Citibank Financial Meltdown and Analysis, Research Paper


The financial meltdown of Citibank in 2008, according to some authors could easily have been predicted based on the market and the strategy of the financial institution. (Gleenlaw et al. 2008)  Citibank was present in the mortgage and housing finance market and held a great market share worldwide. The country currently operates in more than one hundred countries. It has a history of more than 200 years.

  1. Business Strategy Analysis

The business strategy of Citibank reflects a low-reserve and expanding policy from 2005 onwards. The 2005 financial report and analysis (2005) states that the financial report includes an allowance for credit losses, based on predicted figures. This meant that the policies did not include managing debt and keeping it at a low level. (p. 35.) The net income from credit products in 2005 decreased, There was a 8% increase in purchase sales, therefore, revenues declined. The company significantly increased its real estate lending in the first part of the decade.

1.b. Chairman’s Letter on Strategy

The chairman’s letter includes corporate and global citizenship visions, expansions and grabbing opportunities, While the visions were clearly communicated by the chairman, the strategy followed to expand operations, initiate and carry out acquisitions are defined in the strategic plan, year overviews of the financial reports as well. The global presence and the aims to make the financial system more transparent (2002) mean that the company wanted to make improvements in stakeholder relations, securities and building a corporate community.

1.c. Competitive Advantages and Disadvantages

Competitive advantages of the company included the market share on the mortgage market and the consumer credit market. All the reviewed reports of financial standing include the main focus of lending and increasing credit, while there is not enough focus on strict policies on preserving liquidity. Antitrust actions are reported in the 2009 financial report, and this means that the company’s market position, competitive advantage was weakened.

2.Analysis of Financial Reports

Long-term debt increased throughout the four years reviewed in the current study. In 2007, the provisions for credit losses and for benefits and claims was increased, which means that an increased provision for the next year was designed to carry losses and not to include them in the financial reports. While this is an accepted procedure in accounting, increasing the provisions for credit losses and expenses from 7537 to 17.917M dollars should have been a subject of an internal investigation. In 2008, a consolidation of financial reports was introduced, and this included guidelines of estimates, losses and intangible asset reporting.

2.a. Internal Control Report

It is interesting that the company did predict that a diversified portfolio of financial products would help them create more stability when the economy changes. The 2006 report clearly states that credit risks exist in the finance industry, and the credit expenditure ha to be controlled. The company set up strategies to expand its foreign exchange, trading and securities business in order to diversify its operation and reduce the risks.

It seems like the product were not diversified enough, even though the company held fixed return investment funds, much more than other companies in the mortgage landing industry.

2.b. Earning Quality Analysis

The earnings quality of the company after the collapse of the housing market also fell, because the value of shares declined. Further investigating the problem, it is evident that the home loans Citibank handled were generally new, and that means that when consumers fell into difficulties, they owed more than the price of the property plus interest. This resulted in increased financial losses and bad debt within the group. The 2006 financial report shows that the returns on average common equity sharply declined from 2005. (Citibank report, 2006) The average loan size increased from 2005 onwards, and while the financial reports assumed that this was the result of the house price increase, the earnings per product declined.

2.c. Level of Disclosure – Transparency of Annual Reports

While in 2012, the head of US Fund Services called for more transparency within the industry  the clarity of information regarding the source of losses, goodwill and intangible assets was only generally described in the financial reports between 2005 and 2009. The 2008 financial report calls for a consolidation of financial statements. The new principles of accounting include a clarification of reporting loans, assets, stating that “Loans are reported at their outstanding principal balances net of any unearned income and unamortized deferred fees and costs.” (Citibank, 2008) It also clearly states that the allowances for loan losses in the report were only estimated figures.

According to the Citibank reports from 2005 to 2009, the company has made some changes to transparency and internal control. (2005, p. 112.) The Disclosure Committee is currently responsible for the accuracy and transparency of financial reporting. The management is responsible for maintaining the internal control of the financial reports, however, the 2005 financial report states that these controls have their own limitations. Still, some predicted amounts in the financial report had to be consolidated in 2009, due to sell-off, discontinuation of operation and other market changes. Therefore, the reliability of the financial reports is not fully satisfactory, as it includes too many estimates and subsidiary company litigation.


Rezabek, J. (2012) “Follow the Sun Financial Reporting.” Online.             <>

Citibank Citizenship Letter from the Chairman. Online. (2002) < >

Citibank Financial Reports 2005-2009. Web.

Greenlaw,  Hatzius, J.,  Kashyap, A.,  Shin, H.(2008) Leveraged Losses: Lessons from the Mortgage Market Meltdown. US Monetary Funds Conference.

Bianco, K. (2008)The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown. Web.