"Your Citi never sleeps" :: "Where money 1

lives":Citigroup

A critical evaluation ofCitigroups mortgage system

Course Title : Investment analysis
Course Code: 405

Under the supervision of

Dr. S M Sohrav Uddin
Associate Prefessor
Dept. of Finance & Banking
University of Chittagong

List of group members::

SL. No

Name

ID No

Remarks

"Your Citi never sleeps" :: "Where money 2

lives":Citigroup

01

Tanmoy Mohajan

11303008

02

Raju Kumar Barnik

11303010

03

Jabun Nahar Monika

11303027

04

Md. Anisul Hoque

11303029

05

Md. Abul Kalam

11303054

06

Mohammad Aha sanaul Karim

11303053

07

Mohammad Jamal Uddin(GL)

11303060

08

Mohammad Joynal Abedin

11303061

09

Mohammad Ismail Hossain

11303062

10

Palash Dev

11303084

11

Md Ali Newaz

11303128

12

Hasanul Karim

11303101

13

Jubaidur Rahaman Saimun

10303132

Department of Finance & Banking

University OfChittagong.
Session: 2010-2011

Date of Submission: 04/05/2015

Objectiveof the study::

Primary Objective:

"Your Citi never sleeps" :: "Where money 3

lives":Citigroup
To evaluate the assessment of mortgage system and theperformance
ofCitigroupduringthe economicdepression&the mechanism has to use to improve
situations.

Secondary Objectives:
1 To evaluate the overall crisis scenario of financialsectorat the time of depression.
2 To evaluate the performance of the Citigroup.
3 To access Citigroups mortgage system&its impact.
4)To identify the effective mechanism to improve situation of Citigroup.

Methodology:
The secondary sources of data were used for the study. The main sources of secondary data were
company profile (annual report), previous research literature, national and international
publications, several books, journals,newspapers etc. These data were collected from the
websites such as:
www.Citigroup.com/citi/fin/data/ar08c_en.pdfhttp://www.Citigroup.com/citi/about/mission_principle
s.htmlhttp://financials.morningstar.com/ratios/r.html?
t=BAChttp://www.nytimes.com/2008/11/18/business/18citi.html

Limitation of the Study:

Due to the scarce resources and direct supervision, the co-workers of the study have been
compelled to access to the secondary resources. Besides, the data generated through cultivating
the secondary source of informationwere not viable and sufficient to generate the accurate
scenario of our study. Therefore, the result should be viewed keeping limitation in mind.

"Your Citi never sleeps" :: "Where money 4

lives":Citigroup

Mortgage System of Citigroup

Citigroup Mortgage is a Delaware corporation formed for the purpose of acquiring, owning and
transferring mortgage loan assets and selling interests in them. The issuers of the various
offerings (the Defendant Issuers) are established by Citigroup Mortgage to issue billions of
dollar worth of Certificates in 2007. Two types of securities Citigroup mortgage loan trust Inc.
issued:
Mortgage Pass-Through Certificates &
Asset-Backed Pass-Through Certificates.
The Certificates were issued pursuant to Prospectus Supplements, each of which was
incorporated into the Registration Statement. The Certificates were supported by pools of
mortgage loans. The Registration Statement represented that the mortgage pools would primarily
consist of loans generally secured by liens on residential properties.
The Citigroup issues their Certificates based upon three primary factors:
1 Return in the form of interest payments,
2 Timing of principal &
3 Safety.

Residential Mortgage Loan Categories

Borrowers apply for residential mortgage loans with a loan originator. These loan originators
assess a borrowers ability to make payments on the mortgage loan based on the borrowers Fair
Isaac & Company (FICO) credit score. Borrowers with higher FICO scores were able to
receive loans with less documentation during the approval process, as well as higher Loan to
Value Ratio (LTVs). Using a persons FICO score, a loan originator assesses a borrowers risk
profile to determine the rate of the loan to issue, the amount of the loan, and the general structure
of the loan.
A loan originator will issue a prime mortgage loan to a borrower who has a high credit score
and who can supply the required documentation evidencing their income, assets, employment
background, and other documentation that supports their financial health.
If a borrower has the required credit score but is unable to supply supporting documentation of
his financial health, then a loan originator will issue the borrower a loan referred to as a lowdoc or Alt-A loan, and the interest rate on that loan will be higher than that of a prime mortgage
loan and the general structure of the loan will not be as favorable as it would be for a prime
borrower.
A borrower will be classified as sub-prime if the borrower has a lower credit score and higher
debt ratios. Borrowers that have low credit ratings are unable to obtain a conventional mortgage
because they are considered to have a larger-than-average risk of defaulting on a loan.

