Company Press Release, November 27, 2000

Note:  Journalists and others are free to use this material as they wish, although a link is most appreciated.  Also note that the Introductory 3 Page Report  provides helpful background information.

What neither Microsoft nor Cisco Systems anticipated was the impact of Citigroup using a "watered stock " based merger strategy based upon the "pooling accounting loophole," in addition to a variety of other practices designed to generate merger fees through its Salomon Smith Barney subsidiary.  While all eyes are on technology,  Citigroup may have undermined the new economy for reasons explained in these reports and this could be the biggest untold story in the business media. The market value of Citigroup now exceeds that of Microsoft, Intel and Cisco Systems.
 

A number of significant accounting loopholes may now be having a profound effect on Microsoft, Cisco Systems and other components of the new economy.  If these problems are not addressed, there is the real threat that the related undisclosed market risks could undermine the entire stock market.  Practical solutions do exist and, if implemented, could protect the integrity of the market and the information financial analysts use to make market decisions.

This study reviews Citigroup, a major player in this financial "pyramid" and illustrates the need to change the regulatory structure that controls mergers and acquisitions.  Citigroup and its subsidies, such as Salomon Smith Barney, demonstrate how the lack of proper financial and regulatory controls has come to pose a real hazard, and reveal a potential threat to the U.S. markets.

Most important to realize is that Citigroup is really a giant insurance company. Citigroup was formed when an insurance company, Travelers Insurance, purchased a bank, Citicorp, by printing up 1.7 billion of new shares.  Travelers had previously printed up 282 million shares to purchase Salomon Smith Barney in 1997.  Both acquisitions used the pooling loophole in which most of the cost of printing these 2 billion new shares is not reflected anywhere in the financial statements.  After buying Citicorp, Travelers insurance then changed its name to Citigroup. This has resulted in Citigroup becoming a "watered stock."  Citigroup also claims it has $60 billion in capital, an important measure for a bank, yet the truth is they have almost no real capital subsequent to recognizing the cost of goodwill paid for these acquisitions, if the pooling loophole were not used.

This is perhaps the biggest untold story of the financial markets and new economy, that is, how the Federal Reserve and other regulators allowed an insurance firm, Travelers Insurance, to take over the nations largest bank without the proper regulatory safeguards necessary to protecting customers and shareholders.  Citigroup's market value now exceeds that of both Microsoft and Intel.

A key objective of this report is to help technology companies and their employees grasp the significance of caring about what is occurring at Citigroup.  It is true that more than 75 percent of Citigroup's deposits are held in branches outside the U.S.  There may be an irony here because Citigroup is quickly converting U.S. consumers to "third world" status in addition to imperiling our financial system.  The report is 30 pages long and probably best read from a printed version.
 
Table of Contents

I.  How Citigroup Is Undermining the New Economy
A. Travelers Insurance Erects a Financial Pyramid
B.  A Pyramid Based Upon "Watered Stock" 
C.  The Planned AFC Merger, A Desperate Attempt to Sustain the Pyramid
D.  Reviewing the Merger Landscape in Corporate America
 
II.  How Citigroup's Watered Stock Is Disabling The New Economy
A. Triggering Too Much Consolidation in a Quest for Mergers and Acquisition Fees
B. Creating Higher Prices Due to a Lack of Competition, Leading to Inflation
C. Collapsing Privacy and Undermining Confidence In New Economy Services
D. Generating Layoffs and Undermining the Broader Traditional Economy
E. Handicapping Microsoft and Cisco Systems
F. Understanding The Derivatives Risk to The New Economy
G. Circumventing Regulatory Efforts, Thus Far
 
III.  Reviewing Citigroup's Products and Services
A. Consumer Groups Respond to Citigroup
B. Credit Cards and Real Estate Loans
C. Investment Products
D. Corporate Banking Products
E. Student Loans
F. Insurance Products
G. International Finance Activities
 
IV.   Citigroup Corporate Profile and Industry Background
A. Inside Citigroup
B. Relevant Banking, Insurance & Investment Industry Issues
 
V.  Strategies for Restoring The New Economy
End the Pooling Loophole for Mergers
Update ERISA Pension Laws to Provide More Access to Low-Cost Well Diversified Mutual Funds
Reform the Accounting for Stock Options with One Simple Change
Boycott Citigroup’s Products and Services
Block the Associates First Capital Merger
 
 

I.  Inside Citigroup's Pyramid that is Undermining the New Economy

A. Travelers Insurance Erects a Financial Pyramid

1.  What is Citigroup and How Was It Created?
Most important to realize is that Citigroup is really a giant insurance company. Citigroup was formed when an insurance company, Travelers Insurance, purchased a bank, Citicorp, by printing up 1.7 billion new shares of stock.  Travelers had previously printed up 282 million shares to purchase Salomon Smith Barney in 1997.  Both acquisitions used the pooling loophole in which most of the cost of printing these 2 billion new shares is not reflected anywhere in the financial statements.  After buying Citicorp, Travelers insurance then changed its name to Citigroup. This has resulted in Citigroup becoming a "watered stock," like Microsoft and Cisco Systems.  Citigroup also claims it has $60 billion in capital, an important measure for a bank, yet the truth is they they have almost no real capital subsequent to recognizing the cost of goodwill paid for these acquisitions, if the pooling loophole were not used.  

This is perhaps the biggest untold story of the financial markets and new economy, that is, how the Federal Reserve and other regulators allowed an insurance firm, Travelers Insurance, to take over the nations largest bank and proliferate practices used at Travelers on unsuspecting customers and shareholders. These practices include aggressively selling high commission annuities into pension plans, credit card fee abuse, predatory consumer lending, price fixing of Nasdaq stocks, predatory investment banking practices designed to stimulate mergers and a complete collapse of privacy standards.  This only begins to chronicle what is occurring at Citigroup.  Adjusting for the pooling loophole alone would imply that Citigroup is trading at a price earnings ratio in excess of 40/1.

1. 1 Travelers Insurance Acquires Citicorp, Changes Name to Citigroup, Press Release, April 6, 1998
The combined transaction value, using the pooling loophole, will exceed $140 billion, the press release notes.  While are eyes are on the technology sector for abusing this loophole, in particular Cisco Systems, little attention has been given to the biggest offender overall, Travelers Insurance. Also noted was that Travelers would apply to the Board of Governors of the Federal Reserve System to become a bank holding company, technically not legal at the time. This added significant pressure to repeal the Glass-Stegall provision, requiring the separation of banking from insurance activities, and has ultimately allowed Travelers Insurance to plunder Citicorp's customers with high priced insurance and investment products as banking laws were changed to allow cross ownership between banks and insurers.  Traveler's has also been able to box out competitors by circumventing privacy guidelines and thereby lowering their marketing costs.  Privacy rules, a key provision of Glass-Stegall, now inhibit smaller competitors yet are mostly not applicable to Citigroup due to its broad mix of businesses ranging from health insurance to credit cards.  One way or another, it seems that most consumers are a Citigroup customer.  Important privacy rules now only apply to third parties, making Citigroup mostly exempt.

2. Suit Against Travelers Alleges Mammoth Deal Unfair to Shareholders, Wall Street Journal, 04/08/1998
"A shareholder suit from Traveler's own shareholders was filed against Travelers Group Inc. and its officers and directors was considered, alleging that Travelers holders weren't getting as much as they deserve in the company's giant merger with Citicorp."  As it turns out, these shareholders did see their investment increase in value after all due to the success of the merger scheme.  Even today Citigroup is still perceived as a "value investment" by leading investments houses when in reality it has become a dangerous pyramid scheme trading at 5 times its book value, astonishing for a bank.

3. Legal Storms Gather Over Citigroup, U.S. Banker, August 98
The article notes that the Independent Bankers Association, IBAA, filed a legal action over the Traveler Insurance bid to acquire Citicorp.  This action was filed against both Travelers insurance and the Federal Reserve Board of Governors and resulted in enormous pressure to repeal the Glass-Stegall provisions. Although ultimately repealed, rendering the suit irrelevant, the act left regional and smaller banks at a severe disadvantage due to privacy provisions.

B. Citigroup Financial Pyramid Based Upon "Watered Stock"

4. Pooled Interests Link bank Mergers by Peter Larsen and Jenny Wiggins, The Financial Times, Oct. 2, 2000
The authors note that "Observers wonder whether accounting (the pooling loophole), as opposed to industrial, logic is the driving force."  The article also notes that large banks saw the announcement in September 1999 regarding the planned end of pooling as "a setback for companies in the financial services and technology sectors which have used their shares as a currency to snap up smaller operators."  This is a key part of Citigroup's scheme, to buy smaller new economy oriented operators and thereby limit price sensitive competition.  It is important to also note that pooling has not been repealed as planned.

5. Mergers Exhaust Citigroup Capital and The Federal Reserve Remains Silent
This footnote to the SEC filed 10Q, search using term " capital under regulatory," claims that Citigroup has $61B in capital.  What is not disclosed is that the acquisitions of Salomon Smith Barney and Citicorp, if not using the pooling loophole, would have resulted in goodwill charges in excess of $40 billion.  Both were purchased for more than two times book value and the difference between book value and the value paid is required to be recorded as goodwill if the pooling loophole were not used.  This loophole, accounting illusion, has therefore resulted in the nation's largest bank "running on empty" with respect to real capital.

This is an unacceptable situation given Citigroup's exposure to insurance related risks and a deposit base that could be unstable since 75 percent of deposits are in foreign branches outside the U.S.  In addition, the current earnings level is predicated on fee gouging and generally abusive sales practices involving annuities, high credit card fees and other such products.  Also noteworthy is Citigroup's position as a leader in generating merger fees, syndicated lending and the issuance of complex derivative products.  For example, Citigroup led a loan syndication for the Xerox Corporation which is now struggling with a cash crisis.

In a related coincidental matter, less than two weeks after posting my initial report on Citigroup, the company announced a new "shelf debt/equity offering" of $20 billion.  One might ask, why is a financial institution trading at 5 times book with a market value of $250 billion issuing this much new debt and equity?  Citigroup does not have valuable patents as many technology firms do. They are simply an intermediary.

Pooling based mergers between banks are bad enough yet when an insurance company like Travelers is allowed to purchase the biggest bank in the country and run on no real capital and engage in a variety of abusive practices, many of which directly undermine the "new economy," it is nothing but a spectacular financial fraud upon its own long-term investors, the pension system, employees and taxpayers who are insuring deposits via the FDIC.

5.1 Citigroup Files $20.5 Billion Debt, Equity Offering, Yahoo/Reuters, November 7, 2000
Two weeks after sending my initial report to the Federal Reserve, claiming that the AFC merger should be denied based upon inadequate capital at Citigroup, the above announcement was made.  Again, why is a company with a market value of $250 billion issuing new equity anyway?  The article adds that "Citigroup plans to use the net proceeds for general corporate purposes, mainly to fund operating units and subsidiaries."

B.1 The Tough Part of Managing Banks Is Matching Maturities on Loans and Deposits. (This is a lesson from the S&L's Citigroup may not have learned)

5.2 Citigroup's Investment Chief Leaves to Battle Drug Habit, C. Gasparino & J. Lublin, WSJ, Nov. 22, 2000
Banking is a rather straight forward business.  You take in deposits and then use those deposits to make loans.  The leftover deposits are then invested, usually in fixed income securities with minimal credit risk.  Citigroup's problem is that the sum of their loans and investments greatly exceeds deposits, which would create a pressure cooker situation for any investment portfolio manager.  This is aggravated by the fact that 75 percent of Citigroup's deposit base is in foreign branches and vulnerable to a change in the value of the dollar.  These are inherently more unstable deposits than those at other leading banks such as Wells Fargo and Bank of America.

It is not uncommon for banks to have the sum of loans and investments exceed the deposit base.  What is uncommon is the way in which this occurs at Citigroup.

**  Also note that both Citigroup and Citicorp file 10Q and 10K reports.  Each is a holding company yet their is only one stock, Citigroup, ticker C. Since Citicorp is a wholly owned subsidiary of Citigroup, it is best to focus on Citigroup's 10K and 10Q reports because Citigroup includes the overall summary data, although certain specific details may only be available from the Citicorp reports.  It is also helpful to print out these SEC reports in landscape mode, selecting a smaller text view, so that all columns can be seen on one page.

