Citi shuts once-envied muni business

Wall Street firm says the unit is no longer viable.

Citigroup Inc. will shutter its municipal bond business, one of the most dramatic moves yet by Chief Executive Jane Fraser as she seeks to squeeze better returns out of the Wall Street giant.

The bank decided the business, which has tumbled in the rankings for underwriting state and local debt, is “no longer viable given our commitment to increase the firm’s overall returns,” according to a memo to staff seen by Bloomberg News. Citigroup intends to complete the wind-down by the end of the first quarter, which will mean most of the company’s municipal sales, trading and banking staffers will be departing the bank in the coming months.

“We have made the difficult decision to wind down our municipal underwriting and market-making activities,” the memo said.

The move affects about 100 employees, according to a person familiar with the matter.

Reports that Citigroup was deciding whether to exit a business that it once dominated shocked the municipal market earlier this year. For decades, the bank was a powerhouse in the $4 trillion market for U.S. state and local debt, helping on landmark projects including the rebuilding of the World Trade Center site and the installation of 65,000 streetlights around the city of Detroit.

But the unit’s fortunes have turned in recent years, and the division didn’t fit with Fraser’s broader goal of making Citigroup the premier bank for large, multinational corporations. Texas politicians added another blow when they froze the bank out of a number of deals there because of its firearms policies. Texas is the No. 1 market for muni sales this year, so the moves crimped the unit’s revenue and overall profitability.

The decision comes after months of intense deliberations inside Citigroup, according to people familiar with the matter, who asked not to be identified discussing private information.

On one side were top trading executives, including Andy Morton and Mickey Bhatia. They were keen to get out of the business because it was hurting the unit’s broader efforts to improve profitability.

On the other side was Ed Skyler, a key lieutenant of Fraser and head of the firm’s enterprise services and public affairs division. To Skyler, it was important for Citigroup to keep working on financings that lead to the building of bridges, roads, schools and hospitals across America. Not only did they help the bank make inroads with lawmakers, they gave Citigroup a tangible connection to the American public.

Citigroup has spent years trying to convince Texas officials that its policies don’t violate state law, which punishes banks if they discriminate against the firearms industry. In August, Fraser and Skyler even traveled there to meet with Gov. Greg Abbott about the bank’s continued commitment to the state, where the bank has 8,500 employees.

Ultimately, though, Fraser’s aspiration to reach Citigroup’s new financial targets — whatever the cost — won out. The firm has repeatedly abandoned or missed targets over the years, and Fraser is determined to restore investor confidence in the bank’s ability to set and meet guidance. The decision to shutter the municipal business comes after she already decided to exit more than a dozen retail bank operations in overseas markets.

HISTORIC ROOTS

Banks often point to their work raising money for cities and states when facing scrutiny from local and federal politicians, and Citigroup was no exception.

At the New York-based bank’s annual shareholder meeting in 2018, which it held in Chicago, then-CEO Michael Corbat touted the fact that his bank had been a key underwriter on bond deals for the city’s O’Hare International Airport for decades.

The company has also promoted its work as lead underwriter on $2.6 billion of bonds for the Port Authority of New York and New Jersey when it was building One World Trade Center in the aftermath of the 2001 terrorist attacks.

The unit can trace its roots back to Salomon Brothers, the brokerage known for its willingness to take big risks that eventually became part of Citigroup. The firm’s bankers were often a fixture in high-profile municipal finance situations: For instance, in the 1970s, they helped New York City narrowly avoid bankruptcy.

For years, the business was led by Ward Marsh, who took the helm in 1991. He ran the unit until his retirement in 2019, turning it into one of Citigroup’s most successful trading desks along the way.

“They made the most money on the Street, and no one could keep up,” said George Friedlander, who spent 41 years in Citigroup’s municipal department. “They knew the market, had wonderful relationships and knew when to take risk and when to cut it back. It’s an amazing transition from there to imminently vanishing.”

The unit has been stung by departures in recent years. As concerns mounted about the future of the business more recently, a team of public finance bankers focused on health care even jumped ship to rival Jefferies Financial Group Inc.

TEXAS PROBLEM

By early 2022, Fraser was one year into her role atop Citigroup. At an investor presentation early that year, the bank vowed it would renew its focus on higher-margin activities in its trading business. The company was also preparing to adapt to a slew of new capital requirements from regulators, which will also further weigh on the profitability of the trading unit.

Within weeks of the investor day, Citigroup started offering buyout packages to senior bankers, traders and salespeople in the municipal business, some of whom had decades of experience. The bank soon shuttered its muni proprietary-trading unit, which used the firm’s own cash to trade and invest in the debt.

Along the way, there was the bank’s growing Texas problem.

In 2021, Texas passed legislation that blocked government entities from contracting with banks that have policies that restrict business with the firearms industry.

Citigroup had previously instituted a policy that would prohibit retailers that are customers of the bank from offering bump stocks or selling guns to people who haven’t passed a background check or are younger than 21. The bank temporarily halted its municipal business in Texas while it evaluated the new law.

But by the end of 2021, Citigroup had returned, saying it believed its policies complied with the legislation.

But earlier this year, Texas Attorney General Ken Paxton’s office determined that the company “discriminates” against the firearms industry, halting the firm’s ability to underwrite municipal offerings in the state.

Being frozen out of Texas deals further crimped the unit’s revenue, hurting overall profitability. By November, Fraser had begun more seriously mulling whether it was even worth it for the bank to continue offering municipal bonds.

Citigroup will still work with transportation and health-care entities on public-private partnerships and it will also continue its work in the private-placement market. The public sector banking team will continue to work with clients to provide depository services, for example.

The bank will also continue to invest in muni bonds. The decision does not impact the Citi Community Capital team, which finances affordable housing projects across the U.S.

“We will continue to support our municipal clients on all pending capital issuances, including execution of pipeline transactions as well as transition to other underwriters as appropriate,” the memo said.