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lives":Citigroup

The Secondary Market

Traditionally, the model for a mortgage loan involved a lending institution means loan originator
extending a loan to a prospective home buyer in exchange for a promissory note from the home
buyer to repay the principal and interest on the loan. The loan originator also held a lien against
the home. Under this model, the loan originator held the promissory note until it matured and
was exposed to the concomitant risk that the borrower may fail to repay the loan. Under the
traditional model, the loan originator had a financial incentive to ensure that------1 the borrower had the financial wherewithal and ability to repay the promissory note &
(2) The underlying property had sufficient value to enable the originator to recover its
principal and interest if borrower defaulted on the promissory note.
Beginning in the 1990s, persistent low interest rates and low inflation led to a demand for
mortgages. As a result, banks and other mortgage lending institutions took advantage of this
opportunity, introducing financial innovations in the form of asset securitization to finance an
expanding mortgage market. These innovations altered:
(1) The foregoing traditional lending model, severing the traditional direct link between
borrower and lender &
(2) The risks normally associated with mortgage loans.
Unlike the traditional lending model, an asset securitization involves the sale and securitization
of mortgages. The loan originator sells the mortgage in the financial markets to a third-party
financial institution. By selling the mortgage, the loan originator obtains fees in connection with
the issuance of the mortgage. The mortgages sold into the financial markets are typically pooled
together and securitized into what are commonly referred to as mortgage backed securities
(MBS). The loan originator is no longer subject to the risk that the borrower may default; that
risk is transferred with the mortgages to investors who purchase the MBS.
In a mortgage securitization, mortgage loans are acquired, pooled together or securitized, and
then sold to investors in the form of MBS, whereby the investors acquire rights in the income

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lives":Citigroup
flowing from the mortgage pools:

When mortgage borrowers make interest and principal payments, the cash-flow is distributed to
the holders of the MBS certificates in order of priority based on the specific tranche held by the
MBS investors. The highest tranche is first to receive its share of the mortgage proceeds and is
also the last to absorb any losses should mortgage-borrowers become delinquent or default on
their mortgage.
In this MBS structure, the senior tranches received the highest investment rating by the Rating
Agencies. After the senior tranche, the middle tranches next receive their share of the proceeds.
In accordance with their order of priority, the mezzanine tranches were generally rated from AA
to BBB by the Rating Agencies.
The process of distributing the mortgage proceeds continues down the tranches through to the
bottom tranches, referred to as equity tranches. This process is repeated each month and all
investors receive the payments owed to them so long as the mortgage-borrowers are current on
their mortgages.
In the typical securitization transaction, participants in the transaction are
(1) The servicer of the loans to be securitized, often called the sponsor,
(2) The depositor of the loans in a trust or entity for securitization,
(3) The underwriter of the MBS,
(4) The entity or trust responsible for issuing the MBS, often called the trust, &
(5) The investors in the MBS.
The securitization process begins with the sale of mortgage loans by the sponsor (the original
owners of the mortgages) to the depositor in return for cash. The depositor then sells those
mortgage loans and related assets to the trust, in exchange for the trust issuing certificates to the
depositor. The depositor then works with the underwriter of the trust to price and sell the
certificates to investors:

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lives":Citigroup

Thereafter, the mortgage loans held by the trusts are serviced, i.e. principal and interest are
collected from mortgagors, by the servicer, which earns monthly servicing fees for collecting
such principal and interest from mortgagors. After subtracting a servicing fee, the servicer sends
the remainder of the mortgage payments to a trustee for administration and distribution to the
trust, and ultimately, to the purchasers of the MBS certificates.

