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The creation of Citigroup brings together organizations that are extraordinary in their individual capabilities and in the ways they enhance and complement each other. Together, we offer customers a range of quality products and services unmatched in the financial services industry. We serve a broader spectrum of customers, in more places and by more means of access and delivery, than any other financial organization.
With all of us working together to provide our customers with the best service and products, we are forming a model for the industry's future.
We are Citigroup.
The largest financial services company in the world, Citigroup Inc. combines the international banking of Citibank and the numerous insurance products and non-banking financial services of Travelers Group Inc. Citibank's Visa and Mastercard credit cards and Travelers Bank's credit cards together made Citigroup the number one credit card issuer in the world as of 1999. The company's other well-known subsidiaries include the brokerage Salomon Smith Barney, the insurer Travelers Life & Annuity, the life insurance and consumer lender Primerica Financial Services, and the personal and home equity lender Commercial Credit.
Company Origins
Citicorp has its origin in the First Bank of the United States, founded in 1791. Colonel Samuel Osgood, the nation's first postmaster general and treasury commissioner, took over the New York branch of the failing First Bank and reorganized it as the City Bank of New York in 1812. Only two days after the bank received its charter, on June 16, 1812, war was declared with Britain. The war notwithstanding, the City Bank was for all intents and purposes a private treasury for a group of merchants. It conducted most of its business as a credit union and as a dealer in cotton, sugar, metals, and coal, and later acted as a shipping agent.
Following the financial panic of 1837, the bank came under the control of Moses Taylor, a merchant and industrialist who essentially turned it into his own personal bank. Nonetheless, under Taylor, City Bank established a comprehensive financial approach to business and adopted a strategy of maintaining a high proportion of liquid assets. Elected president of the bank in 1856, Taylor converted the bank's charter from a state one to a national one on July 17, 1865, at the close of the Civil War. Taking the name National City Bank of New York (NCB), the bank was thereafter permitted to perform certain official duties on behalf of the U.S. Treasury; it distributed the new uniform national currency and served as an agent for government bond sales.
Taylor was the treasurer of the company that laid the first transatlantic cable, which made international trade much more feasible. It was at this early stage that NCB adopted the eight-letter wire code address "Citibank." Taylor died in 1882 and was replaced as president by his son-in-law, Percy R. Pyne. Pyne died nine years later and was replaced by James Stillman.
Stillman believed that big businesses deserved a big bank capable of providing numerous special services as a professional business partner. After the panic of 1893, NCB, with assets of $29.7 million, emerged as the largest bank in New York City, and the following year it became the largest bank in the United States. It accomplished this mainly through conservative banking practices, emphasizing low-risk lending in well-secured projects. The company's reputation for safety spread, attracting business from the largest U.S. corporations. The flood of new business permitted NCB to expand; in 1897 it purchased the Third National Bank of New York, bringing its assets to $113.8 million. That same year it also became the first big U.S. bank to open a foreign department.
Far from retiring or diminishing his influence within NCB, Stillman nonetheless began to prepare Frank A. Vanderlip to take over senior management duties. Stillman and Vanderlip, who was elected president of the bank in 1909, introduced many innovations in banking, including travelers' checks and investment services through a separate but affiliated subsidiary (federal laws prevented banks from engaging in direct investment, but made no provision for subsidiaries).
Expansion in the Early 20th Century
Beginning in the late 1800s, many U.S. businessmen began to invest heavily in agricultural and natural-resource projects in the relatively underdeveloped nations of South and Central America. But government regulations prevented federally chartered banks such as NCB from conducting business out of foreign branches. Vanderlip worked long and hard to change the government's policy and eventually won in 1913, when Congress passed the Federal Reserve Act. NCB established a branch office in Buenos Aires in 1914 and in 1915 gained an entire international banking network from London to Singapore when it purchased a controlling interest in the International Banking Corporation, which it gained complete ownership of in 1918.
