By Philip Mattera
The financial octopus known as Citigroup is the result of the marriage of one of the country’s oldest and most powerful commercial banks (Citibank) and a conglomerate (Travelers Group) created by Sanford Weill to promote and exploit the weakening of federal rules governing the financial sector. During the 2008 credit crisis, a struggling Citigroup had to be bailed out by the federal government, which ignored calls for its breakup and aside from some multi-million-dollar regulatory settlements did little to curb its aggressive practices. In 2015 it pleaded guilty to a criminal charge of currency market manipulation but was allowed to continue business as usual.
Standard Oil Roots
Citibank, whose roots went back to the early 19th century, later developed close ties to the Rockefeller interests and became the prime bank of the Standard Oil empire. By the early 20th century, what was still called National City Bank was testing the limits of federal bank regulations. Using a holding company, it began to acquire control of other banks around the country—until an uproar over this creation of a “money trust” caused it to abandon the plan. Taking advantage of the 1927 McFadden Act, which allowed national banks to open branches in their home town, National City later began building an extensive retail banking presence in New York City.
During the 1970s, Citi and the other big banks based in the New York City pressured the municipal government to adopt harsh austerity policies to deal with a fiscal crisis. The banks had helped bring about that crisis by dumping their holdings of the city’s securities and refusing to underwrite new issues. Citibank was singled out in this regard: in 1975 municipal unions organized the withdrawal of more than $14 million in institutional deposits from the bank. Undeterred, Citi and the other banks supported the creation of undemocratic bodies such as the Municipal Assistance Corporation and the Emergency Financial Control Board to protect their interests. Citibank also made life more difficult for New Yorkers by raising interest rates on consumer loans to more than 13 percent. In 1981 Citi paid $500,000 to settle usury charges brought by the New York State attorney general.
In the 1970s Citibank was also an aggressive proponent of using the vast new deposits coming in from oil-producing countries to lend aggressively to “underdeveloped” nations. This recycling of petrodollars created unsustainable levels of debt for much of the third world, which later came back to haunt Citibank and other Western institutions. In 1987 Citibank had to add $3 billion to its loan loss reserves to deal with these bad loans. Even so, the third world debt problem kept Citi unstable to the point that there was speculation it might file for bankruptcy or enter into a merger to prop up its weak balance sheet. In 1991 Citi got a $590 million capital infusion from Saudi Prince Al-Waleed bin Talal and another $600 million from the sale of preferred stock to a group of several dozen institutional investors. An August 20, 1991 article in Financial World entitled “Too Big to Fail” described Citi as “a deeply troubled institution.”
Until it changed its policy in 1978, Citi was the largest U.S. lender to the apartheid government of South Africa. Yet it continued to provide extensive loans to the South African private sector, defying calls for divestment. This was a key reason Citi was one of the companies targeted by a group called Americans Concerned About Corporate Power. In 1981 the group, founded by Ralph Nader and other public interest activists, launched Citiwatch to monitor the bank’s practices with regard to employee rights, community reinvestment, pension investments and loans to repressive governments.
In 1982 the U.S. Securities and Exchange Commission overruled its staff and closed a three-year investigation of Citibank’s foreign currency transactions without pressing charges. It later came to light that one of the SEC commissioners who made that decision had previously represented the bank while working for a prominent law firm that had long represented Citi. An investigation by a House of Representatives subcommittee presented evidence of extensive violations of banking laws and tax evasion by Citibank’s foreign subsidiaries.
Citibank took advantage of the savings & loan crisis of the 1980s to acquire failing thrifts such as Fidelity Savings of San Francisco and thus lay the foundation of interstate banking. As Citi moved into more states, it also became the target of more criticism. A 1990 report by Citizen Action alleged that Citi’s home mortgage computer system was overcharging home buyers in 14 states. A 1992 report by the Comptroller of the Currency found that Citi’s home mortgage business engaged in sloppy practices that exposed the company to excessive risk while also overcharging many customers.
The Creation of Citigroup
Citibank’s struggle to survive on its own came to an end in 1998, when it agreed to the merger with Travelers, which Sandy Weill had fashioned out of his takeover of the insurance company by that name as well as the investment houses Shearson and Salomon Brothers. (The latter had paid $290 million to settle charges that it submitted fraudulent bids in Treasury Department auctions of federal securities to circumvent limits on the portion of those issues that a single firm was allowed to purchase.)
The $70 billion merger flew in the face of federal rules barring the combination of commercial banking and either insurance or investment banking. Yet Weill and Citibank CEO John Reed correctly bet that federal regulators would find the deal too big to block. Citigroup thus came into being.
