In response to your peers, compare and contrast your conclusions about the risk analysis of Citigroup with theirs.I upload two responses and you just need to give two comments about them. The word should be around 50-100 two responses, respectively.
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Depend on the news from the New York Time on NOV 22, 2008, Citigroup has
loss $65 billion on that day. More than half of that amount stems from mortgage
related securities. And, based on the price of its stock at that time, Citigroup just
worth $20.5 billion, down from $244 billion two years ago. The two information all
told us that Citigroup lose a lot of money and the companyâ??s value because of
mortgage related securities program. For this information, we can surely say the
operating risk is what Citigroup faced in 2008. For their value loss, the cash flow
risk will be appeared. Because their investment failed, that can produce the cash
flow to be lower. One more important information is about unemployed. As their
money or value loss, there are about 75,000 jobs gone in Citigroup. That is belong to
Causes of the risk:
Although the mortgage program has some issues, most of banks and financial
institutions want to earn money. So, they loan money to some low credit people.
Obviously, they cannot pay back the loan and interest. Some bankers want to earn
poor peopleâ??s money. They make a new rule for loan which do not need to pay the
interest in the first few years. For this reason, a lot of people loan money from bank
and financial institution. For Citigroup, when they invested billions of dollars in
mortgage related securities, the credit risk of banks and financial institutions
transferred to Citigroup. That is the reason for Citigroupâ??s operating risk. If they do
not investment this big number of mortgage related securities, they may not lose this
big amount of money. Losing big number of money will produce the cash flow
lower. That is cash flow risk come from. In 2008, many people lose their jobs
because the financial crisis. Most of company want to reduce the cash outflow and
save money to face bigger problems. So, they cut down the number of employees.
That is the reason for economic risk or unemployed risk.
Operating risk is the managers do some wrong decision. On the other words,
we can say the Citigroupâ??s risk is strategic risk. Because the financial crisis in 2008
is the past, we all know the result of Citigroup and the whole market. For Citigroup
strategic error, they lose billions of dollars. And that produce the price of stock of
Citigroup goes down, they lose the value of stock. For companyâ??s statement of cash
flow and balance sheet is a big damager. Cash flow risk will influence the
Citigroupâ??s running situation. The lower cash flow means that cannot pay for the
current liability. And Citizen bank is a main part of Citigroup. Lower cash flow also
influences the customer cannot withdraw a big number of money. For the
unemployed risk, Citigroup is a huge size of corporation. There are a lot of jobs
need to do. Less worker may bring more work pressure, lower efficiency, and lower
There are a lot of way to measure the financial risk. For example, we can use
the beta to measure the mortgage related securitiesâ?? risk. For the non-financial risk,
we need to use the market forecast and experience to control the risk be lower in my
For the risk whatever financial risk or non-financial risk, a company should
have a department for risk management. For the operating risk, the department can
assume and forecast the result of this decision. And more people participate into this
decision making. More ideas and more voices will help the decision be more perfect
with lower risk. For example, before Citigroup investment the securities, the
department of risk management can require the risk report of this kind of securities
to supervise the risk of this investment. Also, hedging is an important tool. If
Citigroup is buying some other kind of securities to hedge the higher risk while they
are buying the mortgage related securities, that will reduce the loss of Citigroup.
Citigroup once the country biggest and mightiest monetary foundation has been pushed to
the brink of collapse by more than $65 billion in misfortunes, compose downs for harried
resources and charges to represent future misfortunes. The greater part of that sum
originates from contracts related securities made by Mr. Maheras team similar items Mr.
Ruler was advised on amid that 2007 gathering.
Citigroup stock has dived to its most reduced cost in over 10 years shutting at $3.77. At
that value the organization worth just $20.5 billion, down from $244 billion two years back.
Waves cutbacks have achieved that side, with around 75,000 employments effectively
gone or set to vanish from a workforce that numbered around 375,000 a year prior.
Troubled by the loosed and an emergency of certainty Citigroup future is uncertain to the
point that controllers in New York and Washington held a progression of crisis gatherings
toward the end of last week to talk about approaches to enable the lean to the correct
itself. What’s more, as the credit emergencies seem, by all accounts, to be entering
another tricky stage regardless of a $700 billion government bailout, Citigroup hardships
are meaningful of the heedless administration and hurry to wealth that encompassed the
majority of the divider avenues.
Causes of the risk
As indicated by The Financial Crisis Inquiry Report of 2011, the reasons for the 2008
monetary emergency incorporated the disappointment of budgetary control and
supervision; the disappointment of corporate administration; inordinate borrowing;
unsafe investment; absence of straightforwardness; crumbling securitization; the creation
and exchanging of over-the-counter subsidiaries; and a fundamental breakdown in
responsibility and morals. Citigroup was at the focal point of the emergency and occupied
with various unlawful and illicit exercises.
