Assignment – Memo

The purpose of this assignment is to help you learn how to analyze data. It will require you to apply knowledge of investments in a real example. Write a three-page memo (double-spaced) to the Chairman of U.S. Federal Reserve System, Jerome Powell, describing your findings with regard to the lesson we have learned in the U.S. subprime mortgage crisis (2007-2010). Specifically, make the comparison of sub-prime mortgage investments by JP Morgan Chase versus other large banks (e.g., Citigroup). You should also make the inferences regarding these financial institutions’ business or risk strategies before and during the crisis. You can download JP Morgan Chase’s 2009 annual report on the following link:… Note 11 on Page 195 provides the relevant information. You can find similar information for other large banks on their web pages of investor-relations.


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ACG 6138 – Advanced Financial Reporting & Accounting Concepts
Paper and Presentation Guidelines
These instructions will give you guidelines for writing a memo and planning a presentation.
Guidelines for Writing a Memo
The following deductive, bottom-line, structure presents your conclusions (depending on the
case, you will present either your recommendation[s] or findings from your assessment) and
their rationale:
1. The Introduction, your opening paragraph (with no heading): It defines your memo’s
purpose by stating the question to be resolved in the case – the key issues. You may also
provide limited background material. The background material provides only the context
for the argument, not all the facts considered in the analysis—remember who your
audience is and what your purpose is. Transition to the remainder of the memo with a
one-sentence preview of the memo’s main topics: your conclusion(s) and their primary
supporting reasons.
2. “Recommendation” or “Findings”: the first main heading (which should be on the first
page of the memo): It includes both the conclusion(s) and the main supporting reasons.
These two elements set up your purpose statement and preview (but don’t explain in
detail) your rationale. For example, your overall recommendation might be “To expense a
cost as incurred rather than recognize it as a liability.” You then need to (1) support the
position with specific reasons WHY a cost should be expensed as incurred instead of
recognized as a liability and (2) present the alternatives. You are saying that you have
come to your conclusion because of the following reasons; then state the reasons but do
not explain them. This setup establishes the paper’s unity and provides cohesion.
3. “Rationale,” the second main heading, provides the necessary detail regarding the
assertions contained in the above “Recommendation” or “Findings” section. This section
is the major part of your memo and should be at least half of its content. It states the
particular reasons why you believe your overall conclusions are true and then presents the
facts, examples, cites from professional literature, and/or logic to support them. This
structure is the deductive or bottom-line structure.
If you are making a recommendation, the rationale should include a discussion of
alternatives and the basis for your selection of the recommendation and the rejection of
the alternatives. This discussion constitutes your Counterargument and Rebuttal.
If you use subheadings, be sure to write a sentence (or two or three) that previews the
subheadings and shows how they relate to the major heading. Do not use a subheading
unless you have at least two of them.
4. “Conclusion,” the last main heading, briefly summarizes your overall position and the
key supports (the assertions/supporting reasons).
In addition, keep the following points in mind:
Begin the memo with the following information and format:
November 15, 2010
Recipient’s Name
Your Name (put your initial next to your name)
Subject of memo
Do not include an additional salutation (e.g., “Dear Mrs. Name”) or a complimentary close
(“Sincerely yours,”) at the end in the memo format.
Use double-spacing, with one inch margins all the way around and a 12-point font size.
Memos are single spaced when written for business purposes, but for course assignments,
double space is preferred.
Be sure the recommendation appears on the first page of a memos.
Use facts from the case but do not refer to the case; instead, approach the situation as though
you are involved in it instead of as a student working on a case.
Include professional literature (not the textbook or the case) cites to support your arguments.
Include cites from professional literature, academic journals, and practitioner journals.
Remember all citations to US GAAP should be from the FASB Codification and be in a format
similar to FASB 820-10-35-40. Be careful with Internet citations. Wikipedia and similar citations
are not acceptable.
Use direct quotes sparingly—you are to write the paper as opposed to cutting and pasting
together others’ ideas.
Edit the paper—cut clutter, avoid expletives and vague references, be precise and
concise. Read the paper out loud as you edit.
Proofread the paper, and remember that spell check won’t catch wrong words.