One of Citigroup’s first big challenges was to deal with accusations that Citibank had assisted in laundering nearly $100 million in payoffs received from drug traffickers by Raul Salinas de Gortari, the brother of Mexico’s president. A report by the U.S. General Accounting Office found that Citibank violated its own policies in the matter, turning a blind eye to suspicious transactions. In 1999 testimony to a Congressional committee, Reed admitted that Citibank had been slow to correct years of weak controls on wealthy customers. Another GAO report in 2000 found that Citi had failed to follow federal guidelines to prevent money laundering and had allowed up to $800 million in suspicious Russian funds to pass through 136 accounts. And in further Congressional testimony in 2001, Citi officials admitted serious deficiencies in dealing with two offshore Caribbean banks implicated in another money laundering scandal.
Citigroup had troubles at home as well. In 2000 Citibank had to pay $45 million to settle lawsuits alleging that it imposed excessive late fees on credit card customers. That same year, Citigroup announced that it would spend $31 billion to purchase the largest U.S. consumer finance company Associates First Capital, which was already the subject of controversy over predatory lending. Facing pressure from community activists, Citi claimed that it would revamp the business to avoid abusive practices. It nonetheless was targeted by activists groups such as National People’s Action. And in 2001 the Federal Trade Commission sued Citi and Associates for abusive lending practices. (The following year the FTC announced that Citi would pay a record $215 million to settle the charges.)
In 2002 Citi became embroiled in the biggest corporate scandal of the day when it was accused of helping Enron conceal its precarious financial condition by disguising debt as trading transactions. In 2003 Citi agreed to pay $101 million to settle SEC charges relating to the Enron fraud, plus another $19 million relating to manipulation of financial statements by another company called Dynegy. In 2005 Citi agreed to pay $2 billion to settle lawsuits brought by Enron investors.
In the early 2000s, star analyst Jack Grubman of Citi’s Salomon Smith Barney unit was at the center of a conflict of interest controversy. In 2003 Salomon Smith Barney agreed to pay $400 million in penalties and disgorgement as its share of a settlement with regulators on the conflict of interest issue.
Citi was also implicated in the WorldCom accounting scandal, and in 2004 it agreed to pay $2.65 billion to settle lawsuits brought by WorldCom investors alleging that Citi failed to perform due diligence when underwriting the company’s bonds. That same year, Citi agreed to pay $70 million to settle Federal Reserve allegations of abuses in its consumer lending operations. Also in 2004, Citi was fined three times by financial industry regulator NASD: $250,000 for failing to comply with discovery obligations in arbitration cases; another $250,000 for distributing misleading hedge fund sales literature; and $275,000 for various violations relating to a futures fund. During this same period, Japanese regulators shut down Citi’s private banking operations because of serious rule violations.
In 2005 the SEC announced that Citi would pay a civil penalty of $20 million for failing to provide customers material information related to their purchases of mutual fund shares. Two months later, the commission said Citi would pay $208 million to settle additional charges relating to mutual fund sales. That same year, Britain's Financial Services Authority fined a Citi unit £13.9 million for violations of bond trading regulations.
In 2006 NASD fined Citi $225,000 for deficient disclosures in analyst reports and $1.1 million for failing to prevent its brokers from falsely claiming that their customers were disabled to improperly obtain waivers of mutual fund sales charges. In 2007 NASD announced that Citi would pay $15 million to settle charges relating to the use of misleading materials in retirement seminars for BellSouth employees. In 2008 FINRA (the successor to NASD) fined Citi $300,000 for failing to properly supervise the commissions its brokers charged on stock and option trades, while the SEC announced that Citi would restore about $7 billion in liquidity to customers who had invested in auction rate securities and were allegedly misled about their risk. Also that year, Citi agreed to pay $18 million to settle charges brought by the California attorney general concerning the practice of using computerized “sweeps” to remove balances from credit card accounts that were in “recovery” status.
Meltdown and Bailout
When the financial crisis erupted in 2008, Citi was seen as one of the most vulnerable of the big institutions. As a New York Times investigation found, the bank had been particularly reckless in loading up on the subprime mortgage-related securities that were now deemed toxic. Citi was slated to receive an infusion of $25 billion from the Troubled Assets Relief Program (TARP), but its condition turned out to be so precarious that in November 2008 the federal government announced that it would protect Citi against potential losses on its $306 billion pool of toxic assets and provide an additional $20 billion infusion.
As Washington Post columnist Steven Pearlstein pointed out, “Of all the rescues mounted by the government this year, none carries with it more symbolism, or more irony, than that of Citigroup,” which of course had done so much to break down federal restrictions on the financial sector.
For a while, it looked like Citi might be broken up. Under pressure from the federal government, it spun off its Smith Barney retail brokerage business into a joint venture with Morgan Stanley. There was even speculation in the business press that Citi might be nationalized. A full takeover did not occur, but in February 2009 the fed government said it would increase its stake in Citi to 36 percent.