Crisis Scenario of financial sector:

In 2008 the world economy faced its most dangerous crisis since the Great Depression of the
1930s. The contagion, which began in 2007 when sky-high home prices in the United States
finally turned decisively downward, spread quickly, first to the entire U.S. financial sector and
then to financial markets overseas. The casualties in the United States included - a) the entire
investment banking industry, b) the biggest insurance company, c) the two enterprises chartered
by the government to facilitate mortgage lending, d) the largest mortgage lender, e) the largest
savings and loan, and f) two of the largest commercial banks.
The carnage was not limited to the financial sector, however, as companies that normally rely on
credit suffered heavily. The American auto industry, which pledged for a federal bailout, found
itself at the edge of an abyss. Still more ominously, banks, trusting no one to pay them back,
simply stopped making the loans that most businesses need to regulate their cash flows and
without which they cannot do business. Share prices plunged throughout the worldthe Dow
Jones Industrial Average in the U.S. lost 33.8% of its value in 2008and by the end of the year,
a deep recession had enveloped most of the globe. In December the National Bureau of
Economic Research, the private group recognized as the official arbitrator of such things,
determined that a recession had begun in the United States in December 2007, which made this
already the third longest recession in the U.S. since World War II. Each in its own way,
economies abroad marched to the American drummer. By the end of the year, Germany, Japan,
and China were locked in recession, as were many smaller countries. Many in Europe paid the
price for having dabbled in American real estate securities. Japan and China largely avoided that
pitfall, but their export-oriented manufacturers suffered as recessions in their major marketsthe

"Your Citi never sleeps" :: "Where money 8

lives":Citigroup
U.S. and Europecut deep into demand for their products. Less-developed countries likewise
lost markets abroad, and their foreign investment, on which they had dependent for growth of
capital. With none of the biggest economies prospering, there was no obvious engine to pull the
world out of its recession, and both government and private economists predicted a rough
recovery.(Joel Havemann)
The U.S. subprime mortgage crisis was a nationwide banking emergency that coincided with the
U.S. recession of December 2007 June 2009.It was triggered by a large decline in home prices,
leading to mortgage delinquencies and foreclosures and the devaluation of housing-related
securities. Declines in residential investment preceded the recession and were followed by
reductions in household spending and then business investment. Spending reductions were more
significant in areas with a combination of high household debt and larger housing price declines.
The expansion of household debt was financed with mortgage-backed securities (MBS) and
collateralized debt obligations (CDO), which initially offered attractive rates of return due to the
higher interest rates on the mortgages; however, the lower credit quality ultimately caused
massive defaults. While elements of the crisis first became more visible during 2007, several
major financial institutions collapsed in September 2008, with significant disruption in the flow
of credit to businesses and consumers and the onset of a severe global recession.
When U.S. home prices declined steeply after peaking in mid-2006, it became more difficult for
borrowers to refinance their loans. As adjustable-rate mortgages began to reset at higher interest
rates (causing higher monthly payments), mortgage delinquencies soared. Securities backed with
mortgages, including subprime mortgages, widely held by financial firms globally, lost most of
their value. Global investors also drastically reduced purchases of mortgage-backed debt and
other securities as part of a decline in the capacity and willingness of the private financial system
to support lending. Concerns about the soundness of U.S. credit and financial markets led to
tightening credit around the world and slowing economic growth in the U.S. and Europe.
The collapse of Lehman Brothers, a sprawling global bank, in September 2008 almost brought
down the worlds financial system. It took huge taxpayer-financed bail-outs to shore up the
industry. Even so, the ensuing credit crunch turned what was already a nasty downturn into the
worst recession in 80 years. Massive monetary and fiscal stimulus prevented a buddy-can- youspare-a-dime depression, but the recovery remains feeble compared with previous post-war
upturns. GDP is still below its pre-crisis peak in many rich countries, especially in Europe, where
the financial crisis has evolved into the euro crisis. The effects of the crash are still rippling
through the world economy: witness the wobbles in financial markets as Americas Federal
Reserve prepares to scale back its effort to pep up growth by buying bonds.
Low interest rates created an incentive for banks, hedge funds and other investors to hunt for
riskier assets that offered higher returns. They also made it profitable for such outfits to borrow
and use the extra cash to amplify their investments, on the assumption that the returns would

"Your Citi never sleeps" :: "Where money 9

lives":Citigroup
exceed the cost of borrowing. The low volatility of the Great Moderation increased the
temptation to leverage in this way. If short-term interest rates are low but unstable, investors
will hesitate before leveraging their bets. But if rates appear stable, investors will take the risk of
borrowing in the money markets to buy longer-dated, higher-yielding securities. That is indeed
what happened.