In 1919 Frank Vanderlip resigned in frustration over his inability to secure a controlling interest in the company, and James A. Stillman, the son of the previous Stillman, became president. NCB reached $1 billion in assets, the first U.S. bank to do so. Charles E. Mitchell, Stillman's successor in 1921, completed much of what Vanderlip had begun, creating the nation's first full-service bank. Until this time national banks catered almost exclusively to the needs of corporations and institutions, while savings banks handled the needs of individuals. But competition from other banks, and even corporate clients themselves, forced commercial banks to look elsewhere for sources of growth. Sensing an untapped wealth of business in personal banking, in 1921 NCB became the first major bank to offer interest on savings accounts, which it allowed individual customers to open with as little as a dollar. In 1928 Citibank began to offer personal consumer loans.
The bank also expanded during the 1920s, acquiring the Commercial Exchange Bank and the Second National Bank in 1921, the People's Trust Company of Brooklyn in 1926, and merging with the Farmers' Loan and Trust Company in 1929. By the end of the decade, the "Citibank" was the largest bank in the country, and through its affiliates, the National City Company and the City Bank Farmers' Trust Company, it was also one of the largest securities and trust firms.
Surviving the Great Depression
In October 1929 the stock market crash that led to the Great Depression caused an immediate liquidity crisis in the banking industry. In the ensuing months, thousands of banks were forced to close. NCB remained in business, however, mainly by virtue of its size and organization. But in 1933, at the height of the Depression, Congress passed the Glass-Steagall Act, which restricted the activities of banks by requiring the separation of investment and commercial banking. NCB was compelled to liquidate its securities affiliate and curtail its line of special financial products, eliminating many of the gains the bank had made in establishing itself as a flexible and competitive full-service bank.
James H. Perkins, who succeeded Mitchell as chairman in 1933, had the difficult task of rebuilding the bank's reputation and its business (it had fallen to number three). He instituted a defensive strategy, pledging to keep all domestic and foreign branches open and to eliminate as few staff members as possible. Perkins died in 1940, but his defensive policies were continued by his successor, Gordon Rentschler.
As a major U.S. bank, NCB was in many ways a resource for the government, which depended on private savings and bond sales to finance World War II. The bank followed its defensive strategy throughout the war, amassed a large government bond portfolio, and continued to stress its relationship with corporate clients. Unlike its competitors, NCB was so well placed in so many markets by the end of the war that it could devote its energy to winning new clients rather than entering new markets. Sixteen years after Black Tuesday, NCB had finally regained its momentum in the banking industry.
Innovation in the Mid-20th Century
The bank changed direction after the death of Gordon Rentschler in 1948 by moving more aggressively into corporate lending. In 1955, with assets of $6.8 billion, NCB acquired the First National Bank of New York and changed its name to the First National City Bank of New York (FNCB), or Citibank for short.
Citibank used its bond portfolio to finance its expansion in corporate lending, selling off bonds to make new loans. By 1957, however, the bank had just about depleted its bond reserve. Prevented by New Deal legislation from expanding its business in private savings beyond New York City, Citibank had nowhere to turn to for more funding. The squeeze on funds only became more acute until 1961, when the bank introduced a new and ingenious product: the negotiable certificate of deposit.
The "CD," as it was called, gave large depositors higher returns on their savings in return for restricted liquidity, and was intended to win business from higher-interest government bonds and commercial paper. The CD changed not only Citibank but the entire banking industry, which soon followed suit in offering CDs. The CD gave Citibank a way to expand its assets--but at the same time required it to streamline operations and manage risk more efficiently, since it had to pay a higher rate of interest to CD holders for the use of their funds.
The man behind the CD was not FNCB's president, George Moore, nor its chairman, James Rockefeller, but Walter B. Wriston, a highly unconventional vice-president. Wriston, a product of Wesleyan University and the Fletcher School, had worked his way up through the company's ranks since joining the bank in 1946. Having made a name for himself with the CD, Wriston was later given responsibility for revamping the company's management structure to eliminate the strains of Citibank's expansion. Like Vanderlip more than 50 years before, Wriston advocated a general decentralization of power to permit top executives to concentrate on longer-term strategic considerations.
