Once upon a time there were 4 American banks that were considered to be the pillars of the American financial industry – Citi bank, Bank of America, JP Morgan Chase and Wells Fargo. They were considered as mighty Goliaths who could never ever be shaken.
The 2008 economic turned that perception, along with the mighty banks, upside down and into the ground. In the build-up to the recession, banks really fooled around with money. They went on a home loan lending spree to anyone and everyone, including sub-prime borrowers. Everyone bought property and home rates shot up and entered bubble territory. Then banks fooled around some more and traded in exotic derivatives, which had some more of these sub-prime loans wrapped up inside them. One day, the property buyers vanished – property rates crashed, sub-prime borrowers went bankrupt, exotic derivatives became worthless, and the mighty banks, including Citi bank, fell into a deep hole.
Citi bank reeled under losses in 2008. No matter what it did, it could not extract itself out of the mess. The American government could not allow banks to fall because that would shake the common Americans belief in the system. So, in November 2008, the American government announced a humungous economic stimulus package. Slowly, Citi bank found its feet – but it was because of the economic package.
In February 2009, Citigroup, Citi bank’s parent company, announced that it was giving a 36% equity stake to the US government in exchange for $25 billion in emergency aid and a US Treasury line of credit of $45 billion. In addition, the US government also guaranteed losses on more than $300 billion worth of troubled assets. Citi bank was also required to slash its CEO’s salary to $1/year. The bank also could not pay a salary of more than $500,000/year in cash to any executive. Anything higher than this number was to be paid in restricted stock that was not saleable until the government’s loan was fully repaid. Half the bank’s Directors were government nominees and the government retained the right to sack the senior management in case of poor performance.
This was the turning point for Citi bank. Having found its feet, it started performing, and in December 2009, it reduced the government stake to 27% after selling shares worth $19 billion. It slowly consolidated its position and repaid the government’s loan in full by December 2010. In addition, the US government made a profit of $12 billion on selling Citi bank’s shares.
Today, Citi bank (Citi.com) is on solid ground. It is once again a solid pillar of America’s financial sector. If the US government had not saved Citi bank from bankruptcy, the global financial sector would have first panicked and then capitulated. Citi bank’s story contains many morals for every investor – do not be greedy, invest wisely, do not buy anything you are unsure of or don’t know about like exotic derivatives, always stay within your means, and seek help when you desperately need it.