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Part Two: World Famous Chapter 823: Citibank Crisis

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    Chapter 823: Citibank Crisis

    Citi bankers have a great career, but compared to other commercial banks in the United States, not only did they hold much larger subprime mortgage-related assets during this financial tsunami, but the breadth and depth of their participation in the financial derivatives market was also greater than that of other traditional commercial banks.  It's hard to hope for.  As a commercial bank, Citibank was once the second largest dealer in the international financial derivatives market, with an asset portfolio worth up to more than 36 trillion US dollars!

    Citibank can be said to be a typical representative of comprehensive operations in the U.S. banking industry after breaking the boundaries between traditional banks and investment banks.  Objectively speaking, there is nothing wrong with integrated management in itself. The key is whether this strategy can be supported by its own core capabilities.  The integrated operation of the banking industry has indeed greatly broadened the space for banks to survive and develop, but it has also greatly increased the breadth and depth of bank risk exposures and changed the scope and nature of bank risks.  Including conflicts of interest caused by the complexity of the organizational structure and cultural diversity, risks of related party transactions between financial subsidiaries, information disclosure risks caused by differences in accounting systems and industry applicable regulatory systems, and risks caused by the transmission of risks in the money market and capital market.  Systemic risk.

    The most critical thing is that traditional banks like Citigroup, due to their transformation into financial holding groups, have been too actively involved in the asset securitization market, causing many transferred credit risks to return in a cycle, and ultimately banks have taken on excessive risks.  Since most financial holding companies were born out of traditional commercial banks, their traditional internal control mechanisms are difficult to effectively manage highly specialized and complex securities investment businesses, especially off-balance sheet securities investment businesses, which may become a "black hole" that can bring down banks.

    The main reason why Citibank is about to go bankrupt today is that the United States dismantled the risk isolation between the banking system and the capital market in 1998. After the 1990s, Citibank changed its focus on mergers and acquisitions in the commercial banking field that it was familiar with.  The practice of expansion has led to a large-scale entry into a relatively unfamiliar field - the investment banking field.  In 2006, the proportion of various securitization products traded by Citigroup through the establishment of spe entities accounted for 114% of total assets, such as MBS, CDO, CLO, CDS, etc. Through the long-term securitization process, Citibank originally tried to convert a considerable part of  The credit risk was transferred externally, but unexpectedly it backfired.

    As an important participant in the U.S. asset securitization trading market, Citibank is also engaged in the acquisition of securitized underlying assets and the design, offering, and underwriting of securitized derivatives, as well as securities product trading and related services in the secondary market.  The credit support business and the overly complicated financial derivatives business have not been discovered by its internal control agencies. The credit risks that were previously thought to be transferred have actually quietly returned to another department within the bank through the capital and derivatives market business.

    Citibank is also a major dealer in the primary and secondary markets. The risks contained in securitization products issued by many other banks have also been concentrated on Citibank. Multiple crises have broken out, making Citibank unable to escape.  During the period of rapid expansion from 1999 to 2003, Citigroup's average annual M&A transaction volume exceeded US$10 billion, and it rapidly developed from a traditional commercial bank into an all-round global financial holding group including banking, insurance, securities, trusts, etc., with its asset size increasing from 2000 to 2003.  It jumped from about 100 million U.S. dollars to a giant of 2 trillion U.S. dollars, an increase of more than 10 times, but it also triggered a fatal problem. Even if these off-sheet assets suffered a loss of 10%, Citibank would be insolvent.

    As a result, when the financial tsunami came, Citibank was busy selling a large number of subprime mortgage assets in its hands. However, it did not expect that the financial derivatives department, which was not closed in time, would continue to create more toxic assets. It had to demolish the east wall to make up for the west wall, until in the end no one was left.  Dare to invest more money to continue to make up for it.  Citibank then discovered that most of its financial derivatives were in vain and had to bear huge losses.  Citibank has original assets of more than 2 trillion US dollars and has more than 200 million customer accounts in 106 countries and regions around the world. It is truly the world's largest financial empire.  At this point where it¡¯s not worth it, the lesson is profound.

    When Yang Xing led an overseas bargain-hunting group to acquire Citi assets at a low price, he analyzed the causes of Citibank's crisis in detail and reminded the domestic financial regulatory authorities to pay attention to this risk. At present, all domestic commercial banks are operating in a "mixed business".  Financial derivatives are inherently deficient in risk management, and it is often difficult to clearly understand the risks involved, let alone manage them.

    Most of the 4 trillion yuan in bailout funds launched by the country are distributed through the banking system. In many infrastructure projects, local governments also have to allocate funds to cooperate with the funds allocated by the central government. However, since local governments do not have the right to issue bonds, they are in disguise.  Many secured financing companies have been established to operate from bank loans.  Since most of the government and enterprise functions of domestic banks are not completely separated and cannot refuse instructions from local governments, many loan evaluation and disbursement targets do not comply with economic laws.