Risk analysis Measurement and risk management of
Regularly a major bank could never permit the word or only one official to convey so much
weight. Rather, it would have its hazard directors forcefully investigate the shoulder and
make preparations for exchanging or loaning overabundances. Unfortunately, numerous
Citigroup insiders said bank’s risk chief never explored profoundly enough. As a result of
longstanding ties, that blurred their judgment, the very individuals accused of supervising
bargain creators excited t increment here and now income and administrators
multimillion-dollar rewards neglect to get control of them over these insiders say. Risk
management must be autonomous, and it wasn’t free in any event when it came to settled
income said one of the previous administrators in Mr. Barket assemble who like numerous
other individuals met for this article demanded namelessness on account of pending suit
against the bank or hold close connections to their associates. We used to state that on
the off chance that we needed to complete an arrangement we expected to persuade
Randy first since he could get it through. As indicated by a previous of Citigroup Mr. cost
began putting weight on its group to build income in the bank’s exchanging activities
especially in the production of collateralized obligation commitments, securities that
bundled sold and different types of obligation into packs for resale to financial specialists
since obligation commitment incorporates such a large number of types of package
obligation, checking their hazard was especially deceive, a few sections of the package
could be sound while others were helpless against default.
Citigroup is one of the biggest financial institutions in the United States and
is also among the systemically important banks on the global terrain. Before the
2007-2008 financial crisis, it was considered as a â??too big to fail’ company but
within a few months, this premise had been substantially challenged. Through its
subsidiary called CitiFinancial, Citigroup was a key lender of subprime and jumbo
loan arrangements. It also embraced radical securitization, in which it primarily
pooled such loans and those bought from other mortgage institutions and channeled
to investors the incomes streams accrued. However, most of the borrowers ended up
defaulting, thus exposing Citi to mortgage-related losses. A full-fledged credit crisis
Causes of the Risk
The primary cause of Citi’s risk was excessive speculation in the profitability
of housing mortgage financing. Prior to the crisis, the bank, among others, exploited
a statutory loophole in which they saw the need to pressurize Congress to authorize
universal banking by repealing the Glass-Steagall Act of 1933 (Wilmarth Jr 71). The
bank could now engage in underwriting, insurance, and trading securities. Secondly,
the bank was involved in aggressive leveraging of exotic financial instruments,
primarily such tools as derivatives. Almost every activity that Citi pursued during its
aggressive growth strategy was high-risk, including collateralization of debt
obligations, dumping risky assets into off-balance-sheet conduits, packaging toxic
subprime loans into RMBS, and leveraged corporate lending. They had also
over-estimated the profitability of jumbo mortgages.
Several studies that were conducted after the 2008 financial crisis established
that there were numerous factors that exacerbated the gravity of the situation. At Citi,
the aggressiveness with which they approached lending, especially high-risk and
jumbo mortgage plans played a pivotal role in exposing the firm to losses. Firstly,
corporate governance failed to embrace the necessary risk management strategies
that could enable the bank to establish the types of risks that they were susceptible
to and to react to them before it was too late (Erkens, Hung, and Matos 389). Citi
was under the illusion that any kind of a bond, loan, or bank asset could be
converted into a tradable, priceable, and liquid security whose risks had been
eliminated. However, they were wrong. Secondly, due to collapsing securitization,
the pooling of loans bought from other mortgage institutions was highly flawed, and
the company ended up with serious problems in its bottom line. The over-reliance
on the complex credit rating models also played an integral role in encouraging Citi
to pursue the aggressive lending business model. Without a doubt, Citigroup had
been involved in a series of irresponsible, illegal and illicit activities that ultimately
jeopardized its financial health.
By 2006, it had already been established that around 60% of Citigroupâ??s
mortgages had been defaulted, with the percentage rising to 80% by 2008. Citigroup
was insolvent by November 2008, even after receiving $25 billion from the
Troubled Asset Relief Program. In the same month, the firm made 52,000 more job
cuts, in addition to the 23,000 that had already been made earlier in the year. They
had made losses for four consecutive quarters, and projections being made held that
they were not likely going to recover until 2010. The company’s market
capitalization had dropped from $300 to $6 billion within two years. The eventual
count of staff cuts was over 100, 000 employees. The company also had a stock
market value drop from $244 to $20.5 billion within two years.
Even when the practices and business models pursued by firms are within the
confines of the law, franchise, reputational, systemic risks may arise. Moreover,
potential conflicts of interest may also occur. As such, all these potential conflicts of
interest must be identified and the necessary interventions are taken to ensure that
they do not end up affecting the overall functioning of each of the core departments.
Housing mortgage was highly overrated during the first decade of the twenty-first
century (Calem, Francisco, and Wu). However, it later dawned upon the banking
institutions that subprime mortgages were mostly being pursued by people whose
probability of defaulting was very high. As part of the necessary precautions that
should be made, banks should no longer rely on credit ratings provided by other
institutions and they should consider doing their own background checks to
establish the creditworthiness of each customer. Another recommendation that
banks like Citi should have taken is minimizing securitization, especially when the
economic times are not as promising as expected.
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