In an attempt to circumvent federal regulations restricting a bank's activities, in 1968 Citibank created a one-bank holding company (a type of company the Bank Holding Company Act of 1956 had overlooked) to own the bank but also engage in lines of business the bank could not. Within six months, Bank of America, Chase Manhattan, Manufacturers Hanover, Morgan Guaranty, and Chemical Bank had also created holding companies.
Citicorp made no secret of its intention to expand, both operationally and geographically. In 1970 Congress--recognizing its error and concerned that one-bank holding companies would become too powerful--revised the Bank Holding Company Act of 1956 to prevent these companies from diversifying into traditionally "non-banking" activities.
Wriston, who was promoted to president in 1967 and to chairman in 1970, continued to press for the relaxation of banking laws. He oversaw Citibank's entry into the credit card business, and later directed a massive offer of Visa and MasterCharge cards to 26 million people across the nation. This move greatly upset other banks that also issued the cards, but succeeded in bringing Citibank millions of customers from outside New York state. The bank failed, however, to properly assess the risk involved. Of the five million people who responded to the offer, enough later defaulted to cost Citicorp an estimated $200 million.
In an effort to gain wider consumer recognition, the holding company formally adopted "Citicorp" as its legal name in 1974, and in 1976 First National City Bank officially changed its name to "Citibank." The "Citi" prefix was later added to a number of generic product names: Citicorp offered CitiCards, CitiOne unified statement accounts, and there were CitiTeller automatic teller machines and a host of other Citi-offerings.
Falling Fortunes in the 1970s and 1980s
Citicorp performed very well during the early 1970s, weathering the failure of the Penn Central railroad, the energy crisis, and a recession without serious setback. In 1975, however, the company's fortunes fell dramatically. Profits were erratic due to rapidly eroding economic conditions in Third World countries. Citicorp, awash in petrodollars in the 1970s, had lent heavily to these countries in the belief that they would experience high turnover and faced the possibility of heavy defaults resulting from poor growth rates. In addition, its Argentine deposits were nationalized in 1973, its interests in Nigeria had to be scaled back in 1976, and political agitation in Poland and Iran in 1979 precipitated unfavorable debt rescheduling in those countries. Shareholders soon became concerned that Citicorp, which conducted two-thirds of its business abroad, might face serious losses.
In its domestic operations, Citicorp suffered from a decision made during the early 1970s to expand in low-yielding, consumer-banking activities. Although New York usury laws placed a 12 percent ceiling on consumer loans, Citibank bet that interest rates would drop, leaving plenty of room to make a profit. But the oil shock following the revolution in Iran sent interest rates soaring in the opposite direction: Citicorp lost $450 million in 1980 alone. In addition, Citibank purchased $3 billion in government bonds at 11 percent, in the belief that interest rates would continue a decline begun during the summer of 1980. Again, the opposite happened. Interest on the money Citibank borrowed to purchase the bonds rose as high as 21 percent, and the bank lost another $50 million or more.
One investment that did not go awry, however, was the company's decision to invest $500 million on an elaborate automated teller network. Installed throughout its branches by 1978, the ATMs permitted depositors to withdraw money at any hour from hundreds of locations. Not only were labor costs reduced drastically, but by being first again, Citibank gained thousands of new customers attracted by the convenience of ATMs.
Citicorp raised the profitability of its commercial banking operations by deemphasizing interest-rate-based income in favor of income from fees for services. Successful debt negotiations with developing countries cut losses on debts which would otherwise have gone into default. In addition, as a result of the 1967 Edge Act and special accommodations made by various states, Citicorp, until then an international giant known domestically only in New York state, was able to expand into several states during the 1980s. Beginning with mortgages and its credit card business, then savings and loans, and then banks, Citicorp established a presence in 39 states and the District of Columbia. Internationally, the company expanded its business into more than 90 countries. Some of this expansion was accomplished by purchasing existing banks outright.
Wriston, after 14 years as chairman of Citicorp, retired in 1984, shortly after the announcement that Citicorp would enter two new businesses: insurance and information. He was succeeded by John S. Reed, who had distinguished himself by returning the "individual" banking division to profitability.