Check the grammatical elements (e.g., shifts in person, pronoun-antecedent disagreement,
parallel construction, etc.)
Follow the APA guidelines for citing sources or using figures and tables—refer to the style
guide and your GEB handouts.
Plan ahead! Do not wait until the day before the paper is due to start word-processing it. You
must have time to edit and proofread from a “distance.”
Citi Annual Report 2009
The cover of this annual report is printed on Accent® Opaque, an International Paper product. International Paper is certified to both the SFI® Chain of
Custody standard (BV-SFICOC-209908-B) and the FSC® Chain of Custody standard (BV-COC-080209). The financial section of this annual report is printed on
Frontier Opaque, a Fraser Papers premium hybrid product. Fraser is certified to both the SFI Chain of Custody standard (Cert–0025258) and FSC Chain of
Custody standard (SW-COC-003877). Accent is a registered trademark of International Paper Company. SFI is a registered service mark of SFI, Inc. FSC is a
registered trademark of Forest Stewardship Council A.C.
©2010 Citigroup Inc.
566614 CIT24018 3/10
1:10 PM
The New Citi:
Commitment, Strength and Promise
Dear Fellow Shareholders,
For Citigroup, 2009 was a watershed year, financially, strategically and operationally. Over the
course of those 12 months, your Company made much progress. By year end, the distinctive
outlines of a strong “New Citi” had emerged from an extraordinarily difficult period in the
history of the Company and the world financial system.
Through the hard work, perseverance and sacrifice by people everywhere in Citi, I believe
we have largely succeeded in addressing the fundamental challenges the Company faced
when I became Chief Executive Officer a little more than two years ago. Moreover, despite
all the turbulence in the economy, our people have steadfastly maintained solid revenue
performance. In fact, we generated $91 billion in managed revenue against $48 billion in
expenses in 2009, while also bringing our balance sheet leverage down to 12 to 1 from the
peak of 19 to 1 in the fourth quarter of 2007.
Citi today rests on a solid foundation, poised to achieve our goal of sustained profitability.
To reach that goal, what we now need is a positive turn in the economy, with a new cycle of
job and credit creation. Longer-term, though, Citi’s potential is not limited just to sustained
profitability. I believe the possibilities are much more dynamic for our unique institution with
operations spanning over 140 countries and a 198-year history of client service.
Citigroup reported a net loss for 2009 of $1.6 billion. Diluted earnings per share was a loss of
$0.80. This figure is sharply smaller than the loss in 2008 for various reasons, primarily lower
revenue marks and a gain on the transaction that created our Smith Barney joint venture.
Within this overall picture, our core businesses, together known as Citicorp, were profitable
with $14.8 billion in net income, versus $6.2 billion in 2008. I believe this performance
demonstrates the strength of the businesses we have identified as the future of Citigroup. Citi
Holdings, where we have placed non-core businesses and assets for divestiture, had a 2009
loss of $8.2 billion, versus $36 billion in 2008.
The 2009 results underscored the importance of Citi’s strong global position, as approximately
50% of our revenues came from markets outside North America. Our businesses in these
markets generally performed very well and overall, Citi’s results show the impact of improved
risk management and disciplined focus on clients’ interests.
Of course, we are not at all satisfied with the Company’s bottom-line performance in 2009. We
know that we have much more to accomplish and prove for shareholders.
Commitment to Responsible Finance
Perhaps the most obvious evidence of our positive momentum is that we entered 2009 heavily
in debt to the U.S. taxpayer under the Troubled Asset Relief Program (TARP), but we exited
the year by paying back TARP, with a significant dividend for taxpayers. However, we still owe
the nation’s taxpayers a debt of gratitude that goes beyond repayment of TARP dollars. While
we know that many banks as well as companies in other industries received U.S. government
funds, we at Citi took the need for assistance very hard and very personally. We felt a sense
of obligation not only to repay the government as quickly as was prudent, but also to be
engaged in financial reform and recovery.
We committed ourselves to what we call “responsible finance.” That means, first, we will
serve the true interests of our customers above anyone else. If we do that successfully, we
will be generating real, sustainable value for shareholders. Second, we will be a significant
contributor to economic recovery. To us, these are the best, most meaningful ways to repay
taxpayers fully for the support we received.
