Citigroup (C 5.16%) is one of America's preeminent institutions, and has been for most of its 203-year existence.
- It survived the banking panics of the Gilded Age, culminating in the Panic of 1907.
- It made it through the infamous bank runs of the Great Depression.
- And despite problems during the less-developed-country crisis of the 1980s, it spent the years after World War II ascending to the apex of global finance.
When the financial crisis struck in 2008, Citigroup was the largest bank in America and, I believe it's fair to say, had supplanted JPMorgan Chase as the most respected financial institution in the world.
As the adage goes, however, the bigger you are, the harder you fall. And so it was with Citigroup when the proverbial you-know-what hit the fan in the subprime mortgage crisis.
It's no secret that the New York City-based bank has suffered more than any other lender during the past decade -- among firms that still exist, that is. It lost $27.7 billion in 2008 alone, thanks to a $32 billion loss on securities and derivatives, as well as a $14.7 billion loan loss provision.
But even though these numbers are huge, they still fail to capture the overarching impact on Citigroup's shareholders as a result of the crisis. For that, you need to look at the long-term evolution of the bank's book value per share.
The objective of any bank is to grow this figure as quickly as possible. The first way to do so is to earn a lot of money. Because a portion of a bank's net income generally finds its way to retained earnings, a line item in the equity section of the balance sheet, this fuels the growth of a bank's book value. Holding all else equal, in turn, this will boost its book value per share.
The second way a bank can grow its book value per share is to reduce its outstanding share count by buying back shares of common stock. In the decade before the crisis, for example, Citigroup repurchased $41 billion worth of stock. This, coupled with retained earnings, explains why Citigroup's book value per share rocketed higher from 1995 to 2007.
But then things took a turn for the worse. From the second quarter of 2007 through the first quarter of 2010, Citigroup's inflation-adjusted book value per share dropped by 80%.
The first reason this happened is because of the large losses I've already alluded to, which came straight out of Citigroup's capital account. The second reason is because, instead of buying back its shares, Citigroup was forced to issue new stock in order to raise capital. Between 2008 and 2010, its outstanding share count increased by a factor of five, diluting existing shareholders by a concomitant amount.
The net result is that, thanks to the financial crisis, Citigroup essentially lost 20 years of progress.
