Can you imagine that Citigroup, America’s largest financial institution, can reduce its market capitalisation from US$244 billion two years ago to US$20.5 billion on 21 November 2008? Its share value was a mere US$3.77 per share on that Friday.
The losses suffered by Citigroup were the result of their trading activities in collaterised debt obligations (C.D.O.) – securities that packaged mortgages and other forms of debt into bundles for resale to investors. With the US property market slump, the sub-prime mortgages lost substantial values resulting in C.D.O. held by Citigroup losing values as well.
Citigroup moved aggressively in increasing this kind of trading activities in 2005 instead of growing the usual direct loans businesses. C.D.O. is a highly complex product with associated risks that are hard to gauge. In 2007, Citigroup emerged as a financial institution with substantial exposure in C.D.O. and hence the massive write-off of their values.
One reason for this state of affair was the implicit sanction by the senior management to increase earnings via the bank’s trading operations. The fixed income division of the bank was well compensated for growing the C.D.O. business with huge executive bonuses during years of property boom. More risk was taken as Citigroup continued to reap profits.
The risk control unit of Citigroup was not effective because the head has personal ties with a deputy chief of the fixed income division. That made him less independent in performing risk controls over trading activities of Citigroup.
The risks taken by Citigroup were disproportionate to the long term viability of the bank. The greed for more profits and executive bonuses blinded the previous senior management of Citigroup. They were removed as a consequence but not after nearly plunging Citigroup into collapse.
(Source: “Citigroup Saw No Red Flags Even as It Made Bolder Bets” By ERIC DASH and JULIE CRESWELL, Published: November 22, 2008, The New York Times)
Written on 11/30/2008 12:31 PM
Copyright © 2008, the author known as LKT in Singapore.
The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.