Performance Evaluation of Citigroup

Performance evaluation of Citigroup Inc. for the year 2004-2008

Revenue (USD Mil)

Operating Income (USD Mil)
Operating Margin (%)
Net Income (USD Mil)
Earnings Per Share (USD)
Dividends (USD)
Payout Ratio (%)
Shares (Mil)
Book Value Per Share (USD)

2004
86,190
24,182
28.1
17,046
32.6
16
49.1
521
208.23

2005
83,642
29,433
35.2
24,589
47.5
17.6
46.1
516
216.04

2006
89,615
29,639
33.1
21,538
43.1
19.6
46.1
499
241.74

2007
81,698
1,701
2.1
3,617
7.2
21.6
300
500
207.12

2008
52,793
-53,055
-100.5
-27,684
-55.9
11.2
580
125.12

Common size statement

Margins % of Sales
Revenue
Gross Margin
SG&A
R&D
Other
Operating Margin

2004
100
31.92
32.8
28.06

2005
100
34.84
20.49
35.19

2006
100
37.72
21.68
33.07

2007
100
46.89
29.7
2.08

2008
100
68.45
68.95
-100.5

"Your Citi never sleeps" :: "Where money 10

lives":Citigroup
Net InterestInc. & Other
EBT Margin

-7.23
28.06

-9.48
35.19

-7.52
33.07

-21.33
2.08

-63.1
-100.5

Profitability
Tax Rate (%)
Net Margin (%)
Asset Turnover (Average)
Return on Assets (%)
Financial Leverage (Average)
Return on Equity (%)
Return on Invested Capital %

2004
28.57
19.7
0.06
1.24
13.72
16.56
9.4

2005
26.53
29.32
0.06
1.65
13.41
22.33
13.39

2006
27.07
23.96
0.05
1.27
15.86
18.66
13.94

2007
4.38
0.04
0.18
19.26
3.08
9.03

2008
-55.72
0.03
-1.43
27.32
-31.88
0.81

Liquidity/Financial Health
Financial Leverage
Debt/Equity
Asset Turnover
Source: Citigroup Inc. 2008

2004
13.72
1.92
0.06

2005
13.41
1.95
0.06

2006
15.86
2.43
0.05

2007
19.26
3.76
0.04

2008
27.32
5.07
0.03

40
30
20
10
0
2004
-10

NetMar(%)
2005

2006

-20

2007

2008

ROA(%)
ROE(%)
ROIC(%)

-30
-40
-50
-60

Fig: Trend of Net Margin, Return on Asset, Return on Equity, Return on Invested Capital

Performance evaluation:

"Your Citi never sleeps" :: "Where money 11

lives":Citigroup
As we see in financial performance of Citigroup Inc. for the year 2004-2008, there was a reflect
of world economic slowdown in the year 2007 & 2008. Though this was alarmed in the year
2006 but however the management of Citigroup might not or could not take message of boom
and bust of home financing, sub-prime mortgages. In consequences of these events there we see
a upward trend of selling, general and administrative expenses and other expenses whereas the
revenue generation and profit making ability of Citigroup was continuously facing downward
movement from the year 2006. In 2008 its performance was so bad that its net loss exceeds its
revenue generation during 2008. With a negative operating income and net margin all the
indicators of companys health and wealth were trending downward and negative indications.
This all was happened due to inefficient management of assets as we see the asset management
ratio, asset turnover, was continuously decreasing from 0.06 in year 2005 to 0.03 in year 2008,
reduced by 50%, that means assets were not generating revenue as it was generate in 2005.
Moreover the return from assets was more than 200% reduced from year 2006 to year 2008. All
these indicated that its non-performing assets were gradually increasing day by day. Return on
equity was also reflects the inefficient management of assets as Citigroup faced the largest
negative returns on shareholders equity. Citigroups financial health was also becoming more
risky day by day. Its financial leverage ratio and debt to equity ratio supports our statement.
There was $5.07 debt in year 2008 against $1 shareholders equity and 27.32% of companys
assets were financed by debt; the worst from the last four years. Moreover Citigroup has $1.1
trillion off-balance sheet assets most of which was in inferior quality. If these included the
financial leverage will be increased and the profitability ratios will be reduced to a shocking
extent.
There was no good sign in the financial position of Citigroup in year 2007-2008. However these
two years were the beginning of world crisis. The other company may also face the same
problem. This will examine in the next analysis.
Performance comparison of CitigroupInc, Bank of America Corporation(BAC), JPMorgan Chase & Co(JPM), Deutsche Bank AG(DB) for
2007-08
Citigrou
p