In May 1987 Citibank finally admitted that its Third World loans could spell trouble and announced that it was setting aside a $3 billion reserve fund. Losses for 1987 totaled $1.2 billion, but future earnings were much more secure. Citibank's move forced its competitors to follow suit, something few of them were able to do as easily--Bank of America, for example, wound up selling assets to cover its reserve fund.
Reorganization in the Early 1990s
As Citicorp entered the 1990s, the United States' biggest bank faced perhaps its most challenging period since its founding. A faltering economy, coupled with unprofitable business loans--particularly in the commercial real estate market--led to serious financial difficulties which threatened the bank's existence. Year-end statistics for 1990 revealed a 20-year low for Citicorp's share price, which eventually fell to $8. Citicorp's ratio of core capital to total assets stood at 3.26 percent, considerably lower than the minimum four percent which regulators instituted as the standard requirement in 1992. The company was operating on an expenses-to-revenue ratio of 70 percent, which prompted immediate cost-cutting efforts in nearly all expendable (non-core) business operations. Third quarter financial statements for 1991 reflected the impact of restructuring charges, asset write-downs, and additions to reserves necessary for coverage of nonperforming loans: Citicorp reported an $885 million loss. For the first time since 1813, shareholders did not receive their 25 cents a share quarterly dividend. Citicorp was in desperate need of reorganization.
Chairman John Reed described this period of great instability as "tough, demanding," and a time of "turnaround." Widely viewed as a slow-moving and analytical visionary, Reed appeared to many to be unable to maneuver the ailing bank out of its mounting difficulties. Critics blamed Citicorp's loan crisis on Reed's efforts during the mid-1980s to expand in the international market and overextend credit to real estate developers, including Donald Trump. Reed silenced his critics, however, with the successful implementation of a two-year, five-point plan aimed at improving capital strength and operating earnings to offset future, but imminent, credit costs.
Of primary importance in the recovery process were cost-cutting measures, growth constraint, and disciplined expenses and credit quality--considered the control aspects of the banking industry. Staff cuts for the two-year restructuring period resulted in the layoff of more than 15,000 employees--including many in senior management positions. Expenses were also trimmed as Citicorp consolidated its U.S. mortgage service and insurance service operations, as well as its telecommunication resources.
Nearly half of Citicorp's third-quarter $885 million loss was affected by the write-down of its $400 million investment in Quotron Systems, Inc. Citicorp bought the stock quotation service for $680 million in 1986 at a time when the company was hoping to expand in the information business. Since the acquisition, Quotron had been losing contracts with major Wall Street firms such as Shearson Lehman and Merrill Lynch. Quotron Systems, Inc. could not compete with the updated technology of its rival, Automatic Data Processing (ADP). In 1992 Citicorp sold two Quotron divisions to ADP, the leader in the computer services market.
To help raise the projected $4 million to $5 million in capital under the five-point plan, Citicorp sold its marginal operations in Austria, Italy, and France; abandoned its efforts in the United Kingdom; and offered $1.1 billion of preferred equity redemption cumulative stock (PERCS). An important factor in the company's recapitalization was investment by Saudi Prince al-Waleed bin Talal, who provided approximately $400 million of the $2.6 billion Citicorp raised in 1991 and 1992.
Although Citicorp relinquished some of its weaker holdings in Europe, it continued to expand and improve operations in the Asian/Pacific region. New branches were opened in Mexico, Brazil, Japan, Taiwan, South Korea, and Australia. Such selective investing produced growth in earnings of up to 30 percent. From September 1991 to September 1992, Citicorp obtained $371 million in net income from consumer banking in the developing world, exceeding earnings in the Japan, Europe, and North America (JENA) unit of global finance.
Uneven Recovery in the 1990s
Citicorp continued its commitment to international core business, capital growth, and credit stability as it cautiously proceeded through a recovery period. Circumstances called for conservative action in the early 1990s to compensate for severe losses. In addition, Citicorp's freedom to make loans was abridged in 1992 when it was placed under regulatory supervision.
