In every industry there are leaders and large players who seemingly could be leaders but every once in a while something goes wrong. The company has to write down assets, make less money and then rebound for a few years when it seems they make a different mistake but the results are same. In the banking industry, the large player is Citibank and looking at the history of company from being an investor you wonder why? In a book called Borrowed Time by James Freeman and Vern McKinley published by HarperCollins, NY, 2018, the authors help answer the question why?

When Walter Wriston retired, the new President was John Reed. Prior to Mr. Reed, much of banking was paper based, Mr. Reed believed in technology and Citibank was the research and development shop for the industry. Mr. Reed worked on all areas of operations including speed of credit card purchases, expanded the ATMs and made them user friendly, which many Citibank consumers believed was a very good thing. When Mr. Reed was appointed President, he had not worked in the credit department and made loans. He had not thought about what happens when companies and countries do not pay back loans. For the first 6 years as Chairman, he spent half of his time of those issues with little progress made.

In 1990, the biggest creditor to the banks was former President Trump with Trump International Hotel in Atlantic City and Trump Shuttle. Both went bankrupt and Citibank and other banks were owed $2 billion in bank dept and $1 billion in bond debt. Citibank took assets including the Plaza Hotel in Manhattan.

In 1991, Prince Alwaleed bin Talal Bin Abdulaziz al Saud bought a $500 million preferred stock and 4.9% stake in the common stock.

In 1998, Citibank merger with Travelers Insurance to form Citigroup. The merger would serve over 100 million customers worldwide with Citibank for consumers and businesses, Travellers for insurance and mutual finds, and Salomon Smith Barney for investment banking and securities.

Sandy Weill became Chairman and although his reputation is a swashbuckling empire builder, he actuallly is someone who is disciplined in not taking on too much risk during the boom times and controlling expenses in both cycles. The discipline allow him to buy distressed companies and reorganize them. For decades when Wall Street was down, Mr. Weill was looking for bargains and had the ability to buy. When Mr. Weill left Citigroup the total shareholder equity was 8% of total assets. By 2007 it was below 6%

By 2008, Washington had come up with the $700 billion Trouble Asset Relief Program (TARP) and Citibank took $25 billion. The quarterly report announced a $4.4 billion write-down in securities and banking segment; the quarterly loss was $2.8 billion.

Citigroup’s Global Transaction Services unit which manages cash, facilitates trade and executes payments for large organizations worldwide experienced a $14 billion decline in available funds or 5%. The next day significant fund withdrawls came from the US and Europe. Confidence was going down and money was being moved. On November 23, Treasury bought $20 billion preferreds at 8% dividend. By January 31, 2009 Citigroup had used $517.3 billion of the governments money.

Why? Fed Chair Ben Bernanke said the system could not have handled the sudden collapse of a $2 trillion institution that provided much of the world’s financial plumbing.

Those on the other side point out Citibank holds about 5% of US bank deposits.

When the book was written there was a change of CEO from Vikram Pandit to Michael Corbat, a long time Citi veteran who is by most accounts a competent executive who understands the business. He seems more interested in operating a solid firm than in pursuing a grand vision or rapid growth.

Although it is important to remember, the history of Citi is every 20 years they manage to lose money.

Linking to dividend paying stocks, as a dividend investor you love solid operating firms that can implement new ideas, just not starting them. Innovation and technology are wonderful, they can change processes and industries, and with the change the solid dependable become much risker and money is lost. It is a balancing act between growth and slower organic growth, there are advantages and disadvantages to both, as an investor you must make a good judgement.

There are more questions than answers, till the next time – to raising questions.