Data per Citigroup's SEC filed quarterly 10Q report for the quarter ending 9/30/2000. Do a search for the term "statement of financial position" and the second hit will bring you to the statement which has this information
        Total Deposits             $293
        Use of Funds:
        Loans                         ($287)
        Investments                   ($109)

        Surplus Deposits        ($103)

This does not even consider the sizable amount of loans that have been securitized and sold to investors that will one day return to the balance sheet, including more than $45 billion in credit card loans.  What appears to be keeping Citigroup afloat now is a combination of debt, variable annuities and guaranteed insurance contracts sold to investors.

It is almost unimaginable that the Federal Reserve would even consider allowing an additional merger, even if the pooling loophole is not used, given that Citigroup has no real equity after adjusting for mergers using the pooling loophole.  Citigroup should be required to shrink its asset base, as was required of many banks in the early 1990's in order to stabilize its situation.

Equally remarkable is that $90 billion of its investment portfolio is invested in "fixed maturity" securities.  One might ask, why does this not more clearly say fixed rate or variable rate.  Is it possible that Citigroup has $90 billion in fixed rate investments?  Based upon a review of its 10K for the year ending 12/31/99 it is quite possible that the average maturity for the bulk of these investments is close to 10 years.  Imagine if that were true while the deposit base is inherently unstable due to much shorter maturities.  Some might argue this is very similar to the Savings and Loan situation.

This article claims the investment chief was working in a pressure cooker with his CEO even once barking to him that "you don't even know interest rates."  This would, however, not be unusual.  In my experience, many heads of large investment portfolios have not spent the time to understand interest rates.  All it takes is one question to know if you understand interest rates.  For example, if you spend $100K on a 10 year non-callable government bond today yielding 6 percent and you want to sell it one year from today when the same bonds are yielding 8 percent, how much is your bond worth?

This situation is like music in which someone asks you to play a G major chord with a minor 7th. You may be a good musician but that doesn't mean you can play the chord, especially if you play by ear.  The problem with banks is that if you are managing an investment portfolio you need to be able to play the chord; otherwise, it is just a matter of time before your equity takes a big hit and you decapitalize due to investment losses.  Such declines in portfolio values must now be marked to market on a quarterly basis.  This was an important reform, FASB 115, that was introduced in the early 1990's.

The Federal Reserve and OCC should be particularly concerned about this investment portfolio at Citigroup, restrict all mergers and conduct a complete review.  The answer to the bond question if $82,000 (the original amount less an amount determined by the following formula,  remaining term (9 years) times the change in rate (2 percent).

The big lesson from the Savings and Loans was regarding the danger of making 15 year home loans at a fixed rate of 6 percent in an environment in which you might have to pay 10 percent to keep your deposits.  Citigroup now has a substantial portion of its investment portfolio invested in long-term bonds that could plummet in value if interest rates rose 2 percent on the 10 year treasury, if indeed they are fixed rate in addition to fixed maturity bonds.

Citigroup will claim that this risk is mitigated by the use of derivatives yet there is a financial cost to such hedges and often an outcome more uncertain than that expected.  It is my belief that this alone should warrant a full team of auditors from the OCC and require that Citigroup shrink its asset base by a minimum of $75 billion, preferably converting a larger portion of the investment portfolio to true variable rate investments, investments not requiring derivative like hedges, in order to restore financial stability and integrity to the bank.

The FDIC should also be particularly concerned about Citigroup's management of its balance sheet. If this all seems a little excessive, do keep in mind that our tax dollars, via the FDIC, are ensuring a large portion of these deposits at Citigroup, even though most of these insured deposits may be in foreign branches.

The FASB has been looking into the derivatives area and effective January 1, 2000 new disclosure requirements for this type of derivative hedging will be implemented.

6. Selling Your Credit Card Balances to Investors: A Shell Game Designed to Meet Capital Requirements?
This is a link to the SEC 10Q report. Simply type in "securitized credit card receivables" and you can confirm that $45 billion of Citigroup's credit card loans have been securitized and sold to investors.  The accounts are still serviced by Citigroup and you do not see this extra level of fees being generated from selling the balance. This is a type of shell game in which Citigroup needs to take assets off its balance sheet; otherwise, their ratio of capital to net risk assets, loans and investments, would fall sharply.

Since the FDIC is insuring a large portion of deposits at Citigroup, the FDIC requires that adequate capital be maintained to ensure against a variety of factors, including loan losses, changing market interest rates and other factors.  One good example might be Citigroup's active involvement in syndicated lending.

We'll also see that in addition to manipulating the asset base used to determine whether regulatory capital levels are being met, that is securitizing loans, Citigroup is also manipulating its actual capital account by using the pooling loophole as referenced in the previous note.  What has resulted from the pooling loophole alone, from a practical standpoint, is that nation's largest bank is functioning with a real capital ratio of less than 2 percent.  The Federal Reserve defines adequately capitalized as 10 percent.

6.1  Buyer Beware: Big Banks Selling Risky Loans to Small Banks, by R.Bennett, U.S. Banker, Oct. 2000
This article quotes David Gibbons, Deputy Comptroller of the Currency for Credit Risk, as saying "If money center behemoths turn themselves into the equivalent of boiler room pushers of nasty paper to the corporate equivalent of widows and orphans, ultimately they will bring harsh regulations upon themselves.  It is in their self interest, to run ethical organizations."

Gibbons is concerned that money center banks like Citigroup are selling risky loan paper participation to smaller local and community based banks in the form of syndicated national credits, introducing significant credit risks that management neither understands nor can control.  A second major risk could occur if interest rates rise sharply and these smaller banks were left with investments yielding a rate less than what they were required to pay for deposits.

7. Pooling or Fooling, Abraham J. Briloff, Barron's, October 23, 2000
In his article Briloff explains what happens when pooling based mergers are used in conjunction with aggressive stock option programs.  "Pooling, make no mistake about it, is bad stuff," he says.  Briloff claims that "Cisco has suppressed a grant total of $18.2 billion of costs by using pooling in accounting for its acquisitions."  He adds that Cisco's earnings are "enormously inflated."

Strangely, Briloff makes no reference to Citigroup even though the purchases of Salomon Smith Barney and Citicorp alone required Traveler's Insurance to print more than 2 billion shares of new stock.  Today Citigroup is perceived as a "value stock" with its price earnings ratio of 18 yet only by comparing the price to its book value, now five times book value, can we see their pyramid scheme.  They have effectively disguised their biggest cost of running the business, an acquisition cost exceeding $40 billion.

8. Goodwill Charge Heralds End of Pooling, Miles Weiss, Bloomberg, Oct. 20, 2000
Weiss notes that banks must by law meet certain capital ratios and that goodwill must be deducted from this amount for regulatory purposes.  For this reason banks are strongly resisting the end of pooling, the loophole that allows them to avoid taking these goodwill charges.

Senator Joe Lieberman has joined a group of senators asking that the end of pooling be reconsidered.  The story also quotes FASB Chairman Edmund Jenkins criticizing what he called "unwarranted and unwise congressional moves to hamper the accounting group's independence."

9. Candidate Weighs in on Accounting Rule Change, Reed Abelson, NY Times, Oct. 17, 2000
Abelson writes that Senator Joseph Lieberman joined 12 other senators to pressure the Financial Accounting Standards Board to delay the planned end of pooling, scheduled for December 2000. Lieberman is also credited with preventing the board from requiring that stock options be more accurately accounted for.  Lieberman proposed legislation that would have virtually put the accounting standards board out of business 6 years ago if they pursued their plan to require reform in the accounting for stock options.

There is an irony that John McCain, one of the original Keating 5 in the Savings and Loan scandal, strongly advocates more accurate accounting for stock options and mergers.  McCain obviously learned a valuable lesson and is now doing the right thing yet Lieberman continues to align himself with the insurance and investment industries, most notably Citigroup.
 

C.  The Planned AFC Merger, A Desperate Attempt to Sustain the Financial Pyramid
On Thursday December 1, 2000 the following email was sent to the FDIC after a phone conversation with one of the analysts reviewing the proposed merger between AFC and Citigroup.  Mike Zamorski, the acting director, was also copied.  A few hours later a press conference was called in which the acting director indicated that the merger could be "closed immediately."  This is most unusual given that the formal review period was to be extended through mid December.

My sincere belief is that the merger would never have happened if the issues identified in this email were considered.  Unfortunately, the business media made no attempt to cover this story beyond consumer groups claims of predatory lending.  The real story is that Citigroup is overleveraged, having erected a fee pyramid scheme.

To:  khodson@fdic.gov
cc:  okena@sec.gov; kramerich-leslie@dol.gov; herman-alexis@dol.gov; Turnerl@sec.gov; steve.a.sharpe@frb.gov; robert.t.parry@sf.frb.org; mzamorski@fdic.gov
Subject: FDIC Receives Parish & Company Grounds For Denying Pending Citigroup/AFC Merger

Thank you for spending a few minutes with me on the phone this morning Kevin.  I will also copy officials from the SEC , DOL, Federal Reserve Bank and members of the media, expressing why the Citigroup's purchase of AFC should be denied.  Having previously been a CPA at a Big 6 Firm, senior analyst at a major bank and later Chief Financial Officer of a financial institution, I find this proposed merger shocking.  Not due to Citigroup's well known egregious financial practices including predatory lending but rather for pure financial reasons including the following:
 
1)  The company will be grossly overleveraged, its stock trading at 5 times book value, and the sum of its loans and investments now exceed deposits by more than $100 billion.  AFC contributes no new deposits, only debt.
2)  75 percent of Citigroup's deposits are outside the U.S. in foreign branches and therefore inherently more unstable due to potential changes in the US dollar.  A review of the call report for Citibank on the Internet, FDIC Certificate #7213, seems to indicate that a large amount of these deposits in foreign branches are insured by the FDIC? The company can hedge aggressively on rates but what happens if 25 percent of the deposits return to local currencies for investment?  This is clearly an institution chartered in the U.S. yet ,in terms of substance, foreign with respect to its primary funding base.
3)  How did we allow an insurance company, Traveler's Insurance, to purchase the nation's largest bank?  Numerous other contingent insurance related risks including asbestos and other environmental related claims should also be considered.  This is not one bank buying another but rather an insurance company now called a bank trying to purchase a finance company.  When will they start acting with the integrity expected of a bank if such a merger is approved?  Insurance companies disappear all the time and are simply called reorgs.
4)  Citigroup is an aggressive sellor of variable annuities, selling almost $3 billion in the last quarter alone.  They are also aggressive in GIC's, syndicated lending and the issuance of complex derivatives.  These areas all have significant risk and form too significant a part of Citigroup's activities.  Not to mention merger and acquisition fees being a primary revenue source.
5)  The investment portfolio appears to be overweighted toward long-term fixed income securities and we are supposed to trust that derivatives will protect them if rates rise sharply.  They may be right on the direction of interest rates yet, given taxpayers and the FDIC insure a large portion of deposits, this is inappropriate and would be a major issue any bank, no matter how persuasive Robert Rubin's arguments.  The issue is too much risk in the "asset/liability management " area.  They should be required to shrink the asset base by at least $75 billion rather than being allowed to merge.
6)  Two mergers using the pooling loophole resulting in issuing 2 billion new shares have been conducted in the last 3 years.  The company would be furthur overleveraged with 5 billion shares outstanding if this merger is approved.  This leverage can be seen by realizing that a $2 move in the stock price would represent an entire year's net income.  Again, this may be ok for Microsoft yet it is unacceptable for a bank with Citigroup's influence on the economy.
 
These are but a few reasons why the merger should be denied.  Obviously, my opinions are very strong, perhaps because they are rooted in the belief that Citigroup is not only corrupting a most important sector of our economy, banking, yet has also destabilized both the overall stock market and broader economy for reasons explained in the report.  It is unusual for me to take a stand against a specific merger, the only prior significant case being Sprint/MCI Worldcom.   Of course I also aggressively support the end of pooling, as intended by the SEC.  It is unfortunate that Citigroup and Cisco Systems are trying to undermine the SEC's efforts.
 
Thank you for considering these thoughts.  This is the link to the report.  http://www.billparish.com/citigrouppyramid.html   Scanning my archive will reveal publications that have referenced my work, including the Christian Science Monitor, NY Times and the Bild in Germany.
 
