Amid economic turmoil, Citi recapitalizes

For the United States, the first years of the 21st century were a time of low interest rates and an inflow of investment funds from fast-growing emerging economies and oil-producing countries. One consequence was the widespread availability, and build-up, of low-cost private debt, which fueled over-expansion in the housing market. In late 2007, market conditions began to deteriorate, home prices started on what became a steep decline, and residential-mortgage defaults began to rise. The increasing defaults and subsequent drop in the values of mortgage-backed securities weakened many financial institutions, including Citi. Facing significant losses on its mortgage portfolio, Citigroup commenced raising capital through public and private offerings that raised more than $30 billion over two months in late 2007. However, in 2008, economic conditions deteriorated further, culminating in the collapse of the 158-year-old Lehman Brothers investment bank in September, and prompting further upheavals in the credit and equity markets. Amid widespread uncertainty in the banking sector, in October the U.S. government stepped in with the Troubled Asset Relief Program (TARP). Initially, this provided a combined $125 billion in preferred equity to nine major U.S. financial institutions in order to strengthen their capital positions and boost the broader economy. Citi received $25 billion in TARP capital in October and an additional $20 billion in capital in November 2008. Citi also entered into a loss-sharing program with the U.S. Treasury on $300 billion of loans and securities backed by residential and commercial real estate, consumer loans, and other assets. Citi issued $7 billion in preferred stock to the Treasury and the Federal Deposit Insurance Corporation in exchange for the loss-sharing agreement. In February 2009, Citi announced that it would issue common stock in exchange for certain third-party-owned preferred securities, to increase its tangible common equity without any additional U.S. government investment. As part of this exchange, $25 billion of the U.S. government's preferred shares were converted to common shares as well. In January 2009, Citi announced a reorganization that would allow it to focus on its core banking franchise while reducing non-core assets over time. The following month, chief executive Vikram Pandit appeared before the U.S. House Financial Services Committee with seven other CEOs of companies that had received TARP funds. Following public criticism of large Wall Street remuneration packages, he made his own position clear. He intended to take a mere $1 a year as salary and no bonus until Citi returned to profitability. "I get the new reality and I will make sure Citi gets it as well," he told the committee. At the end of 2009, Citi raised $20.5 billion in public equity, used the proceeds to repay the $20 billion of preferred shares owned by the U.S. Treasury, and terminated its loss-sharing agreement at the same time. By the end of 2010, the U.S. government had sold all of its common shares in Citi. In total, the U.S. Treasury netted a cumulative profit for taxpayers of $12 billion as a result of its investment in Citi. "We will always be grateful to the American people for their crucial support during the crisis," Pandit said. In March 2010, Pandit explained that Citi had become "a fundamentally different company than it was two years ago." Indeed, it had re-emerged as one of the best-capitalized major banks in the United States.