Leadership in the 2008 Financial Crisis

Abstract

This assignment is about finding out how the leadership plays an important role in the worst phase of the company life. We all are aware about the 2008 financial crisis throughout the world. This was due to the fact of recession and major hit was on the financial market of the countries which lead to crash in the real estate markets, mortgaged properties and so on that investment financial giant companies had to write off the debt which lead to decrease in the employment and hence worldwide slowdown. In this time, a lot of initiatives were taken collectively by World’s global leaders and non-profit originations. This initiative helped the world to come back on the track in short time. That is the great example of how transformational leadership decisions affect and helps the companies and institutions to recover from that time.

Introduction:

The financial problems came into picture in 2008 which was called a major financial meltdown after long time and it had impacted so far, the financial markets and that lead to concerns about the competence on the capabilities of management and leaders of the financial structure. Seedings of the financial crisis of 2007 were started in 2001 where United states faced mild recession after the attacks on 2001. It impacted their economy and their central bank had to cut the interest rates to make money supply feasible at cheap rate from 6.75% to 1% in 11 times in 6 years. It had controlled the medium-term financial situations but there were a lot of practices and corporate governance, issues of ethical business practices which busted their financial markets. As world financial markets are interlinked with each other, their impact was seen on the other financial markets of the world which lead the world into global recession. One good thing about the management and leadership performance in this bad phase is that it started reflecting the growth back and started accelerating again after 1 years. The world started recovering from the crisis face in 2009 where most of the financial markets started recovering expect the housing, real estate and mortgage markets which were still struggling with high cost of money supply and less demand and paying back the liabilities by the buyers. Sub-prime mortgage and sub-prime loans took time in restoring their balance sheets, employments and so on. Countries chose the borrowing from IMF as their last resort.

Phases of dealing with economic global crisis

The global leadership has played a vital role in accelerating the growth of world with collective management and decision making. The first step was to absorb the taint in the financial system and restore confidence. 2^nd phase was to deal with aftermath of crisis of global recession and movement of capital from the emerging markets to the countries where its effects were worse. 3^rd phase was to propose and implement changes in the financial systems in order to reduce risk and protect future financial crisis. These management of risk and backing for the future required lots of meetings, policy reforms and political backing and world leaders have called for the international meetings to announce changes in the policies and reforms, regulations and enforcement. Ist meeting held in Pittsburgh in September 2009 by G-20 heads to address the concerns of global crisis. The last phase was to deal with security effects, political and social effects of this financial mayhem. Asian region was not affected as the United states and European regions were during this crisis so this help and assistance resulted in the strengthened role of china and its currency in the world.

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  Congress played a complex role in this financial crisis. The ultimate issue was how to ensure the smooth and efficient functioning of financial markets to promote the general well-being of the country. In June 2009, Obama Administration proposed a reform for financial regulations that focused on risk management, regulators responsibilities and ownership in risk management, financial derivative instruments regulations, consumer protection against financial instruments, improving coordination and other provisions for the global world to ensure the mitigation of risks that may arise in the future. Its all about implementation of learning things which caused the financial crisis of 2007. Congress has managed and performed in this typical time well and its legislative changes, demographic and domestic regulations and its functions. Congress has provided the continuous funding and rescue packages for the public. International monetary funds have provided funds for replenishing the poverty affected arenas. IMF also supported a lot of regional banks and humanitarian assistance to the countries who were in the need of that. 

Citibank

Citibank is a multinational bank from the consumer division of the Citigroup companies and it was founded in 1812 as Citibank of New York.  CEO for the Citigroup companies is Barbara J. Desoer (https://www.citigroup.com/citi/about/at-a-glance.html accessed on October 14, 2018) and its market capitalization is 1.7 trillion USD with no. of employees more than 107,000. Its CDO and CDS products were the worst hit for financial markets and Citi felt its aftermath for a long time after the crisis. 

Like most of the big giant banks and investment management companies were hit hard in the financial crisis of 2008 as they had a huge exposure in derivative instruments, CDO (Collateral Debt and obligations) and Mortgage backed securities. Citi had the portfolios having prime and sub prime lending. Citi had created a very complex structure of lending to the borrower’s wo were facing difficulties in paying off their original debt. They had thoughts that these complex structures would mitigate the risk exposure and will get their money back along with interests. When the bubble of sub-prime mortgages burst, these big giants hit hard. Lehman brother collapsed and Citi was on the verge of bankruptcy. It was then funded by USA federal Governments with huge cashflows and Federal Government took a large stake in Citi’s operations and management.

Citibank’s involvement in financial crisis 2008

https://www.quora.com/What-was-Citigroups-role-in-the-2008-financial-crisis

Citibank loss announced in second quarter of 2008

Citibank announced a loss of about $10 Billion in the 2^nd quarter of 2008 as it was the largest loss which they reported first time in their history (Ellis D., 2008, Jan 15,, “Citigroup’s $10 billion loss is worst ever” article published on CNNMoney.com assessed on October 14,2018)  . The losses were mainly due to the failure of their credit default swaps instruments on the underlying instruments of mortgage loans sub-prime lending. Citi also announced that time they have to write off 18.1 Billion USD assets which were in the souring mortgage investments. They also announced a hefty cut on dividend payout as their cost cutting projects to deal with cash outflows, that time Federal Government, Investors from Kuwait, Singapore and New Jersey provinces funded the company.