I have also copied leading members of the business press to clearly demonstrate that I am taking specific actions in an effort to prevent this merger from occurring, knowing that a key deadline date has become December 15.  These actions are not rooted in simply opinions but rather a specific and detailed knowledge of regulatory requirements with respect to banking.   I would hope that major pension funds and other investment companies would also oppose this merger yet that is not happening.  There is an irony that Fidelity investments is being partially blamed for exacerbating the decline in technology stock given that are Citigroup's largest shareholder, in addition to owning almost 10 percent of AFC.
 
If you have quesitons or requests for additional information, please don't hesitate to ask.  At your service.
 
Best regards,
Bill
 

10. Sandy Strikes Again, Jack Milligan, U.S. Banker, November 16, 2000
The author notes that Citigroup's CEO, by way of acquiring Associates First Capital for $31 billion,  has "plunged his company deeper into high yielding consumer finance, reducing dependence on corporate and investment banking."  He further notes that Associates makes a net interest margin of roughly 9.5 percent compared to about 4 percent for the average bank.  What this means is that Associates is probably charging more than 20 percent annual interest for loans, before considering fees which are also substantial. Citigroup uses "Primerica, with its 100,000 Avon-type, door to door salespeople" to aggressively sell a variety of Citigroup products.  Weil expects higher revenue growth based on "experience gained by Citigroup over the past two years from having already  purchased about 170 Associates offices."

Also noted is that Citigroup's 100 million existing consumer customers, when combined with Associates 26 million, will provide excellent cross-sell opportunities.  The merger will make Citigroup the largest originator of home equity loans in the country and also strengthen its lead in the credit card market.

Clearly, what Citigroup has constructed is an integrating "tie-in" based monopoly predicated upon circumventing privacy laws and cross-selling its products. Existing Hart-Scott Rodino anti-trust laws alone should prevent its acquisition of Associates First Capital.  Citigroup is a leader in credit cards, mortgage originations, health and auto insurance, student loans and several other areas, giving it access to privacy data enabling it to target market to reduce marketing costs and aggressively sell high priced low quality products such as variable annuities.

11. Citigroup to Acquire Associates First Capital, Citigroup Press Release, Sept. 5, 2000
Citigroup will pay $31B in stock and account for the merger as a pooling.  Associates is the largest publicly traded finance company in the U.S. with managed assets of more than $100 billion and operating in 2,750 offices in 13 countries.  Associates shareholders will own 10 percent of Citigroup after the merger with Citigroup shares outstanding becoming almost 5 billion.  A $2 change in the stock price now equates to a change of $10 billion in Citigroup's market value.  This is more than the entire annual net income and highlights how highly leveraged the company has become.

12. Along with a Lender, Is Citigroup Buying Trouble?, Richard A. Oppel, NY Times  Oct. 22, 2000
This front page business section article highlights that a variety of consumer groups opposed to Citigroup's proposed merger with Associated First Capital (AFC), described as the "icon of predatory lending."  It does not, however, refer to the more than 150 of the Associated First Capital branches Citigroup already purchased in 1999.  Citigroup's practices are indeed rather similar to those of AFC.

13. Citigroup Equip Finance and AFC Commercial Operations to be based in Dallas, PR Newswire, Oct. 31, 2000
This press release is a good example of how Citigroup's is pressuring regulators to approve the merger by pre announcing internal restructuring and consolidation plans.

D.  Reviewing the Merger Landscape in Corporate America

14. The Mysterious Merger Frenzy, Robert Samuelson, Newsweek, October 16, 2000
"Since 1994 it's totaled $5 trillion" and represents "the most uncovered business story today" according to Samuelson.  One of the largest such mergers is the Travelers Insurance purchase of Citicorp.  Not noted in the article is that most mega mergers use the "pooling loophole" to account for the merger, a loophole the SEC is fighting hard to eliminate.  Without being able to use this loophole, most such mergers would not take place.

Also not covered in the article is the impact on professional services such as legal, accounting and advertising.  Mergers reduce the potential number of customers for such services and force consolidation in these professional areas, further fueling the merger scheme as many law firms become dependent on M&A activity and media outlets become dependent on a few large advertisers.  While all eyes are on technology, in particular Cisco Systems, the most abusive situation is clearly at Citigroup.

Another significant area not addressed are the investment banking fees generated from such mergers.  Without these fees alone, Citigroup's earnings would plummet.  For this reason, they have teams of investment bankers whose job is to go out and stimulate such mergers, whether they make sense of not.

In concluding, Samuelson makes the statement  "perhaps they 're spreading technology and lowering costs. Or maybe they're spawning corporate waste and empire building."  In Citigroup's case, it is clearly the latter and its subsidiary Salomon Smith Barney is known as the M&A leader in telecom.

14.1 The Spin Doctors of Telecom, David Pauly, Bloomberg News, November 27, 2000
In this article Pauly highlights the impact on telecom created from excessive mergers, tracking stocks and other such gimmicks.  These are distracting shareholders from management's miserable performance, he says.  The article does not identify the primary beneficiary of this activity, Citigroup, nor the fact that AT&T CEO Michael Armstrong is also on Citigroup's Board of Directors.

15. Largest US Corporate Mergers, Grolier's Encyclopedia
This is an excellent list showing the largest transactions through 1999. Note that Travelers Insurance purchase of Citicorp stands as the largest, a pooling. The top 10 are mostly large banks and telecom providers, two highly regulated industries with the most to loose due to increased competition.  Most of these top 10 mergers were poolings, perhaps all of them.  Clearly, this merger strategy led by Citigroup is an attempt to compete with new economy innovators by driving them out of business.

16. Mega-mergers:  Bigger is not always better, Patricia Vowinkel, Yahoo News/Reuters, Oct. 16, 2000
Vowinkel notes that successful mergers often boil down to holding on to top talent and not loosing employee productivity. Most large mergers do indeed fail.  One merger perceived as a success is Travelers Insurance purchase of Citicorp, "that acquisition is really focused on the customer," the article notes.

Not noted is that this merger is predicated on Travelers gaining access to Citicorp's broad customer base including banking, VISA, student loans, mortgages serviced and other areas and then aggressively selling Traveler's high priced low quality insurance and investment products.  Since these various business of Citigroup are not "third parties" Citigroup can technically stay within the bounds of the Glass-Stegall privacy standards and fleece its expanded customer base to create short-term results.  Results are nothing more than a desperate attempt to sustain a watered stock merger scheme being fueled by investment banking, annuity and credit card fees.

16.1  Bonuses Mean Investment Bankers Don't Need Regis, Thor Valdmanis, USA Today, Nov. 20, 2000
This year's bonus pool for Wall Street's workers, with the lion's share going to "rainmakers," will exceed $15 billion according to the Office of The New York State Comptroller, according to the story.

17. The Latest Board Game: Oligopoly, Stephen Labaton, NY Times, June 11, 2000
The author explains that in many key industries large players are eliminating competition that is resulting in higher prices and lower quality products and services.  This is a major assault on the benefits of the new economy and is also resulting in substantial quality job loss, without which inflation would probably accelerate sharply.  It is not uncommon for utility services such as electricity, water, natural gas and sewage to be raised more than 25 percent due to such consolidation.

18. Sanford Weil appointed to AT&T Board, Press Release,  July 21, 1998
Shortly before his appointment, in April of 1998, AT&T sold its credit card division, consisting of 13.5 million accounts and $15 billion in receivables to Citigroup for $3.5 billion in cash.  This was an excellent profitable business for AT&T.

AT&T used this cash to finance what were clearly ill conceived acquisitions, Teleport, TCI and Media One.  While enormous investment banking fees were generated, AT&T was left with sharply declining gross revenues, significant debt and although most of the cost of these mergers is not reflected in the financial statements due to its use of the pooling loophole, what I call pooling fraud, AT&T was left with too many shares outstanding and an inability to meet earnings per share expectations.

Citigroup's subsidiary Salomon Smith Barney is the leader in generating investment banking fees in the telecom industry. I have not confirmed to see which transactions they underwrote yet it is clear that excessive mergers using pooling have put the entire industry at risk.  Worldcom is another example of a company that thought the new economy was about merger and acquisition activity rather than higher quality lower costing telecom services.

It is these merger fees that contribute greatly to sustaining Citigroup's scheme and artificially deflate its price/earnings ratio, making it appear a "value stock."

19. Why Reed Left Citicorp, Robert Bennett,  U.S. Banker,  April 2000
The article notes that "Reed has preferred to pick the low-hanging fruit, focusing on consumer business in Third World countries where there are few consumer protection laws and where high interest rates and fat fees could be readily charged."  It adds, however, that "Reed is fundamentally a banker and shunned the most egregious, high powered types of consumer marketing that Weil seems to lust after ... including promoting investment salespeople in its bank branches who have been previously employed by discredited brokerage firms known for high-pressure techniques."  The article concludes that "although Reed is younger, Weil represents the new realities, whether or not they are appealing."

One need only look to the treatment of these developing nations to see what is now happening to consumers here in the U.S. and how these practices are undermining the new economy.

19. Citibank Ends Legal Dispute with Mexico, Yahoo/Reuters,  November 22, 2000
This dispute occurred when Citibank refused to accept an early payment from Mexico on a loan, claiming that early payment would mean losses of $120 million annually in interest.  They settled by issuing a new loan for $2.6 billion at 19.5 percent interest annually.

Here is an impoverished nation, Mexico, trying to step up, which would be a great thing for many U.S. technology companies in particular, and Citigroup is attempting to knock them back down via legal loan sharking.  This also highlights how desperate Citigroup is to sustain these egregious practices, without which their net income would plummet.  They should have been delighted to receive early payment but instead need the loan sharking like interest in order to finance the expansion of its consumer finance loan sharking operations in Mexico.

20. Citigroup and Yahoo? New Economy Banks May Not Be Banks, says John Reed, U.S. Banker, August 2000
Former Citibank CEO John Reed is quoted as saying that he suggested AT&T merge with Citicorp. He also noted that one board member argued against selling the bank to Travelers Insurance, saying that Citicorp should consider "merging with a communications oriented technology company instead."  Reed also speculated that AOL might have been better off merging with a financial company rather than Time Warner.

Such a merger with AT&T would have resulted in significantly lower prices in both financial services and telecommunications by stabilizing the firms revenue base through solid diversification.  Instead, by selling Citicorp to Travelers Insurance and literally forcing the repeal of Glass-Stegall, many new economy financial service companies have seen their prospects crushed for reasons outlined in this report.

21. For AT&T, A Lesson in Ways of the Street , G Morgenson, NY Times, October 29, 2000
The article notes that AT&T has decided to split itself into four separate units.  Not noted is that AT&T used pooling for three major mergers and issued too many shares, making meeting earnings per share goals impossible.

Citigroup's subsidiary is Salomon Smith Barney's strongest sector is telecom related mergers and acquisitions and, whether they earn AT&T's business or not, they have made enormous efforts to stimulate merger and acquisition activity in this sector, plundering the future prospects of many promising companies by charging egregious fees and "flipping" the companies repeatedly in order to generate more fees.

These new economy companies are now being forced to grow too fast which inevitably leads to a cash crisis and thereby stimulating more merger activity.

Given that AT&T CEO Michael Armstrong is also on Citigroup's Board of Directors, one can't help but wonder how much that strong merger related influence he was exposed to has hurt AT&T's long term prospects.
 

II.  How Citigroup's Scheme Is Disabling The New Economy

A.  Triggering Too Much Consolidation in a Quest for Mergers and Acquisitions Fees

22. Internet World Turns Ghost Town, Dan Briody, Red Herring News, October 28, 2000
There is a certain irony to Citigroup being a major exhibitor at Internet World in October.  Robert Rubin, former Treasury Secretary and now Citicorp Vice-Chairman, lectured attendees on "fiscal discipline" and "cultural openness to change."   He added that older, more established firms are catching up and employing better business practices, giving them an overall edge, according to Dan Briody of Red Herring News.  This is the same Robert Rubin that moved from being Treasury Secretary to Citigroup, accepting a $50 million compensation package just before the Glass-Stegall banking laws were repealed, the major beneficiary of which became Citigroup.  We would expect these to be scenes from Jakarta, Indonesia or Russia, not Washington, D.C.  Meanwhile, Rubin travels on an international circuit lecturing countries on the importance of free market based reforms.

