What Could Be the Long Term Effects of the Sub-Prime Crisis Looking on the Biggest American Bank Citigroup?

0. Introduction

The paper will discuss how the sub-prime crisis in the US came up and what were the effects for the Citigroup. It will also give an overview of what might happen in the financial sector looking at the biggest bank in the world.

I came up with this topic because I also invest money on the stock market. It is really important to understand the market and to analyze where it might be going. The crisis has already affected it and it will go on. Also since summer 2007 when the crisis started the media has been discussing it all the time.

First I want to explain why the sub-prime crisis happened by looking at the American housing bubble. Then I will compare the Citigroup before and after (still on-going crisis). I will also give an estimated view of where this crisis will lead and what ef-fects it will have for the bank. In the conclusion I am going to summarize the main parts and will express my own opinion where this might lead.

1. Sub-prime crisis

1.1 What is a sub-prime?

Sub-prime means persons who are debtors who do not have a lot of money. They obtained loans but were not really certified to receive one. This sector of the credit market started in June 2003 when former US Federal Reserve chairman Alan Green-span lowered the key interest rate to 1%. A lot of people took loans for mortgages without thinking about being able to pay back their mortgages at a much higher in-terest rate. The market was booming and since then mortgages have been given to customers worth $ 3200bn. About 20% of them were clients with little money or no proof of income. At this time nobody was really thinking where all that would lead to.

1.2 Short overview over the crisis

In the beginning of 2007 the financial market startet to feel the consequences as the US-housing bubble crashed. People could not pay their mortgages back because house prices started to fall extremely and on the other side the debts increased. At this time almost every week there were bad news about banks, house builders and other sub-prime lending businesses.

In February 2007 HSBC fired its head of the loan business because losses reached

$ 10.5bn. A month later New Century Financial (one of the biggest sub-prime lenders in the states) feared that it might be heading for bankruptcy. In the beginning of April New Century Financial had to repurchase billions of bad mortgage loans and cut half of its employees (3,200). In May business analysts said that the US economy would slow down. In the end of July it affected the Down Jones which slipped due to worries. On the 10th of August the ECB pumps in € 61bn of funds for banks. The US Fed also provided extra overnight money to combat the credit crush. Three days later the ECB puts in another € 47.7bn. A month later the ECB continued to inject fresh cash. The total has risen up to € 250bn. The Fed also cut the interest rate from 5.25% to 4.75% and its chairman said that the losses of the sub-prime crisis were much higher than expected. In October Goldman Sachs forecasted losses for the entire financial sector would be around $ 400bn. On the 27th of November a survey showed that US house prices dropped significantly in the 3rd quarter, the biggest rate drop in 21 years. In the first days of December Canada has also decreased its interest rate for the 1st time since April 2004. The bad news go on and we all see that the financial sector is doing bad.

2. Citigroup

2.1 Facts and formation

Citigroup is one of the major financial services company in the whole world. It has more than 200 million customer accounts and serves in more than 100 countries. The company has about 275,000 employees and provides a wide range of financial prod-ucts and services, including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management. Its history goes back to 1812 when the first Citibank was founded. The group “Citigroup Inc.” was finally created in 1998 with a new model of financial services organization. At this time the major bank “Citicorp” and the insurance group “Travelers Group” merged to form one huge giant.

2.2 Process of the bank during the crisis

As I showed in my previous section, all the major financial companies announced bad news due to the sub-prime crisis. Also the Citigroup fell as a victim to the crisis. Last year in the beginning of October the company had to realize that it had to admit $ 0.31bn in losses.