Citigrou
p

BAC

BAC

2007

2008

2007

2008

Change(
%)

Revenue (USD Mil)

81,698

52,793

-35

66,31
9

72,78
2

Operating Income (USD Mil)

1,701

-53,055

NM

20,92
4

4,428

Operating Margin (%)

2.1

-100.5

NM

31.6

6.1

Net Income (USD Mil)

3,617

-27,684

NM

14,98
2

4,008

Earnings Per Share (USD)

Dividends (USD)

7.2
21.6

-55.9
11.2

NM
-48

3.3
2.4

0.55
2.24

Financials

JPM

JPM

Change(%)

2007

2008

9.74532185
3
78.8376983
4
80.6962025
3
73.2478974
8
83.3333333
3
-

71,37
2

67,25
2

22,80
5

2,773

32

4.1

15,36
5

5,605

4.38
1.48

1.37
1.52

Change(%)
5.77257187
7
87.8403858
8
-87.1875
63.5209892
6
68.7214611
9
2.70270270

DB

DB

2007

2008

Chan

30,79
4

13,52
2

127.7

8,763

5,754

28.5

-42.6

6,484

3,844

11.37
3.47

-6.6
3.9

N
11.0

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lives":Citigroup

Payout Ratio (%)

300

NM

72.7

404.2

Shares (Mil)

500

580

16

4,480

4,612

207.12

125.12

-40

32.05

27.77

Profitability: Margins % of
Sales

2007

2008

2007

Revenue

100

100

Book Value Per Share (USD)

Gross Margin

33.8

181

3,508

3,605

36.68

36.16

2008

2007

100

100

SG&A

46.89

68.45

46

31.83

28.49

Other

29.7

68.95

132

23.98

28.56

Operating Margin

2.08

-100.5

NM

Net IntInc& Other

-21.33

-63.1

NM

31.55
12.64

6.08
36.86

EBT Margin

2.08

-100.5

NM

31.55

6.08

Profitability: Ratios

2007

2008

2007

2008

Tax Rate (%)

6.66666666
7
455.983493
8
2.94642857
1
13.3541341
7

28.4

9.49

10.4932453
7
19.0992493
7
80.7290015
8
NM
80.7290015
8

66.5845070
4
84.2741935
5

Net Margin (%)

4.38

-55.72

NM

22.32

3.51

Asset Turnover (Average)

0.04

0.03

-25

0.04

0.04

Return on Assets (%)

0.18

-1.43

NM

0.93

0.14

Financial Leverage (Average)

19.26

27.32

42

12.05

13.05

Return on Equity (%)