The strategic heart of the commitment to responsible finance is that Citi will be a bank first
and foremost. Our core mission is not to be a financial supermarket or a “shadow bank.”
Everything we do and represent will emanate from the basic functions of a true bank – to
accept deposits, commit capital to clients, lend to individuals, transact for customers and live
up to the highest standards of trust and integrity.
A Strong Foundation for Growth and Profitability
In 2009, Citi’s progress covered the prerequisites for consistently strong profitability: financial
strength, operating efficiency, strategic clarity, and the world-class talent to create and
maintain all these fundamentals. Each is also essential to the practice of responsible finance.
Financial Strength
While Citi started the year as a TARP institution receiving “exceptional financial assistance,”
by the end of the year our capital and liquidity positions were among the strongest in the
banking world. We repaid TARP and exited the loss-sharing agreement with the U.S.
government. Tier 1 Common rose by nearly $82 billion to more than $104 billion, with a ratio
of 9.6%, and we had a Tier 1 Capital Ratio of 11.7% – one of the highest in the industry.
Structural liquidity, at 73%, was in excellent shape. The allowance for loan loss reserves stood
at $36 billion or 6.1% of loans. Worldwide, deposits grew by 8% to $836 billion.
The other essential component of Citi’s revived financial strength has been a large reduction
in our risk exposure. By year end, we had reduced assets on our balance sheet by half a
trillion dollars, or 21%, from peak levels in the third quarter of 2007. This includes a substantial
decline in our riskiest assets over those years.
The actions we took restored Citi’s financial strength and therefore were essential. I deeply
regret that they also resulted in significant dilution for our shareholders.
Citi remains committed to preserving our considerable financial strength and remaining one of
the strongest banks in the world.
Operating Efficiency
We already have reduced the size of the Company by 21%, as measured by assets. Efforts
to centralize operations and technology, as well as other functions, contributed to new
efficiencies and clearer accountability for performance. We are improving and creating
technology to support our clients in a fast-changing, innovative world. In 2009, we also
cut annual expenses by $11 billion (excluding the goodwill impairment recorded in 2008).
Throughout the Company, there are stringent new cost controls in place, and the size of our
enterprise is being steadily reduced by the divestiture of non-core assets in Citi Holdings.
In addition, we have lowered headcount by nearly 110,000 since the peak in 2007. For me,
the reductions were some of the most difficult and personally painful of the actions we took,
yet they were absolutely necessary, given the state of both the economy and the Company.
Strategic Clarity
As we wrestled with Citi’s challenges in 2008, we determined that no meaningful improvement
in our performance or culture could be made unless we sharpened the strategic focus of
our businesses. Our business priorities were not well-defined largely because we were in
too many diverse operations. Consequently, we undertook a wide-ranging, dispassionate
analysis of Citi’s businesses. Nothing was sacred. Everything was weighed against a careful
study of the trends driving future economic growth, including globalization, emerging markets,
consumer demographics, the dynamics of funding and risk transfer, as well as many others.
The outcome of this examination was that we realigned the Company’s many and diverse
businesses into two primary operating segments: Citicorp and Citi Holdings. This action
clarified for our employees and all other stakeholders our strategic priorities for the future of
Citigroup in the United States and around the world.
Into Citicorp, we placed the businesses that are core to our strategy and that offer shareholders
the greatest earnings potential within appropriate risk parameters. These businesses are:
• Global Transaction Services
– Treasury and Trade Solutions
– Securities and Fund Services
• Securities and Banking
– Global Banking
– Global Markets
– Citi Private Bank
– Citi Capital Advisors
• Regional Consumer Banking
– Four Regional Consumer Banks in North America, EMEA (Europe, Middle East, and
Africa), Latin America and Asia that each include retail banking, local commercial banking
and Citi-branded cards
These businesses position us squarely against the world’s high-growth markets and products.
Our core mission is to be the global bank for institutions and individuals, and to serve our
clients with distinction. We bring them unique value through our global reach and innovative
In Citi Holdings, we assembled assets and businesses that are not central to our strategy.