Despite being a ward of the state, Citi continued to get hit with regulatory sanctions. In March 2008 FINRA fined it $2 million for transaction reporting violations and then $175,000 for a failure to properly supervise communications with customers during the initial public offering of Vonage as well as $600,000 for deficiencies related to the supervision of complex trading strategies. The U.S. Commodities Futures Trading Commission announced in October 2009 that Citi would pay $100,000 to settle reporting violations.
FINRA imposed more fines in 2010, including $650,000 for disclosure and supervisory violations relating to Citi’s Direct Borrow Program and $1.5 million for supervisory violations relating to a broker who misappropriated over $60 million from cemetery trust funds. That year, the SEC announced that Citi would pay a $75 million penalty to settle allegations that it misled investors about its exposure to subprime mortgage-related assets. Also charged were the company’s former chief financial officer and its former head of investor relations.
In December 2009 Citi worked out a deal to repay its federal aid, but it negotiated terms that allowed it to enjoy huge tax savings in the process. A year later, the federal government completed its selloff off its Citi shares, claiming that it enjoyed a profit of $12 billion on the transactions.
More violations emerged in 2011. FINRA fined Citi $500,000 for failing to supervise a sales assistant who misappropriated more than $700,000 in customer funds. The Federal Housing Finance Agency sued Citi and other firms for abuses in the sale of mortgage-backed securities to Fannie Mae and Freddie Mac. Then the SEC announced that Citi would pay $285 million to settle charges that it defrauded investors in a $1 billion collateralized debt obligation tied to the U.S. housing market. Citi had taken a proprietary short position against those assets without telling the investors.
The settlement amount in the SEC case, which was far below the $700 million in losses suffered by the defrauded investors, was roundly criticized by the federal judge, Jed Rakoff, who was overseeing the case. Judge Rakoff also challenged the SEC’s willingness to let Citi get off without admitting guilt in the matter, calling the deal “neither reasonable, nor fair, nor adequate, nor in the public interest.” He rejected the settlement, but the SEC filed an appeal, which is not yet fully resolved.
Citi was one of five large mortgage servicers that in February 2012 consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. That same month, U.S. attorney’s office in Manhattan announced that Citi would pay $158 million to settle charges that its mortgage unit fraudulently misled the federal government into insuring thousands of risky home loans. In August 2012 Citi agreed to pay $590 million to settle lawsuits charging that it deceived investors by concealing the extent of its exposure to toxic subprime debt.
During 2012 there were also more FINRA fines: $600,000 for charging excessive markups and markdowns on bond transactions; $2 million for supervisory violations relating to exchange-traded funds; $3.5 million for providing inaccurate performance data related to subprime securitizations; and $888,000 for using municipal bond proceeds to pay for lobbyists. The CFTC announced Citi would pay $525,000 to settle charges that it had exceeded limits on speculative positions in wheat futures. In January 2013 Citi was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve claims of foreclosure abuses.
Citi CEO Vikram Pandit paid a price for the bank’s transgressions. In April 2012 Citi shareholders rejected a board-approved plan to hike his annual pay to $14.9 million, and the following October he was ousted from his post.
In March 2013 Citi agreed to pay $730 million to settle a lawsuit brought by institutional investors charging that they were misled by the bank concerning risks associated with several offerings of Citi preferred stock and bonds between 2006 and 2008.
That same month, the Federal Reserve brought an enforcement action against Citi for having inadequate money-laundering controls.
In July 2013 Citi agreed to pay $968 million to Fannie Mae to settle claims that it misrepresented the quality of home loans sold to the agency.
In October 2013 Freddie Mac announced that Citi would pay $395 million to repurchase home loans the bank had sold to the mortgage agency that did not conform to the latter's guidelines.
In December 2013 Citi was fined $95 million by the European Commission for its role in the illegal manipulation of the LIBOR interest rate benchmarks by major U.S. and European banks.
In March 2014 it came to light that Citi's Mexican affiliate Banamex was being investigated by U.S. prosecutors in connection with possible money laundering charges. (In May 2017 Banamex agreed to pay $97 million and enter into a non-prosecution agreement to resolve the money laundering charges.)
That same month, the Federal Reserve rejected Citi's plan for solidifying its capital position and increasing its shareholder dividend.
In April 2014 Citigroup agreed to pay $1.13 billion to settle claims by institutional investors which had demanded that it buy back residential mortgage-backed securities sold during the run-up to the financial meltdown.
In July 2014 the U.S. Justice Department announced that Citigroup would pay $7 billion to settle charges relating to the packaging and sale of toxic mortgage-backed securities in the period leading up to the financial meltdown.
In November 2014 Citigroup was fined $310 million by the U.S Commodity Futures Trading Commission and $358 million by Britain's Financial Conduct Authority as part of a settlement of charges that it and other major banks manipulated the foreign exchange market.