Citicorp experienced losses in the value of its real estate holdings in the early 1990s. The company decided to hold on to the nonperforming property in the hopes an economic recovery would boost its value. However, Citicorp sold approximately 60 percent of its holdings in 1993 at a loss. Two years later the other 40 percent had recovered its value.
In 1996 a Citibank employee was accused of helping Raul Salinas, brother of Mexican president Carlos Salinas, sneak out of Mexico funds acquired by illegal means. Further embarrassment from Mexico ensued for Citicorp when its 1998 purchase, Banco Confia, was brought up on charges of laundering drug money. Domestically, Citicorp was faced with rising credit card write-offs as consumer bankruptcy increased in the late 1990s.
In 1998 Citicorp took the lead in mega-banking mergers by joining forces with Travelers Group Inc. Citigroup, as the new entity was called, boasted assets of $698 billion. The merger created the largest financial services firm in the world, what the Economist called "a global financial supermarket." With little overlap in service offerings and two separate distribution networks, the two companies hoped to cross-sell to each other's customers. John Reed, chairman of Citicorp, and Sanford Weill, chairman of Travelers Group, agreed to run the new company together.
Despite the Glass-Steagall Act of 1933, which forbade banks from owning insurers and insurers from owning banks, the merger was approved by the Federal Reserve Board. However, Citigroup was required to sell off its insurance businesses, a ruling it hoped would be overridden with new legislation. It stalled the sales while lobbying Congress to modernize the law.
Shares of Citibank and Travelers Group shot up at the announcement of the merger, raising the combined value of the companies by $30 billion. The optimism waned in the months following the merger as cross-selling and creating economies of scale proved difficult to execute. With Travelers still struggling to integrate its recent purchase of Salomon Brothers into its own brokerage business, the merger with Citibank did not proceed smoothly. Rather than cross-selling, the various subsidiaries and divisions moved to protect their own turf. One exception was subsidiary Primerica Financial Services, which sold a range of Travelers products to customers who took the company up on a free financial analysis.
The rift between Citibank and Travelers Group became apparent in late 1998 when Jamie Dimon, likely successor to Citibank's joint chairmen Weill and Reed, abruptly quit. Employees divided along original company lines, with Citibank staff cheering the news as a victory for their man Reed over Weill, who had groomed Dimon to replace him at Travelers. Salomon employees, who had never been fully integrated into Travelers Group before the merger, showed their sympathy for Dimon with a standing ovation on their trading floor. Dimon's loss left a void in the company's leadership, especially because Weill and Reed were both nearing retirement age.
In 1999 Citibank announced a project to simplify its service offerings in an effort to reduce costs. As the bank had grown over the years, its complexity had multiplied to such mind-boggling dimensions that it needed 28 computer systems to handle its back-office records. As an example, Citibank offered 150,000 different kinds of checking accounts in 1999, with variations on how interest was calculated, what fees were charged, and so on. The goal of the new project was to cut complexity by 75 percent and eliminate at least 26 computer systems.
Principal Subsidiaries: Citibank; Travelers Group Inc.; Citibank Mortgage, Inc.; Salomon Smith Barney Holdings Inc.; Travelers Life & Annuity; Travelers Property Casualty Corp. (83.4%); American Health and Life Insurance Co.; Primerica Bank; PFS Investments Inc.; Primerica Financial Services; Commercial Credit Company; Gulf Insurance Company; Citibank Credit Card Marketing; Citicorp Information Resources, Inc.; Citicorp Insurance Services Inc.; Citicorp N.A.; Citicorp Inc.; Citicorp Business Credit Inc.; Citicorp A.G. (Germany); Citicorp (Austria) A.G.; Citicorp Canada; Citicorp Credito, Financiamento e Investimento, S.A. (Brazil); Citicorp Espana S.A. (Spain); Citicorp Copenhagen (Denmark); Citicorp International Limited (Hong Kong).
Principal Divisions: SSB Citi Asset Management Planning Group; Global Consumer Planning Group; Global Corporate and Investment Bank Planning Group.
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