3.08

-31.88

NM

10.77

1.81

0
84.9462365
6
8.29875518
7
83.1940575
7

Return on Invested Capital %

9.03

0.81

-91

11.08

7.12

35.7400722

Financial Health

2007

2008

2007

2008

Financial Leverage

19.26

27.32

42

12.05

13.05

Debt/Equity

3.76

5.07

35

1.39

1.93

Efficiency Ratios

2007

2008

2007

2008

Fixed Assets Turnover

Asset Turnover

Source: Morning Star

0.04

0.03

-25

8.29875518
7
38.8489208
6

3
435.502958
6
2.76510832
4
1.41766630
3

30.5

571

581

94.13

65.03

2008

2007

2008

100

100

100

100

34.69

36.67

44.64

59.04

24.39

23.74

28.02

24.91

75.54

67.02

31.95

28.46

42.55

-9.62

4.12
31.19

-1.99

-7.97

31.95

4.12

28.46

42.55

2007

2008

2007

2008

32.62

25.59

21.06

28.43

0.02

0.01

-1

0.41

-0.18

N
23.96

54.54

71.73

18.55

11.33

20.62

10.17

102.7

2007

2008

54.54

71.73

4.83

4.36

21.53

8.33

0.05

0.04

1.05

0.3

12.68

16.12

12.86

4.34

13.07

6.77

2007

2008

12.68

16.12

1.85

2.99

2007

2008

5.70769674
3
18.0286436
4
87.1048513
3
NM
87.1048513
3

61.3098002
8
-20
71.4285714
3
27.1293375
4
66.2519440
1
48.2019892
9

27.1293375
4
61.6216216
2

6.47

5.97

7.72797527

7.91

6.95

12.1365360
3

0.04

0.04

0.05

0.04

-20

N
1.721

44.74

23.96

2007

2008

9.39

4.41

0.02

0.01

10.77

-112

-1

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lives":Citigroup

Performance comparison:
What we have assumed in the last performance evaluation of Citigroup was completely wrong. It
was seemed that the financial and economic slowdown in US economy was only for Citigroup.
As we see in the above comparison the two similar investment company Bank of America
corporation(BAC) & JP Morgan Chase(JPM) had managed to make profit from their operation
but Citigroup and Deutsche Bank AG(DB) incurred loss. Between these two loss companies the
deviation of Citigroup income and loss was the largest. Citigroups performance however was
similar to the DB where it should be similar to the BAC & JPM. Due to conservative approach of
mortgaging assets BAC and JPM survive in the recession or economic slowdown but aggressive
approach leads to a big loss for Citigroup. Book value per share is a strong factor affects the
market value per share. In this slowdown where BAC lost only 13.5% and JPM, a very little
amount, 1.5% of their book value, Citigroup lost 40% of its book value per share. This resulted
in 60% reduction of market price per share.
Comparing to BAC, JPM & DB Citigroups performance was the worst among them. Its
profitability, asset management, financial health all were below the mark of industry average.
This was happened only for the low grade collateral, inefficient asset management, aggressive
mortgage decisions etc.
Underlying Causes of Citigroups Distress
Over-reliance on Collateralized Debt Obligations (CDOs)
Citigroup had been widely criticized for its excessive issuance of CDOs- complex financial tools
that involve the repackaging of financial assets such as fixed-income securities and individual
loans into products which can be sold to external investors on the secondary market, which were
instruments without a comprehensively assessed level of risk at that time. Subsequently, this
over-reliance on CDOs was pinpointed to be one of the main causes leading to its crippled state
during the subprime mortgage crisis. Reasons behind Citigoup's overreliance on CDOs wererisk reallocation, regulatory capital relief and greater profitability. (Barnett-Hart, 2009)
Citigroups overreliance on CDOs was largely driven by an incentive to boost earnings in the
trading operations of the bank. Short term interest rates were low from 2000 to 2004, bolstering
the attractiveness of issuing CDOs which yielded relatively higher fees (Crouhy, Jarrow,
&Turnbull, 2007). Citigroup increased its issuance of CDOs threefold from 2003 to 2005,
from $6.28 billion to $20 billion, ultimately owning a grand total of approximately $43 billion of
mortgage-related assets by 2007, which indicated a huge exposure to the downside risks
associated to CDOs (Dash & Creswell, 2008).
Shadow Banking and Mortgage Securitization
The shadow banking system comprises of non-banking financial intermediaries including hedge

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lives":Citigroup
funds and Structured Investment Vehicles (SIVs) which are subject to less scrutiny by central
banks and other federal regulators. The shadow banking network under Citigroup, especially in
the form of Structured Investment Vehicles (SIVs) played a major role in creating liquidity issues
for the group at the height of the crisis.
A key risk resulting from this arrangement is that due to lower regulatory oversight, these entities
have incentives to boost short-term profits by leveraging far more than traditional banks. This
can create systemic risk through the system since they have much lesser equity to cushion any
runs that might result on these entities by their creditors in the event of expectations of a
downturn. In the event of a run on the shadow institutions, however, the banks are required to
provide them support in terms of credit and liquidity, and are accountable to creditors for any
loans made by them to these shadow institutions.

