Citigroup Investment Bank Unit Bounces Back (NYSE:C)
Citigroup’s traders and investment bankers are much happier now that their business has experienced a revival. Figures for the bank’s Wall Street operations have improved substantially over the past five years. Citigroup’s investment bank unit had $1.06 trillion of assets at the end of last year. That is 12 percent higher than the figure recorded in 2010.
Citigroup’s investment bank unit generates most of the company’s profits today. In 2012, the unit earned nearly $200 million more than the consumer banking unit. However, the unit’s earnings have been higher than those of the consumer bank by more than $2.5 billion in both of the last two years.
However, much of Citigroup’s recent success is based on the company’s acquisition of vast amounts of derivatives, financial instruments that played a large role in the 2008 financial crisis. Derivatives allow banks and investors to place bets without actually owning an underlying stock, bond or currency. Derivatives often earn bigger profits than stocks and bonds. According to regulatory filings, Citigroup had $70 trillion in derivatives in the third quarter of 2014.
Citigroup has reportedly been purchasing derivatives from various financial institutions that have been selling them off to adhere to the new regulations recently issued to make the financial system safer. Citigroup lobbyists also helped draft a bill that altered a provision of the Dodd-Frank financial overhaul law that was intended to limit taxpayer support for derivatives. The bill recently became law.
Unsurprisingly, the company has chosen not to focus much attention on this aspect of their business. Most senior executives have largely emphasized other recent actions taken by the bank. Citigroup’s investment bank no longer holds many of the toxic assets that could considerably damage the bank’s health. The bank has also increased its capital levels substantially. Earlier this month, the bank made an announcement regarding an agreement reached to sell its unit that focuses on subprime loans to consumers.
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