In Rubin's defense, he is simply taking advantage of a broken system.  Ending pooling would fix this system and stop predatory mega-mergers.  This would also relieve inflationary pressures for the Federal Reserve since most of these mergers are resulting in sharply higher prices due to lack of competition. The focus would shift to genuine shareholder perspectives rather than allowing executives to leverage growth in their stock options, leaving long-term shareholders and the retirement system to deal with the consequences.

Exactly this type of activity at Citigroup poses the greatest risk to the stock market.  No one doubts Robert Rubin's capabilities, but he does not see that he has become a shining disincentive to achieve the solid work ethic he espouses.  For example, who is going to spend the energy and financial resources to launch a truly innovative Internet-based lower cost credit card program when they have to compete with a predator like Citigroup, Microsoft and Cisco Systems?

22.1 The Next Downturn, Michael Mandel, Business Week, October 9, 2000
Mandel notes that "the Old Economy business cycle is giving way to a New Economy tech cycle driven by financial markets."  He provides numerous examples for his thesis yet doesn't state the obvious.  The tech economy is being used as a shell to fleece both investors and tech employees by Wall Street investment bankers, in particular Citigroup.

Also not noted is the staggering burden these tech employees have with respect to the many layers of investment fees and commissions being directly and indirectly extracted from their companies.  This can occur due to factors ranging from aggressive turnover by mutual funds and related brokerage fees to merger and acquisition fees as tech companies merge in an effort to compete with the industry dominating predators like Citigroup.

Basically, the tech industry needs to get Wall Street off its back so that it can focus on building the new economy.  Boycotting Citigroup due to its predatory practices, both with respect to individual consumers and new economy companies, should be an integral part of this strategy to get the new economy back on track.

23. Bank of America CEO Sees the Future, Robert Bennett, U.S. Banker, September 2000
McColl is quoted as saying that "Citicorp has always been a very powerful international bank headquartered in the United States."  McColl adds that he is "not very much afraid of start-ups or single-product companies" while he does consider Citigroup a formidable competitor.  This is a remarkable statement given that banks were expected to be among the biggest losers in the new economy and further highlights that Citigroup's assault on privacy has provided a key strategic advantage thus far, one dot.com new economy companies offering a top quality low cost service have been unable to compete with since they are limited in the information they can obtain without violating privacy standards and are therefore left with much higher marketing costs.

24. Checkfree and Microsoft Join to Accelerate Electronic Billing, Press Release, Feb. 15, 2000
Microsoft, First Data and Citibank together now own 23 percent of CheckFree. Citigroup is also a significant shareholder in PayTrust following its acquisition of PayMyBills.com

Clearly, there are significant "tie-in" anti-trust issues here and Citigroup should be required to divest itself from one of these prior to allowing any new mergers. Not discussed are consumer privacy related issues and whether Citigroup can use this data to legally sell its predatory financial products to these customer bases.

25. Paytrust, PayMyBills Join Forces, Deborah Kong, USA Today, August 23, 2000
Paytrust acquires PayMyBills to become second in industry behind Checkfree. Citigroup is large shareholder in both, clearly an anti-trust issue. This is one more case of a promising start-up succumbing to a predator, Citigroup, due to its inability to cross the growth threshold and achieve profitability in a time frame demanded by investors.

26. Citigroup Makes Three Major Acquisitions, Press Release,  March 23, 1999
"Citigroup today announced three separate acquisitions designed to strengthen its position in the area of consumer lending."  They include Mellon Bank's credit card business, including a portfolio of $1.9 billion in receivables.  The second acquisition is 128 consumer finance branch offices from Associates First Capital for $558 million. The third purchase is 65 branches of Financiero Atlas, a consumer finance company based in Santiago, Chile, giving Citigroup a 15 percent market share of the consumer lending market in Chile.

26.1  Insurance Agents Get OK To Start Bank, Andrew Clark, Yahoo/Reuters, Nov. 17, 2000
The article notes that a trade group representing independent insurance agents won approval to set up a federal savings bank that will allow its 300,000 members to offer customers a wide range of banking products.  This is an ideal example of how a new economy company might help stimulate competition yet, by not having the large existing customer base Citigroup has, it will face a tough challenge.  This is nevertheless a good beginning for those agents that want to remain independent.

A key test of this new bank will be whether it can grow from within or whether it will embark on the acquisition binge that has destroyed so many new economy companies unable to meet growth expectations mandated by predatory investment bankers only interested in short-term results.

B.  Creating Higher Prices Due to a Lack of Competition, Leading to Inflation

27. Citigroup Launches Consumer Online Payments Service, Yahoo/Reuters, October 31, 2000
Citigroup announced a major partnership with America on Line in which AOL will use Citigroup' new service for cash transfers. "People can transfer money from a bank account, a brokerage account or credit card from any financial institution. The recipient can have the payment credited to a credit card, deposited in a bank account, or sent as a check.  The service is available at http://www.c2it.com. Citigroup is waiving fees for the first 90 days, after which transfers will cost $2 each."

Existing companies providing an equal service now charge $1 per transaction.  By leveraging its use of AOL, Citigroup is effectively creating 100 percent inflation in the cost of this service.  Sadly, rather than compete against Citigroup, Microsoft appears asleep regarding what could be an excellent market for them.

28. Citigroup Advises Legal Industry to Raise Rates 5-8 Percent,  Stimulating Inflation and Mergers
Citibank Law Firm Survey, PR Newswire, November 16, 2000
Citibank's "Law Firm Group" is quoted as saying that revenues are up at major law firms yet expenses are up more due to compensation increases designed to prevent lawyers from defecting to dot.com companies. The press release also notes that legal firms need to be more creative, noting that in Europe consulting and accounting firms are merging with legal firms, not permitted in the U.S. due to the American Bar Association. The survey also encourages accepting more compensation in the form of equity stakes in clients and promotes Citibank's Private Bankers as "financial architects, designing and coordinating insightful solutions."

Not mentioned is the disastrous impact of excessive mergers on legal firms which is forcing rapid consolidation in the industry and making it harder for start-ups to obtain quality legal services. Younger attorneys also have a much more difficult time making partner as the average legal firm's structure now resembles a steeper pyramid to partner.

Perhaps most remarkable about this Citigroup press release is that it is presented as if it were from the legal industry itself when in actuality it is a sophisticated sales pitch to raise billing rates 5-8 percent, reduce retirement benefits and merge with non-legal firms.  Naturally, they specialize in all these areas and are desperate to gain such fees due to the slowdown in their key merger market, telecom..

29. Skadden, Arps, Slate LLP, Citigroup's Outside Legal Counsel on "Matters From Time To Time."
This firm also represents Bank of America, Barclays Bank, Bankers Trust, Chase Manhattan, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs and many other high profile leaders in financial services. Do a search for Kenneth J. Bialkin, Skadden partner, who represented Travelers in its purchase of Citibank in 1998, Salomon Inc. in 1997 and Primerica Insurance in 1993, in addition to numerous other major transactions including Travelers $4 billion acquisition of Aetna's property and casualty insurance operations.

Bialkin has also represented the American Institute of Public Accountants, been involved with SEC enforcement matters and is now a Director of Citigroup.  Reviewing his remarkable biography is an excellent way to preview the history of Traveler's Insurance and how it came to be Citigroup.  Bialkin is clearly one of the most trusted and influential financial services attorneys in the country.

C.  Collapsing Privacy and Undermining Confidence In New Economy Services

30. Lines of Business Summary per Citigroup Web Site
This one page summary identifies the major business groups at Citigroup. Citigroup's strategy is clearly to broaden this mix and thereby avoid privacy guidelines since most everyone will be a customer, one way or another.

31. The Burden of Privacy, Robert Bennettt, U.S. Banker, July 2000
The author notes that "ironically, the conglomerates primarily responsible for triggering Gramm-Leach Bliley's privacy provisions will be least affected by them.  That's because affiliated banks are exempt from the most dire restraints, and the conglomerates, such as Citigroup, operate all sorts of companies under one umbrella."  With Citigroup boasting 120 million customers via products ranging from credit cards to student loans to mortgage loan servicing and health insurance, their interests are being pitted against regional banks and dot.com financial providers who are left at a competitive disadvantage.

The article follows to say "Suddenly consumers feared that Citibank might turn down their loans because of information about their health provided to Traveler's insurance units."  When U.S. Bancorp shared customer records with outside marketers a privacy outcry followed yet much more alarming should be what Citigroup has done to ignite this debate

31.1  Citistreet Administers Health Plans for 6 Million Participants. Privacy implications?
CitiStreet is one of the largest global benefits delivery firms.  It services more than 6 million participants including corporate, government, health care and not for profit organizations. Citistreet is a 50/50 joint venture between State Street Corporation and Citigroup.

The obvious question is, how much exchanging of information between Citistreet and the various other divisions of Citigroup is occurring?  Could a participants health care coverage be modified based upon other insurance of financial files maintained by Citigroup?  Can a mortgage be denied due to health history?  The possibilities for abuse are endless.

State Street is one of the largest providers of government pension plans and fourth largest holder of Citigroup stock, owning more than $5.5 billion.  Clearly, State Street is helping pave the way for Citigroup's plundering of the governmental retirement system through a variety of aggressive and egregious sales practices outlined in this report.

32. Citigroup Privacy Policy Highlights the Impact of An "Integrating Monopoly"
Not adequately addressed in this policy is the cross selling of products and services between Citigroup's various operating units including student loans, mortgages, credit cards, pension administration, consumer lending, insurance, investment brokerage, auto and home insurance and various other direct services areas.  Citigroup also has an exclusive agreement with American Airlines and its advantage program that rewards purchasers with mileage, providing Citigroup travel details on millions of unsuspecting consumers which are then aggressively marketed its financial products.

Another relevant question involves Citigroup's relationship with WebMD.  Are they using medical profiles to market and profile consumers for financial services based upon health care situations?  There were rumors that Citigroup had even marketed a service to credit card customers in which they could pay a fee to see their complete credit and health history. Also recently announced is a long-term major agreement with America Online in which it will Citibank will get an exclusive presence on key AOL screens.  A final important area to review is how Checkfree and Paytrust, the number one and two companies for which Citigroup is a significant owner, handle electronic bill processing.

Does this mean that your heating bill does not involve a "third party" and therefore the details can be used by Citigroup?

Although Citigroup emphasizes that information provided to third parties can be restricted upon request, one might ask who is left as a third party and how could any dot.com start up in financial services compete when it has to conform to privacy standards and does not possess an integrated monopoly able to circumvent such standards.  Marketing costs would simply be too high compared to those of Citigroup's.  The following article in U.S. Banker quotes a Citigroup executive as saying that they now have 100 million customers to which they are aggressively "cross selling" products and services.

33. Meet the CPO: Chief Privacy Officer, USA Today, July 11, 2000
The article notes that companies, including Citigroup, have hired privacy officers and are "giving them broad powers to set policies that protect consumers from invasion and companies from public relations nightmares."   Not discussed is that Citigroup's corporate structure has completely evaded the overall guidelines.  In its case, the CPO becomes nothing more than an anti-competitive club.

34. Citicorp plan relies on high tech, USA Today, January 26, 1999
After the $82 billion merger purchase of Citicorp by Travelers Insurance was announced last week, Citicorp CEO John Reed said he wants to get to 1 billion customers by 2010.  Reed adds that "the only way to do it is through technology."  What he probably did not anticipate is the egregious product practices by Travelers Insurance that could imperil this strategy.

It is not inconceivable that Citigroup is on the cusp of a Nike like public relations disaster.  This could very well include a national boycott by the NAACP over its predatory lending practices.

34.1 Citigroup Expands Big-Business Advantages for Small Business at Bizzed.com, Business Wire, Nov. 15, 2000
This site is a very sophisticated attempt to gather information from which Citigroup's diverse businesses can then aggressively market its products.  It is also exactly the kind of closet surveillance effort that undermines confidence in the Internet.

The privacy statement clearly states "We will not reveal customer information to any external organization unless we have previously informed the customer in disclosures or agreements, have been authorized by the customer, or are required by law."  The catch is that this of course does not apply to any of Citigroup's own business, for example the area that markets high fee annuity products, health insurance, auto insurance, credit cards, student loans, mortgages, etc.