Although Citigroup was required to disclose these activities and hold sufficient capital under the
aforementioned third pillar of Basel II, this requirement was largely circumvented in two ways.
Firstly, the group took advantage of the fact that under the existing accords, stand-by loan
commitments with rolling maturities of up to a year were assigned zero weights. The group
artificially created agreements in which the legal tenure of these loan commitments was less than
a year, but regularly renewed these agreements on expiry (Pomerleano, 2010). When the ABCP
market plunged in the summer of 2007 due to the housing downturn, there was a resulting "run"
on the Papers issued by the SIVs, forcing them to sell under duress their illiquid MBS
investments and suffer large losses in the process. Citigroup was not contractually obligated to
support these SIVs; however, since the majority of SIVs investors were also the banks primary
institutional clients, Citigroup risked undermining important business dealings bhand a potential
loss of reputation. With regard to these concerns, Citigroup, according to a 2007 press release
(Citigroup Inc., 2007), ultimately decided to provide liquidity support to these shadow
companies, resulting in them having to re-transfer $45 billion worth of troubled assets back onto
their balance sheets.

Insufficient Risk Management

Citigroups MBS assets were not classified as subprime and were not included in risk
calculations because they were deemed by credit agencies to have a risk or default of less than
0.01%, indicating little chance of default. It can be deemed inexcusable for institutions like
banks, which specialize in credit risk assessment, to rely on ratings agencies to assess the risk of
their assets. By the time Citigroup disclosed the full extent of its subprime holdings in November
2007, the value of the securities had plunged.

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The role of risk managers is crucial in the long-term sustainability of a bank because they are
expected to monitor trading floors and flag potential problems that could result in large-scale
losses. However, such independence of the risk management function was absent in the
Citigroup context because of the cronyism that existed between Thomas Maheras, Head of
Trading, Rudolph Barker, the chief MBS trader and David Bushnell, the senior risk manager. In
fact, employee testimonies during federal inquiries revealed that traders presumed that the senior
risk manager could be persuaded to accept any exotic trades that they wished to perform (Gerth,
2009).

Impact of subprime mortgage crisis on Citigroup:

The crisis of subprime mortgage system affects Citi group very badly. it incurred a huge amount of
financial losses and induce it to restructure its financial proposition and huge job cut.

Financial losses and asset impairment

Citigroup incurred huge financial losses as a result of the crisis. The financial statement of
Citigroup shows that Citigroup incurred gross $53055 million and net $27684 million losses in
the year 2008(Citigroup Inc. 2008). The market value of Citigroups stock had also fallen to a
great extent in responses to the reduction of profitability ratio, financial health ratio and
efficiency ratio. Due to the high mortgage default Citigroup faced difficulties in the form of
credit crunch and the write downs of bad investment and other assets. Overall, Citigroup had
incurred losses of more than $27 billion, causing severe liquidity problems.

Large scale job cut

In order to reduce losses and bolster underperforming stock, Citigroup decided to reduce the
number of employees on their payrolls. In 2007, Citigroup eliminated 5% of their global
workforce which was around 17,000 jobs (Spencer, 2007). In 2008, Citigroup retrenched 52,000
employees which was another 14% of their workforce (Dash, 2008) . This was done to recover
and restore investor confidence; however, this was not successful since widespread job cuts
created dissatisfaction and skepticism about Citigroups future.

Loss of Credibility
The large losses and write-downs created a loss in confidence and fear of collapse of the bank
among stakeholders. The bad bets on repackaged debt securities, consumer loans and other assets
forced Citigroup to take three Government rescue packages which totaled an amount of around
$45 billion and was the largest package given to any bank (Drawbaugh, 2008). There was a cut
in the credit ratings of Citigroup by Moodys and Standard & Poor's. On 19 December 2008,
Moodys downgraded the financial strength rating of Citigroup by three notches to C from B
which implied a change in the baseline credit assessment to A2 from Aa3 (Moody's Investors
Service, 2008). S&P credit rating services placed revised their rating to A/A-1 rating and revised
its outlook as negative (Chang, 2009) and Fitch cut Citis preferred rating to BB from BBB and
individual rating to C/D from C (Witkowski, 2009).