    Once there is a problem with such a loan, it will lead toA large number of bad debts and bad debts appeared.  In order to solve the huge bad debts of several major commercial banks, they had to divest these assets and established four major asset management companies to solve the problem.  Now that old debts have been cleared and new debts have arisen, in order to lower the ratio of bad debts, the easiest way for domestic banks is to package problematic assets and sell them to the market as so-called "financial management products."

    According to Yang Xing¡¯s understanding, most of the current purchasers of these financial products of domestic banks are ordinary depositors. In order to attract them, many banks¡¯ financial products use the trick of issuing new bonds to offset old debts. Therefore, Yang Xing suggested to the central government that  The United States has paid a heavy price for the subprime mortgage crisis, and the country's huge domestic local debt and bank financial products are also time bombs. Citibank has learned from the past. Don't make the same mistake again!

    Citibank declared bankruptcy. It is much larger than Lehman Brothers in terms of scale and market influence. If the U.S. government does not rescue Citibank, the impact on the U.S. and the world's finance and economy will probably be greater than that of Lehman Brothers.  The global economic impact caused by the bankruptcy of Mann Brothers was much more severe, so the U.S. government could not leave it alone under any circumstances. It was truly "too big to fail."

    However, in view of the newly introduced severe restrictions on the rescue of "too big to fail" companies, on October 24, 2006, the U.S. government, the Federal Reserve and the Federal Insurance Corporation jointly issued a statement to implement a package of rescue measures for Citibank, which was on the verge of bankruptcy.  Stringent conditions were imposed.

    First, the U.S. government injected US$80 billion from the US$850 billion bailout plan into Citigroup and obtained 40% of its preferred shares. Citigroup announced that it would be split into US$200 million in assets and allocated to the new Citibank. The remaining US$850 billion was non-profit.  The transfer of core assets to Citi Holdings marked the end of Citigroup's era as a financial supermarket.

    And the government stipulates that in the next three years, without government approval, Citibank will not be able to distribute common stock dividends exceeding US$001 per share, and must comply with regulations that cap the management salary and benefits system.  The government provided guarantees for Citibank's US$306 billion in non-performing assets, and the four banks signed a loss-sharing agreement, but Citigroup must absorb most of the losses caused by the US$306 billion in non-performing assets.

    Third, the Federal Reserve will provide certain loans to risky assets other than US$306 billion and invite external investors to make acquisitions.  After the government "nationalizes" Citibank, it will also welcome investors from other countries to acquire Citigroup shares. The Committee on Foreign Investment in the United States will give the green light to this, even if it is the country's sovereign investment fund.

    This is a huge discount. You must know that Americans say they like free trade, but they are picky about other countries investing in the United States, especially national investments. Not long ago, CNOOC¡¯s failed acquisition of Unocal is an example.  But now the situation dictates that Americans have to make concessions.  Nowadays, the financial tsunami has caused huge damage to European and American countries. The previous economic democracy had to give in to self-rescue. The bankrupt Icelandic government chose to cut off its arms and sell large tracts of land to foreign investors. The Greek government even considered selling some ancient artworks to pay off debts.

    Citibank has previously sold many financial businesses in the region to Japan, India, France and Germany. Now that the group is split into two, the first thing to keep is the traditional bank where it is based. As for Citigroup Holdings, which has assets of US$850 billion  , obviously wanted to put it on the auction table to be sold at a high price, and did not care whether the Chinese would buy it.

    In fact, the Americans originally planned to sell it to some national sovereign funds that are closely related to them. After all, there are not many private companies in the world willing to take over such a big deal. However, Europe, which has the closest relationship with it, has not cleared up because of the debt crisis.  There is more than enough but not enough power.  Although countries such as Iceland and Cyprus have restructured their domestic financial systems, temporarily bringing the EU back from the brink and no longer sliding into the abyss, the problems of other European pig countries have not disappeared and are still struggling in the quagmire.

    The Spanish and Portuguese governments fell one after another, and Yang Xing's close friend Silvio Berlusconi of Italy did not retain his throne. Fitch took the initiative to lower the 3a credit rating of seven European countries, including France, before the Citibank incident. As a result, Hungary and the Czech Republic were named  The debt problems of newly-joined countries such as Latvia and Latvia have emerged.  Compared with established Western countries, the financial situation of these countries is quite bad, and they are regarded as the source of the next wave of crises. The European Union hastily launched the European Financial Stability Fund efsf, and proposed to use 400 billion euros of rescue funds to rescue EU countries.

    Under this situation, although Norway and other Nordic countries, where Europe's largest sovereign fund is located, are not members of the EU, they are still struggling. Even if they use it, they must first consider political factors and must save European countries first. They can only express their helplessness in acquiring Citi assets.  In addition to Europe, the sovereign funds of Saudi Arabia and the United Arab Emirates in the Middle East have to deal with the crisis in Dubai, United Arab Emirates. As a result, they have to pick and choose, and they can only take advantage of China, Singapore and other Asian countries.

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