35. Citibank Acquires Source One Mortgage Services Corp., Press Release, March 25, 1999
With this purchase Citibank Mortgage becomes the nations 9th largest originator, $27B in 1998, and 11th largest servicor, $70B in 1998, in the U.S.

The addition of Source One and Central pacific Mortgage, both of which specialize in FHA and VA loans, enhances Citibank Mortgage's offerings for low to moderate income home buyers, the press release notes. What it also provides is a ready market to aggressively sell its predatory home equity loans to the economic category most vulnerable to such practices.

D.  Generating Layoffs and Undermining The Broader Traditional Economy

36. Mergers Based Upon The Pooling Loophole Lead To Substantial Jobs Loss and Undermine New Economy
More than 11,900 jobs were eliminated after Travelers Insurance purchased Citicorp, do search for term "11,900 positions."  All such mergers based upon pooling result in significant layoffs because too many new shares have been issued to meet earnings per share goals.

The root economic cause of these pooling mergers, however, is the inability of companies like Travelers Insurance to compete with new economy start-ups.  This is why the biggest pooling based mergers can be seen in banking and telecom, two industries that were highly regulated and protected from competition. Citigroup's strategy now is to merge, cut costs and move like a predator to destroy new economy competitors via financial engineering and subsequently raise prices.

Dramatic cost reductions become paramount because too many shares are now outstanding. This is an important consideration since many of these jobs are mid level managers and it is these people that are the strongest consumers and drivers of the economy.  They also consume large amounts of financial information and other related services.  After these mergers, two CFO's become one, two HR managers become one, two subscriptions to the Wall Street Journal become one,  etc., etc.  Perhaps the best example is Citicorp's own CEO John Reed who was effectively dismissed after the merger.  Weil and Reed were never equals because again it was Travelers Insurance that bought Citicorp and then changed its name from Travelers Insurance to Citigroup.

37. AFC Announces Severance Plans, Jim Fuqay, Fort Worth Star-Telegram, October 4, 2000
The article notes Citigroup hopes to save $400 million by consolidating in the first year alone yet would provide no exact number of planned layoffs.  Assoc. First Capital employs 8,000 workers. The layoff is planned for January 5, 2001.

38. Thestreet.com Slashes 100 Jobs, Bloomberg News via CNET, November 16, 2000
This is an excellent example of a promising dot.com business media services company unable to make its business model work due to the predatory influence of Citigroup's subsidiary Salomon Smith Barney.  Just when the market needs more independent hard hitting investment commentary, Citigroup is eliminating quality financial analysis by its ability to subsidize its own biased services and market commentary via merger fees.

All investors should be concerned about the potential failure of Thestreet.com because it is an excellent business media source, often breaking many important stories months before the main stream business press.  My belief is that excessive mergers have made sustaining advertising revenues difficult in addition an overall lack of acceptance on the public's part with respect for paying for such services such as Thestreet.com.

39. Mortgage.com Moves To Cease Lending, Cut 85% of Workers, Wall Street Journal, 11/01/2000
Mortgage.com Inc., conceding that online mortgage-lending isn't yet a viable business, said it plans to wind down its lending operations and eliminate almost 85%, or 518, of the staff employed.

Citigroup of course has the ability to examine detailed customer records including job changes, key purchases, etc. and target market its mortgage lending services.  Such information is not readily available for single service providers like mortgage.com.  This company clearly had other problems yet its long term viable is still compromised by Citigroup's ability to circumvent privacy guidelines in order to aggressively "cross-sell" products."

40. Banks Struggle With a Troubled Debtor, Riva Atlas, NY Times, November 16, 2000
This article highlights that both Bank of America and First Union may have significant write-offs regarding loans to the Sunbeam Corporation.  Sunbeam's stock has fallen from more than $50 per share to 60 cents and is an excellent example of how investment bankers focused on generating fees by selling key business lines and engaging in various forms of financial engineering can destroy a company.

It is quite possible that what "Chainsaw Al" did to Sunbeam, Citigroup is now doing to the new economy for reasons outlined in this report.  The problem with this type of aggressive syndicated lending is that it distances the bankers from being adequately involved in helping advise the company on an ongoing basis.  Citigroup of course favors this type of lending because it often underwrites the debt offering and makes enormous fees, even if it does not take the largest position with respect to the loan.

41. House Passes Bankruptcy Legislation, Yahoo News/AP by Marcy Gordon, Oct. 12, 2000
Gordon notes that advocates of this new law claim" rampant abuse of the system, creating a hidden tax on American families." Critics see this as a "heartless attack on working families by powerful financial institutions."  What neither mentions is that bankruptcy is an essential component of the free market system and that such a law would discourage essential risk taking and undermine the economy.  One need only look to other countries to see the economic stagnation that can occur due to fear of ending up in a "debtor's prison."  Citigroup is the largest issuer of credit cards and clearly is looking for legislative corporate welfare designed to accommodate their inability to make good credit decisions.  They have also made significant political campaign contributions toward this end. This is most remarkable given their complete invasion of privacy and access to detailed financial and health records on most Americans.

42. Senate Blocks U.S. Bankruptcy Bill, Prospects Dim, By Andrew Clark, Yahoo/Reuters, Nov. 1, 2000
This article notes that financial services companies are" reaping the results of their own aggressive marketing of credit and call the bill a huge special-interest giveaway."  President Clinton has vowed to veto the legislation.

It is interesting that this potential subsidy of the credit card industry makes no mention of the numerous special tax advantages now received by companies operating in the consumer lending field.  These include tax deductions for stock option wages paid in addition to an inability of students to now get student loans discharged in bankruptcy.  Citigroup prides itself on now being the leader in student lending and owns 80 percent of the publicly traded student loan corporation, ticker STU.

E.  Handicapping Microsoft and Cisco Systems

43. Oracle, Citigroup Sign B-to-B Alliance, Adam Feuerstein, Upside Today, November 14, 2000
This story highlights that "Under terms of the multi-faceted agreement, Citigroup will tie its financial payment and settlement capabilities into Oracle's online marketplace software. The financial services giant will also use Oracle procurement software to handle its internal spending and market Oracle b-to-b software to its clients."

Effectively, Citigroup has cut Microsoft out of one of its most important future markets.

44. Citigroup and America Online Announce Major Strategic Alliance, Press Release, July 18, 2000
The agreement notes that Citigroup's payment and money transfer infrastructure will be "embedded throughout AOL, offering more convenient online payment options.  Citigroup will also become a preferred provider of a full range of financial products and services including credit cards, mortgage loans, banking, insurance, investments and other areas.  Citigroup's products will be "prominently promoted in the personal finance areas of AOL, Netscape and other brands, including the business news areas.  Citigroup will also have a continuous presence on AOL's My Accounts page."

As Microsoft had done with various partnerships, AOL is now selling out new economy companies by offering such an arrangement with an old economy predator like Citigroup. Clearly, AOL will experience the same fate as Microsoft with respect to its Citigroup partnerships within 2 years.

44.1 Bill Gates Turns Skeptical on Digital Solution's, Sam Howe Verhovek, NY Times, Nov. 3, 2000
In a remarkable speech, Gates is quoted as saying  that the world's poorest people will not constitute a strong market for high-tech anytime soon.  He also says that he was naive when he began his charitable endeavors.  What he has not yet understood is the impact of Citigroup's influence on developing nations, Microsoft's most important future market.

Rather than partner with this financial predator, Microsoft should carve its own path and thereby help restore the new economy not only here in the U.S. but also improve the prospects for others in developing nations of achieving more genuine economic progress and thereby grow Microsoft's own long-term markets.  Mr. Gates should also look very closely at how Citigroup, through a variety of predatory practices, is impacting consumers here in the U.S., some might argue converting them to the status of those in a developing nation.

A good beginning for Mr. Gates would be to take a high profile public stand on ending the pooling loophole for mergers, a loophole Microsoft rarely uses.  This legal fraud has led to excessive mergers, job losses and an undermining of the basic economic fabric here in the U.S. and abroad due to a lack of competition, resulting in higher prices.

What personally finally soured me on Microsoft was an experience in Lima, Peru that mirrors exactly what Gates is now clearly seeing.

45. Schwab, AOL Form Alliance, Yi Ping Ho, Thestreet.com, Oct. 31, 2000
The companies will engage in co-branding initiatives across a variety of media.  The deal calls for Schwab to become AOL's main financial services company and brokerage firm across its redesigned personal finance channels.

My unsubstantiated "personal opinion" is that Schwab is positioning itself to be sold to Citigroup.  Of course this would only be possible if the pooling loophole were continued.  Given Schwab's high market capitalization and low book value, the impairment of Citigroup's capital would not be acceptable were it not for pooling. Such a merger, from a business standpoint, would probably destroy the Charles Schwab Corporations reputation.

F.  Understanding The Derivatives Risk to The New Economy

46. Greenspan Urges Law to Simplify Derivative Treatment if Major Firm Goes Bankrupt, Reuters, Oct. 20, 2000
This legislation aims to allow the speedy resolution of derivatives contracts held by a bankrupt financial firm rather than having them tied up in bankruptcy court, where delay could spread the firm's problems to others involved in the deals. Among other things, it would permit the ``netting'' -- or offsetting -- of all the derivatives contracts between a bankrupt financial firm and a counterparty to quickly arrive at a single outstanding claim. ``It would reduce the likelihood that incidents such as the near-collapse of Long-Term Capital Management in September 1998 would pose a broader threat to our financial system,'' Summers and Greenspan said.  The effort has near-universal support in Congress, but has become snarled in controversy surrounding a broader overhaul of U.S. consumer bankruptcy laws. The House has already passed the broader bankruptcy bill, which contains the derivatives provisions, and the Senate may follow suit next week. But the White House has threatened a veto, making it unlikely to be enacted this year.

It is ironic that sensible legislation designed to protect the financial system is being held up by Citigroup's effort to effectively put many consumer's in debtors prison via new stricter consumer bankruptcy laws.  Clearly, Citigroup wants the government to bail it out from making poor credit decisions and excessively fleecing consumer with respect to credit card fees and other predatory consumer lending practices including "flipping." This is an affront to our free market system.

Meanwhile, Citigroup has a significant risk that could have been reduced if it would have supported a bill without the consumer bankruptcy language.  An example indicating the need for this legislation can be seen by examining the following quote taken from their 12/31/99 10K report "the company entered into interest rate swaps to convert $21.1 billion of its $29.9 billion of fixed rate debt to variable rate obligations."   Citigroup has engaged in a whole variety of these complex derivative based transactions, the outcome of which is impossible to determine given existing disclosures.

47. FDIC Report Discloses Citigroup Had $4.8 Trillion in "Off Balance Sheet Derivatives" on June 30, 2000
This report can be accessed by selecting the above link which takes you to the FDIC Web site followed by selecting "individual bank data" from the menu on the left.  Then select "Institution Directory" followed by "Find Bank Holding Company" from the yellow menu at top of page. Now input "Citigroup" for BHC name and select find followed by clicking on the Bank ID #.  This will bring up a summary of assets and liabilities report, line 44 of which contains this information on derivatives. It is truly astonishing that Citigroup did not do what was necessary to pass this most important legislation regarding derivatives advocated by Alan Greenspan and Treasury Secretary Summers.

47.1  Xerox Tries to Avert Repurchasing Derivatives if Rating Cut, J. Niedzielski, Dow Jones News, Nov. 20, 2000
Xerox may be required to buy back as much as $240 million of outstanding derivatives if its credit rating is cut, it disclosed in an SEC filing.  This again highlights the unique risk of derivatives, especially if Xerox were forced into bankruptcy and unable to meet its obligation, potentially creating a ripple effect throughout the financial system.

G.  Circumventing Regulatory Efforts, Thus Far

48. EU's Monti Sees Major Regulatory Role in New Economy, Reuters, October 20, 2000
EU Competition Commissioner Mario Monti notes that "the EU's rules governing antitrust are well-equipped to handle the evolving issues of today. He added that "the new economy is a strong potential ally for competition. Yet it is a potential ally that needs antitrust monitoring to avoid a number of pitfalls that could create competition problems."

49. Antitrust's Future, Jim McTague, Barron's, Sept. 25, 2000
The author notes that "It would be alive and well under either candidate presidential candidate, George W. Bush or Al Gore.  It did not however divulge the candidates position on the continued use of pooling and whether they support the Securities and Exchange Commission's efforts to end pooling."