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Recommendation and Conclusion

In order to determine whether borrowers had sufficient income to meet their monthly mortgage

obligations the originators implemented policies designed to extend mortgages to borrowers

regardless of whether they were able to meet their obligations under the mortgage such as:
Coaching borrowers to misstate their income on loan applications to qualify for
Mortgage loans under the underwriters underwriting standards, including directing Applicants to
no-documentation (no-doc) loan programs when their income was Insufficient to qualify for
full documentation loan programs;
Steering borrowers to loans that exceeded their borrowing capacity;
Encouraging borrowers to borrow more than they could afford by suggesting No
Income No Assets (NINA) and Stated Income Stated Assets (SISA) loans when they could
not qualify for full documentation loans based on their actual incomes;
Approving borrowers based on teaser rates for loans despite knowing that the
borrower would not be able to afford the fully indexed rate when the loan rate adjusted;
Allowing non-qualifying borrowers to be approved for loans under exceptions to the
underwriters underwriting standards based on so-called compensating factors without
requiring documentation for such compensating factors.(CITIGROUP MORTGAGE LOAN
TRUST INC)
A modification agreement is used when the customer has a significant reduction of income
that impacts his or her ability to pay and will last past the foreseeable future. In this situation the
customer's loan terms are modified in order to resolve the mortgage delinquency which makes
the mortgage more affordable for the customer.
A repayment plan is a written agreement between the borrower and the lender to implement a
payment moratorium due to unforeseen circumstances wherein the property or employment
status is affected. It can also include a repayment plan under which the customer pays the regular
monthly payment and an additional amount each month to catch up delinquent payments over
time.
A short sale is when the customer does not have either the desire or ability to keep the property
and is willing to sell the property to satisfy the debt. This option is utilized when the amount
owed less acceptable closing costs to sell the property is more than the value of the property.
Deed in lieu of foreclosure is when the customer does not have either the desire or the ability to
keep the property and is unable or unwilling to sell the property but is willing to sign the
property over to Citi in exchange for stopping the foreclosure action. Deeds in lieu of foreclosure
are generally accepted only after all other options have been exhausted.
An extension is when the customer has experienced a temporary hardship and is unable to bring
the loan current. The customer has the ability to continue making future payments, but does not

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have the funds to completely reinstate the loan. An extension may re-amortize the loan or defer
the interest to the back of the loan.
A reinstatement occurs when a customer that is 90+ days past due is able to pay all of the
delinquent fees, interest and principal owed to the bank with a single payment. This brings the
customers account current immediately and allows him or her to continue to pay off the loan
according to the original amortization schedule.
In the event of a breach of its representations and warranties, Citi could be required either to
repurchase the mortgage loans with the identified defects (generally at unpaid principal balance
plus accrued interest) or to indemnify (make-whole) the investors for their losses on these loans.
On Citis analysis of its most recent collection trends and the financial viability of the thirdparty sellers (i.e., to the extent Citi made representation and warranties on loans it purchased
from third-party sellers that remain financially viable, Citi may have the right to seek recovery
from the third party based on representations and warranties made by the third party to Citi
(a back-to-back claim)).
Citigroup and Related Parties were named as defendants in a variety of class and individual
securities actions filed by investors in Citigroups equity and debt securities in state and federal
courts relating to the Companys disclosures regarding its exposure to subprime-related assets.
Citigroup obtained an amount of $25 billion by selling preferred stock to the U.S. government
through the Troubled Asset Relief Program (TARP). TARP was initiated as part of the
governments package in 2008 to address the subprime crisis which allowed the US government
to purchase assets and equity from troubled financial institutions in a bid to strengthen the
company.
Citigroup initially turned to elimination of about 14% of its global workforce on 17th November
2008 (Dash, 2008) as a part of internal restructure to face the problem of insolvency and was
compelled to seek governmental aid. As a result, Payouts beyond the fixed limit (nominal
compensation of US$1 per year and the maximum salaries $500,000 in cash) could only take the
form of restricted stock and could not be sold until the emergency government loan was repaid in
full (Dash, 2008). With the rescue agreement, Citigroup was severely crippled as the US
government gained control of half the seats in its Board of Directors that the senior management
had limited decision-making control since they were more exposed to governmental checks.
Citigroup suffered disastrous financial losses and was extensively affected due to issues such as
its over-reliance of CDOs, poor risk management and shadow banking, resulting in long-term
implications such as loss in investors confidence and a dampening of their credibility. Even
though Citigroup managed to alleviate the impacts of these problems with its reliance on bailouts
and accumulation of capital, this report highlights certain alternative measures that Citigroup
could have adopted such as alterations to its incentive system and improvement to its risk
management processes. Besides Citigroups efforts, regulators should also ensure strict abidance
to the regulations and risk measurement. As such, the future stability of Citigroup will depend
heavily on the effectiveness and efficiency of new reforms in the corporation and banking
regulation.

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lives":Citigroup

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