Some have significant value in their own right. Some have iconic brand names. Many are
economically sensitive. Citi Holdings encompasses:
• Brokerage and Asset Management, which includes the Morgan Stanley Smith Barney joint
• Local Consumer Lending
– North America, which includes residential and commercial real estate loans; auto, student
and personal loans; and retail partner cards
– International, which includes Western Europe consumer banking and other consumer
finance franchises around the world
• Special Asset Pool, which includes non-core assets, many of which are illiquid in current
We are managing the Citi Holdings businesses with an eye toward tightly controlling their
risks and divesting them as quickly as market conditions and other factors enable us to
maximize their value. Since the end of 2007, we have completed more than 35 divestitures.
Our riskiest assets, which are pooled in Citi Holdings, already have been substantially
reduced, as I have noted, and they will continue to shrink. Overall, Citi Holdings assets have
declined by $351 billion, or almost 40%, over the past two years. Financial resources gained
from our ongoing divestitures are being reallocated to Citicorp.
Our restructuring of the Company for strategic clarity, I should add, has been an important
means of achieving further operating effectiveness and efficiency because we have expedited
sound decision-making on asset and liability management, capital allocation and other priorities.
World-Class Talent
Of course, all of our accomplishments would mean very little for the future of Citi without
the right people and management in place to execute our plans. Talent is the bedrock of
our strategy. In the slightly more than two years since I became CEO, we have extensively
revamped the leadership of Citi and its businesses, not only at the very top but also
throughout our organization.
We have been successful in recruiting more than our share of the very best people in our
industry. In risk management, for instance, the leadership team was thoroughly overhauled
with an impressive array of veteran talent from outside, as well as inside, Citi. In our operating
businesses, we have emphasized the recruitment of individuals with the experience and
expertise to carry out a strategy distinctively geared to our sharp client focus, vast global
network and constant innovation. Our leaders also meet another essential criterion: they
embrace a team-oriented, collegial approach to their work. That is an essential aspect of the
new Citi culture.
At the Board of Directors level, there also have been impressive additions of talent important
to our positioning for the future. During 2009, seven new non-management directors joined
the Board. They bring to Citi distinguished backgrounds of success in banking or financial
services as well as other closely related experiences that help support the execution of our
In sum, 2009 was a year when we laid a strong foundation for Citi, with financial soundness,
new operating efficiency, strategic clarity and world-class talent.
Fundamentals of Citi’s Strategy
As we build shareholder value on the strength of that base, the essential elements of our
strategy are client focus, global strength and constant innovation. All three are tightly woven
together in the fabric of our strategy, but client focus is the dominant thread throughout.
Client Focus
Everything we do must serve the customers’ interests first. This is our uncompromising
mandate, and our managers around the Company will be held accountable for meeting it.
Obviously, the financial system as a whole strayed from this customer-centric focus, and the
consequences around the world have been stark.
We are concentrating our operations and our people directly on customers in many different
ways. At the broadest level, we reorganized the Company so that our products, services and
investments will be readily responsive to local clients’ needs. For example, rather than have
the CEOs of our businesses run operations across regions globally, we installed regional
CEOs in most areas. We also have emphasized investment in local markets and have
customized tailoring of products to those areas. In our hiring practices, we have prioritized
more than ever the recruitment of local residents. For instance, in our Institutional Clients
Group today, 99% of our employees outside the United States are local or regional hires.
Global Strength
We are determined to capitalize fully on Citi’s most immediately distinctive trait that our
competitors cannot match: the strength of our global positioning and network. For nearly 200
years, Citi has been creating an international network. Today, it includes an on-site presence
in nearly 100 countries and operations in more than 140. This is one reason why 95% of the
Fortune 500 companies and 85% of the global Fortune 1000 are our clients. Citi is integrated
into the economic life and communities we serve in developed and emerging markets around
the world. No competitor has a global presence approaching ours, so we have a clear
advantage, particularly in view of major trends that are increasingly driving economic growth in
the world:
• We are seeing a rising wave of middle-class consumers in emerging markets. In the past,
the U.S. consumer was by far the main source of credit creation and spending in the world.
Now there is a seismic shift toward consumers elsewhere, and they will be a major factor,
along with those of us in the United States, in generating the next credit and spending
cycle …
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