Citibank roadmap to recovery

On November 25, 2008, Federal Government agrees to bailout Citigroup riskiest assets of 306Bn USD and injecting new capital and passing on the message that Government is there to support the big financial banks. (Wilchins. D. Stempel. J. 2005 November 25, news from Reuters published under article name “Citigroup gets massive government bailout” accessed on 10 October 2018). This massive bailout was because of the continuous efforts of that time group’s CEO Vikram Pandit as he represented the company’s issues and roadmap on how to get recovered from this time and the largest individual investor appreciated Vikram in the townhall meetings of Citigroup companies “Vikram deserves the vote of confidence” (Saudi Prince Alwaleed bin Talal, Citigroup’s largest individual investor, told CNBC television) and increased its stake to 5% from 4%.Vikram Pandit also announced that time that he would take $1 salary per year until the group returns to growth. He would for two years on the salary of $1 per year and then after showing the consecutive profits in 5 quarters, Citi turned into profit in 2011. In the initial year, Vikram’s leadership although helped the bank in recovering from the bad phase but he faced a lot of corruption charge. One was of the buying a private jet of 45 Million USD in 2009 with the funding received from TARP. As the Forbes article published, Citibank faced a major roadblock when it didn’t pass the stress test conducted by Government authorities (Halah Touryalai, Forbes, Kuly 15, 2013 under article “Citi Is Having Its Best Year Since The ’08 Crisis”). Vikram Pandit resigned in 2012 and Mike Corbat took the CEO post and turned the bank into performing robust gains. Citigroup share rose 41% just in the short span of 9 months after Mike Corbat was appointed. He followed the strategy of cost cutting which turned very positive for the group. Mike proposed the lot of changes and he gave priorities to the efficiency and investor’s sentiment and he proposed the robust increase in the dividend per share on the preferred stock issued.

Citi leadership made best of the funds received from TARP

As soon as Federal Government bailed out Citigroup and assurance of support, Citi leadsership formed a “TARP Committee” to make the best use of the funding received from the Government.

1. In Novermber 2008, Citi purchased a pool of MBS of $10 billion USD secured by Fennie Mae, the Government sponosored housing finance agency to improve liquidity.
2. In the fourth quarter of 2008, TARP committee considered the proposal to deploy 36.5 Bn USD in credit areas for business and public to improve liquidity and business areas of economy. This deployment of funds was majorly in the five areas like U.S residential mortgage activities (app. 25 BN), business and personal loans (2.5 Bn USD), student loans (1 Bn USD), credit card lending (5.8 Bn USD) and corporate loan activities.

Source: https://www.citigroup.com/citi/news/2009/090203a1.pdf

3. Citi also encourages to work and provide more funding except from TARP funds to the industry and small business enterprise to improve their money conversion cycle and helping them to fight with money supply. This ultimately helped the economy as production and employment increased and helping the economies to resume running back on the growth track,

Citi disbursement to the different sector apart from TARP funds in 4^th quarter 2008.

4. Citi’s leadership developed a plan to mortgage plans to give additional timelines to repay the debt and under some circumstances helping them in the short time money availability crisis.
5. Along with increasing the business, Citi also announced a lot of cost cutting initiatives to improve profitability of the firm. Citi cut 110,000 jobs in 2012 across the globe and also, they put bars on the salary hikes and limiting perks and incentives. Citi planned to close its business with other vendors on the locations that were incurring costs and thus by heeling the operational inefficiencies. 

Conclusion:

To conclude the Citi leadership performance in the financial crisis of 2008, I feel that because of the experienced leadership, Government backing, strategy management, business expansions, areas of expertise and providing short term liquidity and initiative with the central US government and other countries Government helped Citi in coming back on the track and reassuring the people’s faith in the brand image of the Citigroup. Bail out from the Government helped Citi’s leaders with the supply of funds and they managed the funding very well. Citi’s board strategy management was so effective that in 3 years of time, company’s stock prices again soared up in the leadership of CEO Vikram Pandit followed by Mike Corbat.

References:

• https://www.forbes.com/sites/halahtouryalai/2013/07/15/citi-is-having-its-best-year-since-the-08-crisis/
• https://www.reuters.com/article/us-citigroup/citigroup-gets-massive-government-bailout-idUSTRE4AJ45G20081125
• https://www.citigroup.com/citi/about/
• https://www.quora.com/What-was-Citigroups-role-in-the-2008-financial-crisis
• https://www.theglobeandmail.com/report-on-business/the-2008-financial-crisis-through-the-eyes-of-some-major-players/article14322993/