The bank's resurgence on Wall Street is all the more remarkable because it is taking place as many of its rivals pull back in the face of new regulations intended to make the financial system safer. The Wall Street operations of JPMorgan Chase and Goldman Sachs, for instance, have remained steady or shrunk during the last four years.
Citigroup's advance has involved acquiring vast amounts of derivatives, the financial instruments that gained notoriety during the 2008 financial crisis. It has at times snapped up derivatives from other banks that have been selling them to comply with new rules.
Citigroup has not trumpeted its comeback. Its most senior executives have largely emphasised streamlining operations that have little to do with Wall Street. For instance, the bank announced this month that it had agreed to sell a large unit that focuses on sub-prime loans to consumers.
"Citi is much simpler, smaller, safer and stronger than it was before the crisis," Danielle Romero-Apsilos, a spokeswoman for Citigroup, said in a statement.
Citigroup's investment bank is also no longer involved in the toxic activities that were most dangerous to the bank's health. The bank also has substantially higher levels of capital, the financial buffer that reflects a bank's ability to absorb losses.
Such steps have helped it slowly regain favour with regulators, although last year the bank failed the stress tests that the Federal Reserve administers annually. Still, figures for Citigroup's Wall Street operations show a bank that is on something of a tear.
The unit that encompasses the firm's investment bank, for instance, had $1.06 trillion of assets at the end of last year, a 12 per cent increase from the level in 2010. Over the same period, Goldman's assets dropped 6 per cent while those in JPMorgan's investment banking and commercial banking divisions rose 4 per cent.
The unit that contains Citigroup's investment bank is now generating most of the company's profits. In 2012, it earned roughly $200 million more than the consumer bank. In each of the last two years, however, its earnings have exceeded those of the consumer bank by more than $2.5 billion.
Perhaps most astonishing is Citigroup's meteoric growth in derivatives, the financial contracts that allow banks and investors to place bets without actually owning an underlying stock, bond or currency. Derivatives often earn bigger profits for Wall Street dealers than stocks and bonds. But new rules, including higher capital requirements, have started to take their toll, persuading many banks to cut back on the amount of derivatives they hold.
That has not been the case at Citigroup. In 2009, Citibank, Citigroup's main banking subsidiary, had $32 trillion in derivatives, according to regulatory filings. That figure more than doubled, to $70 trillion, in the third quarter of 2014.
"It's a little bit of a head scratcher," Mike Mayo, a bank analyst at the brokerage and investment group CLSA, said. "Why is this the best use of Citi's capital?" Over the same five-year period, derivatives in JPMorgan's main banking unit declined by 17 per cent, to $65 trillion. (The derivatives holdings are stated using their notional value, an industry measure that does not reflect the actual amount that the banks could lose.)
Citigroup has also flexed its muscles behind the scenes to protect its derivatives business from certain new rules. The bank's lobbyists helped draft a bill that gutted a crucial provision of the Dodd-Frank financial overhaul law that aimed to withdraw taxpayer support from some types of derivatives. The bill recently became law.
Romero-Apsilos, the Citigroup spokeswoman, said that the increases in derivatives had been "gradual" and "risk managed," adding that the higher totals were for derivatives linked to interest rates and currencies, not those linked to the creditworthiness of borrowers. She also noted that Citigroup's derivatives were increasingly going through central clearing houses, which back trades and are meant to prevent problems in one bank's derivatives business from spreading to the wider financial system.
Still, within the enclosed world of derivatives, Citigroup's remarkable ascent has not gone unnoticed.
International Financing Review, a trade publication for deal makers and traders, gave Citigroup its top derivatives honours in 2013 for its ability to expand its business in the new regulatory environment. "The seemingly unending overhaul of banks' derivatives businesses in response to a changing regulatory regime left the door wide open for those that were first-movers in postcrisis recovery," the magazine wrote.
Rival bankers also contend that the relative laxness of US regulations is helping Citigroup increase its derivatives holdings.
Citigroup, for instance, bought credit derivatives last year with a notional value of $250 billion from Deutsche Bank, Germany's largest bank and a big Wall Street player, in a deal reported by Risk magazine. European banks are shedding certain derivatives because they are ahead of their US counterparts in applying provisions of a capital regulation known as the Basel III leverage ratio.
Citigroup's investment banking business and its derivatives holdings may be growing because the bank's executives may have calculated that it has enough capital to fuel the growth. James A Forese, who worked at Salomon Brothers, the high-rolling bond-trading firm, is chief executive of the institutional clients group, which includes Citigroup's Wall Street operations. A November presentation by Forese listed "growing our franchise" as one of the group's main goals.
One question is whether the growth is leading to strong levels of profitability. To gauge performance, banks state their profits as a percentage of the capital, or equity, that they have deployed in a division. Citigroup does not break out how much equity it has in the institutional clients group, but Forese said last year that its profits were equivalent to about 15 per cent of its "tangible common equity," a return that would rank it above other large Wall Street firms.
Still, the growth of Citigroup's investment bank and its derivatives business has raised concerns among financial specialists who support tougher regulations. Wallace C Turbeville, a senior fellow at Demos and a former Goldman investment banker, says that Citigroup's resurgence suggests that capital rules may not be enough to put a strict cap on certain Wall Street activities. Outright prohibitions might be needed instead, he contends.
"The headline to these numbers should be, 'Gosh, This Is Depressing,'" Turbeville said. "It's depressing because this is what I was expecting and fearing."
© 2015 The New York Times News Service