Also not addressed is why the Federal Reserve and OCC have not blocked such pooling based mergers in banking, an essential act to maintain adequate capital in the system.

Another key area not fully addressed is Hart Scott Rodino and the notion of "tie-in" monopolies such as that being developed by Citigroup and their non-competitive impact created as a result of privacy regulations.  How can a new economy firm specializing in one area and forced to respect privacy guidelines compete with a company like Citigroup that has collapsed the legislation's intent by using pooling mergers to expand its cross selling opportunities.

III.  Summary of Predatory Product Practices

A.  Consumer Groups Respond to Citigroup

50. Five Questions for Martin Eakes: Thorn For Citigroup, J. Flaherty, NY Times, Nov. 12, 2000
This story describes the efforts of Martin Eakes in addition to a variety of other consumer groups that are contemplating a national boycott of Citigroup due to various predatory consumer finance related practices.  They are specifically dedicated to blocking the proposed purchase of Associates First Capital yet strangely have not tried to block the merger on pure financial grounds.  This may be their strongest avenue for reasons outlined in this report.

51. The Greenlining Institute
This organization promotes low income and minority economic development. The institute is threatening a national boycott over the proposed Citigroup purchase of Associated First Capital.  It is curious, however, that no mention is made to the fact that Citigroup already purchased more than 150 of Associates' branches in 1999. There should be no surprise that many of AFC's practices are already an integral part of Citigroup's strategy to sustain its pyramid scheme.

51.1  Activists Can't Block Citi's Purchase, Jaret Seilberg, Thedeal.com, November 27, 2000
This story discusses several groups trying to block the merger yet concludes that the merger will succeed due to a few administrative loopholes.  These include the fact that Associates banks are "not allowed to accept local deposits." Instead, they are a "specialized institution that primarily handles credit card transactions" and therefore not subject to the rules activists are leaning on to prevent the merger.

**  Remarkably, the activists have been handed the grounds for denying the merger on a silver platter.   All they need do is review the balance sheet for Associates Sept. 30, 2000 quarterly filing with the SEC.  Associates is clearly overleveraged since they have no deposit base and to allow Citigroup to buy Associates, given that Citigroup is already seriously undercapitalized in real terms and could also have a major balance problem with its investment portfolio for reasons outlined in this report, would result in a monumental fraud on the American taxpayer since Citigroup would be overleveraged and its deposits are insured by the FDIC.  All the activists need do is confer with a few experts in banking to confirm that neither the Federal Reserve, OCC or FDIC can justify permitting this merger.

52. NAACP calls Banking Industry Disappointing, Reuters, Oct. 23, 2000
The highest grade was received by the Bank of America while Citigroup received a failing D grade.  The NAACP is now urging various groups to boycott Citigroup and other banks receiving a failing grade. Of particular concern to the NAACP is Citigroup's predatory lending practices.

53.  Salomon Smith Barney Hosts Investor Education, Targeting African Americans, PR Newswire, Nov. 2, 2000
This press release notes that there is a "lack of relevant information within the African American community. There is however a growing interest and demand within this community for high-quality financial information."   This seminar is part of a national effort to "increase the flow of financial information to and among African Americans."  It is ironic that Citigroup has also positioned itself for a national boycott by the NAACP due to its predatory lending practices.  Once again Citigroup has attempted to use a public relations scheme to disguise their conduct.

B.  Credit Cards and Real Estate Loans

53. Citigroup has  56 Million Credit Card Accounts With $95 billion Of Receivables
Total credit card accounts exceed 56.8 million with managed credit card receivables of $95.6 billion per this press release for the quarter ending 9/30/2000. Go to the investor relations earnings release and search under term "credit card receivables." Citigroup is the industry leader with almost 20 percent of the U.S. market, when combined with AFC.  Growth has come mostly from acquisitions including 13.5 million accounts from purchasing AT&T's highly successful Universal Card Program

The balance sheet only shows $51 billion in credit card loans since $45 billion have been securitized and sold to investors. Citigroup sells these loans to generate liquidity, even though they maintain the servicing rights.  Selling these loans also helps to maintain an adequate capital ratio in what amounts to a sophisticated "shell game."  If these loans were to remain on the balance sheet, Citigroup would have to come up with almost $5 billion of equity to maintain its existing capital ratio of 11 percent.  This ratio is defined by the Federal Reserve as capital divided by risk adjusted assets.  Risk adjusted assets are generally loans and investments.  A detailed example will be provided later in this report.

54. Credit Card Fees Represent 15% of Pretax Income.
This link is to a "call report" filed with the Federal Reserve Bank for the 6 month period ending 6/30/2000. Do a search for "service charges on credit cards."  You will see a total of $1.5 billion in credit card fees and pre tax income of $10 billion for 6 months ending June 2000.

It is also noteworthy that total non interest income, commonly called fee income,  is 5.88 percent of average assets for the same period at Citigroup while the average is only 2.47 % in Citigroup's peer banking group.  Again, Citigroup has become a fee mill, the opposite of what the new economy was supposed to bring.  Of course a large portion of these fees are also related to investment banking activities.

How is the new economy ever going to get a foothold when Citigroup is earnings fees of 5.88 percent of average assets in addition to interest charges?  The new economy is supposed to be about ending such egregious practices by stimulating more competition.

55. Consumers Sue Card Issuers, Lisa Fickenscher, American  Banker, July 28, 2000
Citigroup agreed to pay $45 million to settle a consumer class action suit over improperly charged late fees.

56. Is Citigroup Pioneering A New Form of Credit Card Disclosure Abuse?
Understanding a Nov. 16, 2000 Reuters story titled "U.S. asset-backed market pipeline building" may indeed unlock a fascinating new form of credit card abuse being pioneered at Citigroup.

Citigroup is now packaging credit card balances and selling them to investors for a certain period, although they maintain the servicing rights, and therefore individual card holders can not see what is occurring.  Investors receive a stated yield for a specified period of time while Citigroup pockets servicing and other related fees.  In addition, Citigroup's subsidiary Salomon Smith Barney is acting as the lead underwriter for these debt offerings, per Reuters.

In the bond world there are three levels of commissions.  These are the management concession earned by the lead underwriter and applicable to the entire balance (Salomon Smith Barney in this case), the seller's concession that is paid to other investment firms that participate as dealers in making a certain portion of the offering and finally the individual broker's commission for peddling the securities to individual clients.

The question becomes, is Citigroup adequately disclosing fee income earned from your credit card balances since you are indirectly paying for this activity in the form of higher rates and fees?  When these securities mature (your credit card balances) they will most likely be securitized again or what is called "flipped" in the predatory lending field.   With 50 million credit cards and half of these balances already securitized, this is an issue that obviously affects millions of consumers here in the U.S. yet no one has raised a dialogue on this situation.

Once again, this demonstrates how Citigroup is undermining the fundamentals of a new economy supposedly predicated on more competition and better disclosure when in reality they are engaging in "flipping" and egregious fee practices designed to sustain the equivalent of a volatile fee pyramid scheme.  Selling these loans also removes them from the balance sheet and inflates the capital ratio to net risk assets, a measure closely monitored by the Federal Reserve.

57. Nader Calls for Credit Card Bill of Rights, Press Release, June 30, 2000
"Consumers are being bombarded with credit card solicitations promising introductory low interest rates and fees which overnight turn into cards bearing usurious rates and growing fees and hidden charges for unwanted and unneeded services," Nader said. He added that the Office of the Comptroller of the Currency and other financial regulators along with the FTC should establish a "credit card bill of rights" that would spell out consumer protections, identify unfair and deceptive marketing practices and require ongoing disclosures of companies that engage in these practices."

57.1 Critics Scrutinize Citigroup's Lending to Minorities, Paul Beckett, Wall St. Journal, Nov. 17, 2000
In defending its planned purchase of AFC, Citigroup claimed that it had "significantly increased its lending to African Americans and Hispanics since 1997."  The Journal discloses that most of this increase was a large increase in the number of home improvement loans of $1,000 or less.  "For example, nearly 80% of Citigroup's mortgage loans in minority neighborhoods in downstate New York in 1999 were for $1,000 or less" according to the Journal.

Once again Citigroup is attempting to use a public relations gimmick and the irony is that successfully using it could allow them to merge with a company generally considered the "icon of predatory lending." Citigroup's lack of integrity is almost pathetic and should be of great concern to regulators such as the Federal Reserve Bank and OCC because it may be indicative of other internal practices, specifically, a risk to financial system in the area of derivatives.

C.  Investment Products

58. Citigroup's Heavy Assets, Brian Lund, The Motley Fool, October 17, 2000
"Variable annuity premiums and deposits have ramped up in the last year, rising 128%," the author notes, and adds "that makes me sad" since investors generally have better places to put their money. He continues to say "also slightly disturbing is the rise in credit card income as the revenues net of interest expense in North America crossed the $2 billion mark for the quarter."

59. Individual And Group Annuity Balances Close To $50 Billion, Weigh Heavily on New Economy
Select this link and do a search for the term "drove account balances" and read the following 2 paragraphs which explain that individual and group annuity balances will exceed $50 billion by year end given the $3 billion in new annuities sold per quarter.

The SEC has targeted this are for more disclosure due to rampant abuse and egregious fees yet somehow Citigroup has not been a key focus.  Selling annuity products into retirement plans, in my opinion, is a monumental fraud upon investors and significant class action lawsuits have already been undertaken in this area.  Perhaps its worst impact is the destruction of investor confidence as participants see how completely they are being fleeced. These practices also weigh heavily on the new economy providers of financial services since consumers have a difficult time distinguishing between the two due to inadequate disclosure.

60. SEC Chief Pushing for Lower Fund Fees, USA Today, Nov. 3, 2000
SEC Chairman Arthur Levitt claims that "investors are being denied the benefit of narrower spreads - and the industry is keeping the difference for itself" as profit.  The title of his speech was "Costs Paid with Other People's Money," a rather startling title for the Chairman of the SEC.  Citigroup is of course one of the biggest offenders in this area.

61. Variable Annuities, What You Should Know, Securities and Exchange Commission, July 27, 2000
This summary was created due to the significant abuse occurring with respect to variable annuities.  It explains how the various programs work and how investors can protect themselves.  The most egregious examples of abuse involve selling these products into tax deferred retirement accounts.  What benefit is there of selling a tax deferred high fee product into an account that is already tax deferred, such as an IRA?  Remarkably, CPA's in many states now engage in such practices.

62. Death of the Fund Salesman Greatly Exaggerated, Robert Hershey, NY Times, Oct. 8, 2000
The author notes that the growth in load funds continues with some companies, such as Scudder, even considering switching from a no load perspective to one charging loads.  Clearly, this represents the demise of the expected benefits of a new economy financial services paradigm in which low cost investment is important.  After all, these fees not only can destroy investor confidence when exposed yet they also extract valuable investment capital from the market.

63. Supreme Court to Resolve Pension Plan Dispute, USA Today, Jan 7, 2000
The court will decide if plans can sue brokers and others who provide services for their roles in deals that make the plan lose money.  Harris Trust and Savings Bank is trying to recover $20 million lost in a deal with Citigroup subsidiary Salomon Smith Barney. Whether the case is won or lost,  it does highlight the potential conflicts of interest at Citigroup which is not only a significant underwriter of stocks and bonds but also now a leading provider of pension plans.

One has to wonder how much of these products are leveraged into the various mutual and annuity based offerings that are sold to investors in retirement plans.

64. Not used

D.  Corporate Banking Products

65. Banks Jeopardizing Quality of Loan Portfolios, Mark Bruno, U.S. Banker, November 2000
This article notes that "some regulators are blaming banks for caving into Wall Street's insistent demands for rapid-fire profit growth."  Citigroup's CEO has publicly stated that a price earnings ratio of 20 is a key goal.  Of course the only way he can get there is to fleece consumers and compromise Citigroup's reputation by engaging in predatory business practices.

As with Nike and Microsoft, Citigroup does now appear vulnerable to inflicting severe damage to its brand name and trademark red umbrella.