That same month, FINRA fined Citigroup Global Markets $15 million for failing to adequately supervise communications between its stock analysts and clients. A few weeks later, FINRA fined the company another $5 million as part of a case against ten investment banks for allowing their analysts to solicit business and offer favorable research coverage in connection with a planned initial public offering of Toys R Us in 2010.
In May 2015 the Justice Department announced that Citibank was one of a group of banks pleading guilty to criminal charges of conspiring to fix foreign currency rates. Citi was fined $925 million (and another $342 million by the Federal Reserve) and put on probation for three years. The SEC gave it a waiver from a rule that would have barred it from remaining in the securities business.
In July 2015 the Consumer Financial Protection Bureau announced that Citi would to pay about $700 million to customers to settle allegations that it misled them into purchasing unnecessary add-on products for their credit cards. The following February the CFPB ordered Citi to pay a penalty of $3 million and provide nearly $5 million in consumer relief for selling credit card debt with inflated interest rates and for failing to forward consumer payments promptly to debt buyers.
In May 2016 the Commodity Futures Trading Commission ordered three Citi subsidiaries to pay a $175 million penalty to resolve allegations that they manipulated interest rate benchmarks.
In January 2017 the CFTC filed and settled (for $25 million) allegations that Citigroup Global Markets engaged in the illicit practice of spoofing — bidding or offering with the intent to cancel the bid or offer before execution — in U.S. Treasury futures markets and that it failed to diligently supervise the activities of its employees and agents in conjunction with the spoofing orders.
That same month, the SEC announced that Citigroup Global Markets would pay $18.3 million to settle allegations that it overcharged at least 60,000 investment advisory clients with unauthorized fees. In a separate SEC case, Citi had to pay $2.96 million to settle allegations that it misled investors about a foreign exchange trading program.
Also in January 2017, the Consumer Financial Protection Bureau fined two Citi subsidiaries $28.8 million for keeping borrowers in the dark about options to avoid foreclosure and burdening them with excessive paperwork demands when they applied for foreclosure relief.
In 2001 Citi’s Salomon Smith Barney unit agreed to pay $635,000 to the U.S. Equal Employment Opportunity Commission to settle charges that it discriminated against certain employees of a data center based on race and/or national origin. In 2008 Smith Barney agreed to pay $33 million to about 2,500 current and former female brokers to settle a class-action gender discrimination suit. In 2010 a group of current and former female employees in Citi’s municipal securities division sued the company, accusing it of being an “outdated boys club” in which “women are denied equal terms and conditions of employment. The case is pending.
In 2009 a Citigroup retail industry analyst participated in a U.S. Chamber of Commerce-sponsored conference call designed to build opposition to the Employee Free Choice Act legislation that would have made it easier for labor unions to organize.
In the early 2000s Rainforest Action Network targeted Citi for its role in financing projects—such as the Gobe oil fields in Papua New Guinea and the OCP pipeline in Ecuador—that contributed to the destruction of old-growth forests, displaced local communities, and accelerated global warming. In 2003 RAN suspended its campaign after Citi agreed to reform its environmental practices. But several years later RAN resumed criticizing Citi for helping to finance coal-mining firms and utility companies using coal-fired power plants.
Other Information Sources
Violation Tracker summary page
Watchdog Groups and Campaigns
Key Books and Reports
Before the Bailout of 2008: New York City’s Experience with Tax Giveaways to Financial Giants by Bettina Damiani and Allison Lack (Good Jobs New York, February 2009).
Citibank, 1812-1970 by Harold van B. Cleveland and Thomas F. Huertas (Harvard University Press, 1985).
Citibank: Ralph Nader's Study Group Report on First National City Bank by David Leinsdorf and Donald Etra (Grossman Publishers, 1973).
Citicorp: The Story of a Bank in Crisis by Richard B. Miller (McGraw-Hill, 1993).
Dirty Money: U.S. Banks at the Bottom of the Class (Rainforest Action Network, BankTrack and Sierra Club, 2012.
Dividend Tax Abuse: How Offshore Entities Dodge Taxes on U.S. Stock Dividends (Senate Permanent Subcommittee on Investigations, September 2008).
King of Capital: Sandy Weill and the Making of Citigroup by Amey Stone and Mike Brewster (Wiley, 2002).
Off the Books: Citibank and the World's Biggest Money Game by Robert A. Hutchison (William Morrow, 1986).
Pay or We (Might) Go: How Citigroup Plays the States and Cities by Dan Steinberg and Sarah Stecker (Good Jobs New York and New Jersey Policy Perspective, June 2007).
Tearing Down the Walls: How Sandy Weill Fought His Way to the Top of the Financial World—and then Nearly Lost It All by Monica Langley (Simon & Schuster, 2003).
Walter Wriston, Citibank and the Rise and Fall of American Financial Supremacy by Phillip Zweig (Crown, 1996).
Last updated June 1, 2017