreak of the Citigroup crisis, which had a huge impact and declined during the crisis.

Liquidity crisis and a run on depositors

As the subprime mortgage crisis deepened, the Citigroup crisis came to the liquidity crisis and the run on depositors, when the subprime mortgage crisis deepened, the market's confidence in Citi gradually lost, customers began to run on deposits, and creditors recovered loans. At the end of 2007, Citi's cash on its books accounted for only 1.7% of its total assets, and by 2008, Citi's cash on its books was only 1.7% of its total assetsHouseholds withdraw, and Citigroup returned 425 net100 million yuan of long-term debt and 13.8 billion yuan of short-term loans, and was net run by depositors of 37.8 billion yuan, which totaled the three pieces The net expenditure of 91.1 billion yuan made Citi's cash flow situation worse, and the declining liquidity exacerbated Citi's crisis.

Government assistance and crisis relief

In the face of the increasingly serious crisis of Citigroup, the government began to bail out in the later stage, and the government provided three rounds of bailouts for Citigroup with a total of $45billion in liquidity support, and made asset guarantees for Citigroup to attract customers to invest in Citigroup, and promised to continue to provide liquidity support if necessary. The overall bailout reversed Citigroup's declining assets and brought the group back to life, and later Citigroup stabilized the people, readjusted its business, and resolved the crisis.

Four. The reason for Citigroup's financial crisis

Citigroup's causes of the 2008 financial crisis are complex and diverse, mainly including the following aspects: 1. Asset quality problems and huge losses

Deterioration in asset quality:

Citigroup holds significant amounts of real estate-related assets, such as mortgage-backed securitiesMBS) and CD01. As the U.S. housing market collapsed, these assets rapidly depreciated, causing Citigroup to suffer significant losses.

Consecutive losses:

Citigroup posted four consecutive quarters of massive financial losses, totaling $20 billion. In particular, its financial distress was further exacerbated by the large scale of mortgage-related businesses, such as primary and secondary mortgage loans, of which US$75 billion could become negative equity

2. Loss of market confidence and operational factors 1. Decline in market confidence:

Market confidence has been hit hard by the deterioration in Citigroup's asset quality and exposure of huge losses. Investors were pessimistic about Citigroup's future and sold off its shares, causing its share price to plummet and its market value to shrink significantly

Operational Risks:

Citigroup has obvious loopholes in risk management. For example, its risk managers did not scrutinize the risk profile in depth and carefully, and long-term relationships affected the judgment of decision-makers. In addition, Citi Set

The regiment also used accounting methods to eliminate non-performing assets from the books in order to free up capital to further expand the scale of the bank, and these actions increased its operational risks

Third, the business structure is complex and mutually dragging

The business structure is large and complex:

Citigroup's business covers retail banking, investment banking, securities trading, insurance and other leading cities, forming a comprehensive and financial business station-style business model. In times of crisis, this kind of business structure tends to drag each other down, with both prosperity and loss

Consumer Lending & Credit Card Business Risks:

Citigroup's huge consumer payments and credit card businesses have become a heavy burden in times of crisis. Citigroup's financial woes were further exacerbated by a significant decline in revenues from these businesses due to consumers' weakened ability to pay

IVExternal factors and policy influences

Policy Shift and Rescue Measures:

The U.S. government's shift in bailout policies and short-selling by hedge funds also had a negative impact on Citigroup's share price. In addition, although the Government provided three rounds of bailouts to Citigroup, providing a total of $45 billion in liquidity support, this also reflected the dire situation faced by Citigroup at the time

Global financial market turmoil:

The 2008 financial crisis was a global financial crisis that traced its roots to the collapse of the U.S. housing market, which in turn triggered a freeze in credit markets and turmoil in the global financial system. This external environment has had a huge impact on financial institutions such as Citigroup. In summary, Citigroup's 2008 financial crisis was due to a number of factors, including asset quality issues, loss of market confidence, complex business structure, and external factors and policy influences. These factors interacted and contributed to Citigroup's predicament in the crisis.

Five. The enlightenment of Citigroup's financial crisis

Here's what Citigroup has to say. Citigroup's financial woes and genetic challenges as a former global financial giant have important implications for other countries and other financial institutions.