66. Not used

67. Pension Funds to Explode in Mortgage Market, Mark Fogarty, U.S. Banker, November 2000
This article notes that "retirement funds are about to take on a load of new risks."  According to the article, the largest holder of mortgage backed securities (MBS) is TIAA-CREF, a national teacher pension fund.  The department of labor has also now proposed changing ERISA rules to allow expanded investments in mortgage securities by pension funds, allowing investment grades as low as BBB to be eligible."

Interestingly, the former President of TIAA-CREF, Thomas Jones, is now employed by Citigroup.  "Mr.Jones joined Citigroup in August 1997 and, prior to that time, he was Vice Chairman, President, Chief Operating Officer, and a Director of the Teachers Insurance and Annuity Association--College Retirement Equities Fund" according to a board of directors profile.

The article does not note the quantity of such securities sold by Citigroup yet Citigroup is involved in issuing a whole variety of such securities and has already even securitized more than $45 billion of their credit card portfolio.

68. Leader in Syndicated Loans, Citigroup #3 for 12 Months Ending 9/30/2000, U.S. Banker, November 2000
Salomon Smith Barney, Citigroup subsidiary, is listed as number 3, showing a syndicated loan total of $109 billion with a 9.6 percent market share for this activity.  Interestingly, the top syndicated loan package for an individual company was listed as Associates First Capital, the company Citigroup plans to acquire.  Chase Manhattan syndicated a $12 billion package for Associates First Capital  in June 2000 with a rate of LIBOR plus 23 basis points.

69. Credit Concerns hit Xerox, Leslie Miller, Bloomberg, Oct. 17, 2000
Citigroup is a leader in syndicated lending and led the establishment of a syndicated credit line with 58 banks for Xerox in 1997. This is germane given that Xerox is experiencing a cash crunch.  It was even rumored in the business press that they may file Chapter 11 bankruptcy.  Xerox plight is especially unfortunate for the Tektronix employees since Xerox bought Tektronix color printer division for $950 M in January, 2000.  Xerox paid cash for this acquisition and used the purchase method of accounting.

69.1 Loan-Fund Yields Come With Risks, Riva Atlas, NY Times, Nov. 12, 2000
This article notes that "Mutual funds that invest in bank loans to corporations have been marketed as higher-yielding alternatives to money market funds, with average returns of 5.9 percent over the last three years."  These funds do have risk, however, and they are not insured deposits.  In Portland, Oregon such loans were responsible for the collapse of a large pension manager, Capital Consultants, in which union pensions will loose more than $200 million.  Capital had invested more than $200 million in such loans with one company, Wilshire Capital.

These are highly leveraged loans in which the underwriter's like Citigroup make significant fees and commissions.  This is the true driving force behind these deals, many of which have overleveraged corporations who are thereby compromising their long-term growth prospects due to such debt.  This instability further fuels more merger and acquisition related fees.

70. U.S. Banks Grow Skittish on Lending, Mary Kelleher, Reuters, October 26, 2000
Citigroup CEO Sanford Weil is quoted as saying "Corporate borrowing has become more expensive and the amount of loans being classified is increasing.  This is happening at a time when the economy continues to be very good, raising concerns about leverage."  The article also notes that regulators are taking a closer look at syndicated lending of which Citigroup is a leader.  This is a remarkable comment from Mr. Weil given that mergers using pooling have effectively eliminated all of Citigroup's capital base due to the pooling loophole for too many mergers.

71. Wall Street Backs SC Lottery, Reuters, October 31, 2000
The article notes that Citigroup and three other investment companies have contributed to a campaign to pass this ballot initiative.  Securities firms cannot contribute to individual campaigns for offices they solicit for municipal bond underwriting business, but they may give to campaigns for ballot initiatives. Citigroup wants the lottery to pass so that they can underwrite related bonds.  It is most unfortunate that this important decision by voters is being so clearly colored by an outside financial predator like Citigroup.

72. Big Bond Gain Pads Profits, Peter Eavis, Thestreet.com, October 17, 2000
"Without a $199 million after tax gain on the sale of Brady Bonds, Citi's per share income would have been as much as 4 cents  lower," roughly 6 percent. Brady Bonds helped finance distressed loans made to emerging nations in the 70's and 80's.

Citigroup is now in a fierce battle with Mexico, not wanting them to prepay their debt without a substantial prepayment penalty.  Whether you are a hispanic struggling to rise here in the U.S. or a national government, Citigroup seems to have a predatory policy for you.  The big losers are technology firms unable to fully develop products and services for these countries due to pricing considerations.

E.  Student Loans

73. Studentloan.com Is A Subsidiary of Citigroup
Citigroup notes that they are "Americas leading student loan provider." Since student loans are no longer discharged in bankruptcy, the provision for loan loss is almost zero.  This is remarkable and probably implies that many students are in a form of "debtors prison" for life.  It would seem reasonable that Citigroup would be forced to write off an amount of loans at least equal to its provision in other areas of consumer lending yet no such requirement now exists.  An obvious question becomes, how many future new economy leaders will compromise the quality of their education for fear of being in debtor's prison if unable to repay student loans.

Citigroup discloses its student loans as part of its real estate totals, making it impossible to see the overall yield on the portfolio and related fees.  Including student loans in real estate totals is also a creative way to bring down the average rate charged on home equity loans and thereby disguise its predatory lending practices.

74. Citigroup Also Owns 80% of the Student Loan Corporation (Ticker STU):
Citigroup owns 80% of the student loan corporation, a publicly trade company, ticker STU.  It is one of the largest originators and servicors of student loans, perhaps second only to Sallie Mae.  Citigroup is also trying to buy the remaining 20 percent they do not already own.

75. Citigroup Is Also Sallie Mae's (Renamed USA Education Inc.) 5th largest shareholder (Ticker SLMA)
As with other student loan programs, these loans can no longer be discharged in bankruptcy and therefore the provision for loan loss is close to zero.

F.  Insurance Products

76. Life Insurance Policies In Force at Citigroup Exceed $400 Billion
Most life insurance is sold through the Primerica subsidiary of Citigroup.  Do a search for "403" at this 10Q report and you will see that Primerica has issued life insurance with a face value of $403 billion as of June 30, 2000.  This amount will probably exceed $450 billion by year end.

This highlights again that Citigroup is really an insurance firm that acquired the nations largest bank and is now aggressively "cross selling" its high fee products to the bank customers. For financial reporting purposes, Primerica changed its name to Travelers Insurance early in the 1990's but kept the brand name.

77. Significant Liability Exposure in Commercial Insurance Area, including "Environmental and Asbestos"
Citigroup's purchase of Aetna's property and casualty insurance for $4 billion has created another area with new risks to the banking sector.  Three significant reserves have been established for "environmental losses," "asbestos claims," and "Cumulative Injury Other Than Asbestos (CIOTA)" claims.

Search this link to Citigroup 10K footnote using term "39,000 environmental-related claims" to access related details on all three areas.  Such activity again highlights why maintaining an adequate capital ratio at Citigroup in addition to financial integrity  is imperative since, again, an insurance company, Travelers Insurance, has been able to effectively seize control of the nations largest bank and, even with reinsurance, these risks are substantial.  Perhaps this also explains why Citigroup is so aggressively pushing so called "tort reform" in order to limit such damage claims.

G.  International Finance Activities

78. Citibank Announces $200 million Loan Facility with OPIC in Central America, Press Release, Feb. 10, 1999
The agreement provides that "funding for the loans under the $200-million facility will come from Citibank, with half the amount carrying an OPIC credit guaranty and the remaining 50% eligible for OPIC political-risk insurance."  Citibank claims this will bring needed jobs to 22 countries in the Caribbean and Central America.  Loans will range from $500,000 to $40 million, with maturities from one year to ten years.

79. Argentine Govt. Support for Aerolineas Staff Grows, Gilbert Le Gras, Reuters, Sept. 11, 2000
This national airlines debt is mainly to two large Spanish banks and Citigroup.  Employees are hoping to lead a rescue effort and reduce the interest rate now being charged.

Argentina is in the midst of a financial crisis that resulted from linking its currency to the U.S. dollar.  As the dollar appreciates, its product have become less price competitive.  Exports in several key markets are now falling.  Argentina linked its currency to the U.S. dollar in order to generate investor confidence in its financial practices.

79.1 Hyundai To Reduce Loans by Nearly Half, Dow Jones Newswire, Nov. 23, 2000
Hyundai is struggling to stave off insolvency and has submitted a plan to its major creditor, Korea Exchange Bank.  Citigroup will be leading a syndicated loan package.  In addition, Hyundai will also be issuing new corporate bonds and selling assets.  The size of the syndicated loan package and related interest rate were not disclosed yet clearly Hyundai should be cognizant of Mexico's experience with Citigroup.
 

IV.  Citigroup Corporate Profile and Industry Background

A.  Inside Citigroup

Links: Note that both Citigroup and Citicorp file 10Q and 10K reports.  Each is a holding company yet their is only one stock, Citigroup, ticker C. Since Citicorp is a wholly owned subsidiary of Citigroup, it is best to focus on Citigroup's 10K and 10Q reports because Citigroup includes the overall summary data, although certain specific details may only be available from the Citicorp reports.  It is also helpful to print out these SEC reports in landscape mode, selecting a smaller text view, so that all columns can be seen on one page.

80. Citigroup Earnings release for quarter ending 9/30/2000
80.1 Citigroup Quarterly SEC 10Q Report for Quarter Ending 9/30/2000
81. Citigroup Quarterly SEC 10Q Report for Quarter Ending 6/30/2000
82. Citigroup Annual SEC 10K Report for Year Ending 12/31/99

83. Citigroup has 4.5 billion shares outstanding on November 13, 2000:
This does not include roughly 450 million new shares that will be printed up for the pending Associated First Capital (AFC) acquisition.  Also not included are more than 300 million shares owed to employees in stock option commitments.  What this means is that for every $1 increase in Citigroup's stock, the market value of the firm increases $5 billion or more than half the entire current annual net income.  It also means that paying adequate dividends, necessary for a bank, is a mathematical impossibility.  There are simply too many shares outstanding and the company has become a "watered stock."   Both the Office of the Comptroller of the Currency (OCC) and FDIC regulators should be particularly concerned and block any further merger attempts by Citigroup.  The Federal Reserve should also be concerned regarding the leverage built into Citigroup's stock price.  Clearly, what is deceiving investors is a price/earnings ratio of 18, making them believe Citigroup is a "value stock."  In reality, a large percentage of the company's earnings are resulting from the pooling loophole and represent an unsustainable fee pyramid, in particular in the investment banking and credit card areas.

Aggressive financial engineering with these mergers, in particular the excessive use of the pooling loophole, has resulted in the nation's largest bank running on empty with respect to "real capital."

Citigroup's total market value, with AFC, is now $260 billion, exceeding all tech firms except Microsoft and Cisco SystemsIn addition, the share price of $50 is five times the book value of $11. This is remarkable for a bank in which a share price of two times book is considered highly valued.  Banks generally trade at discounts to book since they are simply intermediaries.

Many industry analysts consider Citigroup a "value stock" yet are unaware of what is occurring and do not see the risk created by Citigroup siphoning off new economy investment capital in the form of excess fees.

84. Company Financial Profile
This profile from Yahoo contains numerous key financial facts including the total market value, book value, shares outstanding, etc. Citigroup, with the Associated First  merger (ticker AFS), will have almost 5 billion shares outstanding and a market value of $260 billion.  This market value will exceed all technology firms with the exception of Microsoft and Cisco Systems.  Remarkably, Citigroup is considered a "value investment" based upon its price/earnings ratio yet there is little attention to its trading at an unprecedented price of 5 times book value.

85. Citigroup, An International Bank With 75 Percent of Its Deposits in Foreign Branches Outside the U.S.
Deposits total $285 billion, $213 billion or 75 percent of which are in foreign branches outside the U.S.  Bank of America's CEO McColl succinctly describes this situation in U.S. Banker by saying "Citicorp has always been a powerful international bank headquartered in the U.S.

This is a much more unstable deposit mix than most banks, for example B of A and Wells Fargo, both of which have the majority of their deposits in the U.S.  Citigroup is very dependent on a strong dollar, without which they could see a significant drop in deposits and a liquidity squeeze if foreigners invested in their own currencies.  What Citigroup's competitors need is a stable, not a strong dollar, because a strong dollar can hurt domestic firm's with domestic deposits by pricing their products too high for key export markets.

Citigroup's best interests are clearly in contrast to those represented by leaders of the new economy.

It is often forgotten that crown prince Al-Waleed saved Citicorp from going under a decade ago.  John Reed, Citicorp CEO, by appealed for help to Al-Waleed, who remains one of Citigroup's largest investors today, with the company representing half of his entire net worth according to a reference in a recent Upside Today profile on Gordon Moore.  It is not known how much of Al-Waleed's funds, if any, are included in Citigroup's deposit base.

Al-Waleed was very loyal to John Reed and an excellent long-term shareholder yet he might also now benefit from further diversification, especially given his staggering recent losses in priceline.com and other technology and new economy focused companies.

There is an irony that his largest investment, Citigroup,  has played a key role in destroying the value of Al-Waleed's "new economy" related portfolio for reasons outlined in this report.

86. Not used

87. Largest Citigroup Shareholder Is Fidelity Investments
This summary at yahoo.com indicates that Fidelity Investments is the #1 shareholder with $9.2B worth of Citigroup stock.  The next largest shareholders are Barclays, AXA, State Street, Citigroup Inc., Putnam, Mellon and Vanguard, all with more than $3B.  Fidelity also owns roughly 10% of Associates First Capital, which Citigroup has announced it will acquire.

88. Bank of America, Wells Fargo, Bank One:   Profiles of Key Citigroup Competitors
This information is helpful to compare key financial statistics between Citigroup and its primary competitors.  Most striking is that more than 75 percent of these banks deposits are in branches here in the U.S. while Citigroup has more than 75 percent of its deposits in foreign branches (see SEC 10K and 10Q to confirm domestic and foreign deposits).  What this means is that Citigroup's deposit base could be much more unstable and dependent on a strong dollar while its competitors and their customers are more oriented toward a "stable" dollar, especially those technology firms focused upon exports.

A strong dollar can undermine a domestic firms ability to compete in key export markets if their products are overpriced.   Citigroup might claim they are a "money center bank" and offer different comparisons yet these are still valid comparisons and should be of particular interest to the Federal Reserve Bank.

89. Sanford L. Weil Profile, CEO
This profile summarizes how Sanford Weil has leveraged a small brokerage into becoming a large insurance firm and then later acquired the nations largest bank, Citicorp. In the last five years alone he will have printed up more than 2.5 billion shares of new stock to finance the mergers, most of the cost for which will never be reflected in the financial statements since the mergers were done using the pooling loophole.  Remarkably, Weil has wiped out all the capital at Citigroup while the Federal Reserve does nothing.  The nation's largest bank is basically running on empty with respect to capital.

90. Declared 4/3 Stock Split Payable on August 25, 2000, Company Press Release
It seems rather unusual that Citigroup would engage in such a stock split.  "This split combined with our May 1999 action, has the effect of a 2 for 1 split in little over a year" Citigroup notes in addition to saying this demonstrates "our commitment to delivering the benefits of our progress to shareholders.  Clearly, this split is an attempt to manipulate the share price and as management knows has absolutely nothing to do delivering benefits to shareholders.  Paying a more appropriate dividend would be a benefit.

B.  Relevant Banking, Insurance & Investment Industry Issues

91. Just What Banking Doesn't Need, R Bennett, U.S.'s Banker, July 2000
Historically, "customers knew that in dealing with a bank they could rest assured that they wouldn't be taken advantage of and that they were dealing with an up front organization."  He adds that things have changed as some banks such as Citigroup have become shrewd marketers with weak ties to the local communities they serve.  Other than an occasional donation more akin to a public relations ploy, Citigroup, given its size, puts back little in the communities it serves.

92. New Rules for Accounting May Roil Banks by Paul Sherer, Wall St. Journal, October 11, 2000
New rules proposed would require that bank loans be valued at their "fair accounting value" rather than original cost.  Many tricks are played with bad loans by most financial institutions in order to forestall recognizing them as bad debts.  This is why bankruptcy is so important because at that point the bank is forced to charge-off the entire loan.

93. Loan and Deposit Average Rate Disclosure is Misleading at Citigroup
Citigroup uses a sophisticated system of not accurately disclosing the key rates earned on loan portfolios and rates paid on deposits.  This includes using summaries by business category such as "consumer loans" rather than the actual loan type, for example home equity loans or student loans.  Many rates are also reflected net of adjustments for derivative based hedging.

94. Not used.

95. SEC Chairman Arthur Levitt's Testimony on Loan Loss Allowances, House Banking Committee, July 29, 1999
This is an area that has received considerably attention from the SEC.  Citigroup has indeed recently reduced its overall provision by .5 percent, based upon what it calls improved credit management, which may not seem like much yet that itself can add more than a billion dollars to net income given a loan portfolio of $200 billion.

In his testimony Levitt noted that transparent and consistent financial reporting of allowances for loan losses is essential to the safety of our financial markets. The SEC  had become concerned about loan loss manipulations and these concerns actually predated its focus on "earnings management."  Levitt added that the SEC is not targeting banks but rather trying to address an important issue.

96. Overpaying for Damaged Goods, Robert Bennett, U.S. Banker, August 2000
This story profiles Thomas Brown, a top banking analyst who says "too many institutional investors can't distinguish good analysis from bad and if they do recognize good research, most are unwilling to pay for it."

Brown's company can be seen at www.bankstocks.com  Brown advocates the equivalent of term limits for banking CEO's, many of whom he says have become more interested in acquiring other banks than running their own.  Brown refers to Sandy Weil of Citigroup as an outstanding CEO yet does not discuss the ramifications of his financial engineering.

97. A Big Tax Loophole for Insurers, David Cay Johnston, NY Times, October 5, 2000
This loophole disclosed by the NY Times in March allows insurance companies to stop paying income taxes simply by opening a small office in Bermuda.  The article adds that the loophole could cost the Treasury as much as $4 billion a year, equal to 2 percent of all corporate tax payments.  It is not known if Citigroup has such an office in Bermuda.

98. Federal Income Tax Considerations:
According to Citigroup's SEC 10K report for the year ending 12/31/99, search under "generated federal taxable", an average of one-third of pretax income has been non-taxable over the last 3 years.  Citigroup will attempt to attribute this to foreign earnings yet they do not fully disclose if tax is paid there either.

Although Microsoft and Cisco Systems now pay no federal income tax due to their financial engineering,  it is hard to tell exactly what rate Citigroup pays. It is also not known if Citigroup is using a loophole available to insurance companies identified in the NY Times recently.  This loophole allows an insurance company to set up a small Bermuda office and avoid all federal income tax.

99. Understanding the Effective Tax Rate Footnote and a Simple Recommended Reform:
This footnote in the annual 10K filing, search under the term "federal statutory income", is a relatively worthless exercise in disclosure because it reconciles the standard statutory corporate rate of 35 percent to the rate reflected by the provision for income taxes on the financial statements.  It does not, however, reconcile the provision amount to the actual rate paid based upon the tax return.

Permanent differences between the provision rates and actual rates paid due to areas such as stock option wages therefore go permanently undisclosed. This would be a very helpful reform for investors, that is, to expand this reconciliation to include a reconciliation to the actual rate paid, highlighting the five largest reconciling items.  Doing so would identify firms such as Microsoft and Cisco who pay no tax and investors could incorporate this important fact into their analysis of cash flows.  This reform has been recommended to the SEC and would imply no additional cost to filing corporations.

Following this current reconciliation is a footnote indicating that Citigroup has net deferred tax assets of almost $4 billion. This seems to imply that they have accumulated tax credits against future earnings that they have decided to book as an asset. The company notes that this benefit will probably be realized by saying "it is more likely than not based on existing carryback ability and expectations as to future taxable income. The Company has reported pretax financial statement income of approximately $12 billion, on average, over the last three years and has generated federal taxable income exceeding $8 billion, on average, each year during this same period.

Many new economy dot.com firms also have similar tax benefits but do not book them as an asset due to the uncertainty over their realization.  Amazon.com is one such example.

V.  Strategies for Restoring the New Economy

**  End the Pooling Loophole For Mergers

This legal accounting fraud is greatly undermining the national economic fabric and the largest abuser of this loophole is clearly Citigroup.  It has allowed Traveler's Insurance to take control of the nation's largest bank and compromise not only the integrity of the system yet also introduce new risks that are unacceptable for a system ultimately guaranteed by the FDIC and therefore the taxpayers.

** Update the ERISA Pension Laws to Provide More Access to Low-Cost Well Diversified Mutual Funds

The insurance industry, specifically Citigroup, has a long history of using administrative structures put forth by their lobbyists that serve only to fleece investors and undermine confidence in the system.

A bold yet perhaps necessary step due to the millions of workers roped into poor plans would be to open up the 401K system and make it completely self directed, not unlike an IRA account.  This would be rather simple from an administrative standpoint but will surely ignite an intense battle from an army of Citigroup's legal advisors since they would be the biggest losers as participants held prisoner in shameful plans wrapped in annuities with egregious fees would be liberated.

This is another area where Microsoft and Cisco Systems input could make a difference. They would of course be big long term beneficiaries.

100.  Controlling 401K Assets, Danny Hakim, NY Times, Nov. 17, 2000
This article introduces Theodore Benna, the consultant who helped found the concept of 401K plans.  Benna is now advocating opening the plans up to a more self directed approach.  Doing so would of course stimulate more growth in new economy alternatives as high fee predators like Citigroup would see their paradigm based upon legislative restrictions unravel.

Although I have been philosophically opposed to such a step for fear that many employees would be taken advantage of, the practical reality is that more would benefit and it is the right thing to do given the pervasive legal fraud now occurring.

** Reform the Accounting for Stock Options with One Simple Change

This would be to accept the system "as is" yet require that for every dollar taken in tax deductions for options exercised, an equal amount would have to be charged against earnings as wage expense.  There are many theories regarding options and various proposals but as an expert in this area it is my sincere belief that this is the only practical solution.

A free market should allow companies to issue whatever quantity of options they desire, provided adequately disclosed, but what we can't afford is to have unprofitable new economy companies paying the federal income tax for Microsoft, Cisco Systems and Citigroup.

The current system requires employees to pay tax on stock option gains when exercised, even if the stock is not sold, and the company correspondingly gets a tax deduction.  What this means is that the government has received a windfall from failed dot.com's because the employees paid the tax yet the companies will never realize the tax deduction.  Microsoft and Cisco get to fully utilize their deductions and therefore pay no tax yet if these deductions were charged to earnings, these lower earnings would deflate their stock prices and introduce more competition into the equity markets.

**  Boycott Citigroup's Products and Services and Request That Socially Responsible Funds Similarly Boycott Securities in Which Salomon Smith Barney Acts As Lead Underwriter

This is a very practical way of encouraging Citigroup to reduce its predatory behavior.  Federal and State organizations, in particular, might be persuaded to not use Salomon Smith Barney if they realize that these socially responsible mutual funds may not be interested in holding such securities. Leading corporations might also be less reluctant to use them. To their credit, both leading socially responsible funds, Domini and Calvert, exclude Citigroup from their list of approved companies while many other banks and financial institutions, including the Bank of America and Charles Schwab, are included.

Many excellent alternatives now exist for financial services including top quality mutual funds such as Vanguard, brokers including Waterhouse and Etrade, insurance with Allstate and Standard and credit card programs with credit unions and regional banks.

**  Block the Associates First Merger and Prohibit Citigroup From Additional Mergers Until Integrity Is Restored To Its Financial Results

Remarkably, the activists have been handed the grounds for denying the merger on a silver platter.   All they need do is review the balance sheet for Associates Sept. 30, 2000 quarterly filing with the SEC.  Associates is clearly overleveraged since they have no deposit base and to allow Citigroup to buy Associates, given that Citigroup is already seriously undercapitalized in real terms, and could also have a major balance problem with the management of its investment portfolio for reasons outlined in this report, would result in a monumental fraud on the American taxpayer since Citigroup would be overleveraged and its deposits are insured by the FDIC.

All the activists need do is confer with a few experts in banking to confirm that neither the Federal Reserve, OCC or FDIC can justify permitting this merger.  They may be concerned about predatory lending practices yet if they want to block the merger the strategy should be financial fraud, not predatory lending.

Parish & Company is an independent fee based investment advisor to individuals, pensions and trusts based in Portland, Oregon.  No fees are accepted, either directly or indirectly, from any provider of investment products.