The first point is to prudently promote the financial mixed industry, which refers to the business model that integrates a full range of financial businesses such as securities, insurance, trusts, funds, and leasing on the basis of banks. Citigroup's bankruptcy is related to its all-round financial mixed business strategy. Businesses that are too large and complex can lead to management difficulties, rising costs, and contagion of risks across different businesses. Here I would like to mention that inter-business risk refers to the close relationship between different business units in an enterprise in terms of capital, assets, information, etc., when a business unit is at risk, this risk will cross the business boundary and spread to other business units, resulting in the entire enterprise or group facing greater risk exposure. Therefore, financial enterprises should act cautiously when promoting mixed business operations, and fully consider their own risk management capabilities and resource allocation efficiency.

The second point is to strengthen risk management, which Citigroup suffered in the financial crisis, in part because of its inadequate risk management. Financial institutions should establish a sound risk management system, strengthen the monitoring, assessment, prevention and control of various risks, and ensure the steady development of their business. For example, a comprehensive risk management system can be established, risk management strategies can be formulated and implemented, emergency management mechanisms can be established, and risk management culture can be cultivated.

The third point is to strengthen government supervision: Citi's bankruptcy has also exposed the inadequacy of financial regulation. The government should strengthen the supervision of financial institutions to ensure that their business activities comply with laws and regulations and the principle of prudent operation, so as to prevent the occurrence of systemic risks.

The fourth point is to pay attention to market confidence and consumer ability to pay: market confidence and consumer ability to pay are essential to the sound operation of financial institutions. Financial institutions should strengthen communication with the market, improve transparency and enhance market confidence. At the same time, it is also necessary to pay attention to the changes in consumers' ability to pay, reasonably adjust business strategies, and reduce them

Risk Exposure.

In conclusion, Citigroup's bankruptcy in the 2008 financial crisis is a profound lesson. He reminded that financial institutions must pay attention to risk management and internal control while pursuing profits. In addition, in the face of crisis, decisive action should be taken to ensure the long-term stability of the organization, which is what Citigroup has brought to us. Citigroup's financial woes and genetic challenges as a former global financial giant have important implications for other countries and other financial institutions.

The first point is to prudently promote the financial mixed industry, which refers to the business model that integrates a full range of financial businesses such as securities, insurance, trusts, funds, and leasing on the basis of banks. Citigroup's bankruptcy is related to its all-round financial mixed business strategy. Businesses that are too large and complex can lead to management difficulties, rising costs, and contagion of risks across different businesses. Here I would like to mention that inter-business risk refers to the close relationship between different business units in an enterprise in terms of capital, assets, information, etc., when a business unit is at risk, this risk will cross the business boundary and spread to other business units, resulting in the entire enterprise or group facing greater risk exposure. Therefore, financial enterprises should act cautiously when promoting mixed business operations, and fully consider their own risk management capabilities and resource allocation efficiency.

The second point is to strengthen risk management, which Citigroup suffered in the financial crisis, in part because of its inadequate risk management. Financial institutions should establish a sound risk management system, strengthen the monitoring, assessment, prevention and control of various risks, and ensure the steady development of their business. For example, a comprehensive risk management system can be established, risk management strategies can be formulated and implemented, emergency management mechanisms can be established, and risk management culture can be cultivated.

The third point is to strengthen government supervision: Citi's bankruptcy has also exposed the inadequacy of financial regulation. The government should strengthen the supervision of financial institutions to ensure that their business activities comply with laws and regulations and the principle of prudent operation, so as to prevent the occurrence of systemic risks.

The fourth point is to pay attention to market confidence and consumer ability to pay: market confidence and consumer ability to pay are essential to the sound operation of financial institutions. Financial institutions should strengthen communication with the market, improve transparency and enhance market confidence. At the same time, it is also necessary to pay attention to the changes in consumers' ability to pay, reasonably adjust business strategies, and reduce risk exposure.

In conclusion, Citigroup's bankruptcy in the 2008 financial crisis is a profound lesson. He reminded that financial institutions must pay attention to risk management and internal control while pursuing profits. In addition, decisive action should be taken in the face of a crisis, which is the only way to ensure the sound development of institutions.

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