In Depth: Little-known Citigroup unit grows with U.S.

Fed's help --- Role GTS plays as financial

plumbing system for global commerce shows how complicated shrinking behemoths might be

By David Enrich
1,925 words
12 January 2010
The Wall Street Journal Asia
AWSJ
18
English
(c) 2010 Dow Jones & Company, Inc. To see the edition in which this article appeared, click here

EVEN as U.S. federal officials move to rein in the nation's biggest banks, one chunk of giant Citigroup Inc.
keeps expanding -- with the help of the U.S. government.

Citigroup's Global Transaction Services unit, or GTS, zaps more than $3 trillion around the world each day
for hundreds of corporations and dozens of governments and agencies, including the Federal Reserve. It
converts currencies for the Fed, processes all passport applications for the U.S. government and handles
U.S. military payments to Iraqi contractors.

The political winds are blowing stiffly against giant banks these days, as their "too big to fail" status galls
much of the public and many in Congress. Federal officials have pushed Citigroup executives to radically
downsize the company. The House has just passed a bill that would empower Washington to break up big
banks even if they're healthy, if they are deemed to pose a risk to the overall financial system.

But the key role GTS plays as a kind of financial plumbing system for the world's commerce shows how
complicated shrinking the behemoths might be. In many parts of the world, Citigroup is the only
sophisticated financial institution available to work with foreign companies, governments and other
organizations. And its GTS unit is so deeply intertwined with the rest of Citigroup that splitting the unit off
would leave some governments and companies in the lurch.

"They can help us reach parts of the emerging markets that we can't reach on our own," says World Bank
official Georgina Baker, who heads the financial-institutions division at the bank's International Finance Corp.
arm.

Otis Otih, the treasurer of candy maker Mars Inc., uses GTS to handle most payments to employees and
vendors of Mars operations in 68 countries. "Citibank is the only truly, truly global company for us -- I don't
see any alternative," he says.

As an example of what the unit allows multinationals to do, an Asian subsidiary of a European company can
deposit funds with Citigroup locally and the money will instantly show up on the ledger of the parent a
continent away. The system makes it easier for corporate treasurers to manage their finances, and many
corporate and government clients outsource a wide range of other finance work to GTS.

Citigroup executives called this to the government's attention in November 2008, when the company was on
the ropes. Executives told officials with the Treasury Department and the Fed that GTS's technology and
presence in more than 100 countries made it too dangerous for the U.S. to let Citigroup collapse. The
Treasury gave the bank a second big helping of $20 billion just six weeks after an initial $25 billion infusion
from the Troubled Asset Relief Program, partly in recognition of GTS's importance to the financial system,
according to government and company officials.

The U.S. government then followed up by reassuring clients of GTS they could count on it. Moreover,
especially after the U.S. last February took a 34% stake in Citigroup (since reduced to 27%), various arms of
the government repeatedly gave more business to the Citigroup unit. Since mid-2008, the amount of revenue
GTS gets from the U.S. government has more than doubled, executives say. That has made the federal
government and Citigroup more dependent on each other than ever.

Late last year, Citigroup repaid $20 billion of its TARP aid.

While Citigroup is primarily known for its retail banking and credit-card businesses, the GTS unit is
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increasingly integral to the parent company's functioning. Clients that move funds through GTS leave a lot of
cash on deposit at the unit, which funnels the money to other parts of Citigroup for lending or other uses.
GTS's deposit-gathering muscle has grown more important since the financial crisis began, now providing
about 40% of Citigroup's $800 billion of deposits.

GTS, led by a German-born Italian citizen, Francesco Vanni d'Archirafi, has been a source of consistent, low-
risk income during a tumultuous period for Citigroup. In the first nine months of 2009, the unit generated 10%
of its parent's revenue and nearly half of its $6 billion in profit. In September, Citigroup Chief Executive
Vikram Pandit described GTS as "the foundation of our global business." But to defuse internal jealousies,
company executives have asked officials of GTS to stop describing their operation as the company's "crown
jewel."

The unit was formed in the late 1970s, under a different name. Over time, Citigroup persuaded many
corporate treasurers to consolidate overseas bank accounts at GTS instead of using a different bank in each
country. Its power to process currency and other transactions made it attractive to central banks.

In 2005, Citigroup won the job of processing passport applications for the State Department. It got off to a
rough start, according to a senior Citigroup executive, with so many applications pouring into a GTS facility
in Delaware that executives pulled all-nighters to keep up. Lawmakers blamed Citigroup for delays. The
kinks got ironed out, and a State Department official says the government is pleased with Citigroup's work.

The passport contract helped open doors around the world, as U.S. officials vouched for GTS's credentials,
according to the senior Citigroup executive. The State Department wouldn't comment on that.

According to Citigroup executives, more than 80 national governments and about 60 central banks rely on
GTS to manage their cash, make payments, transfer funds across borders and convert currencies. Among
its many international assignments, GTS doles out government pensions to French farm workers and
unemployment benefits in Mexico and Poland. It distributes about six million pension payments a year to
British citizens living abroad. In the Darfur region of Sudan, it provides payroll services for United Nations
peacekeepers.

In the U.S., GTS handles about 90% of the Federal Reserve Bank of New York's transactions in 180
countries and 90 currencies -- some $23 billion of payments in 2009. That includes Social Security payments
to expatriates. Maryland uses GTS to distribute unemployment benefits via prepaid debit cards, adorned with
a photo of a blue crab on a beach.

In August 2008, the Treasury Department tapped GTS to design and run a governmentwide system for
collecting and processing payments businesses and individuals make to virtually any federal agency. A
month later, the Treasury hired GTS to process checks and money orders federal agencies receive in the
mail.

GTS's many tentacles weighed on government officials in November 2008 as doubts grew about Citigroup's
viability, despite its first dose of TARP funds. Some central banks and large companies withdrew some of
their deposits from GTS, according to Citigroup executives. "We were terrified" a run on the bank might
erupt, one recalls.

On Friday, Nov. 21, Mr. Pandit and his deputies turned to Washington to plead for a federal bailout. While
some U.S. officials were receptive, others initially balked. Hoping to cement their case, Citigroup executives
scrambled to marshal evidence of why the company was too big to fail. A top executive told GTS officials to
assemble a list of 25 services the unit provided to governments around the world to help illustrate Citigroup's
importance, say people familiar with the events.

In phone calls with federal officials, Mr. Pandit and another executive, Edward Kelly, argued that Citigroup
deserved more aid in part because of GTS's role serving governments and moving money around the world,
as well as because Citigroup had a big foreign-exchange business and was a symbolic embodiment of the
U.S. financial system, according to government and company officials. Mr. Pandit said if Citigroup was
allowed to unravel, "100 governments around the world would be trying to figure out how to pay their
employees," recalls a Citigroup executive who says he heard the remarks.

At the end of the weekend before Thanksgiving 2008, U.S. officials agreed to inject $20 billion more into
Citigroup and to insulate it from most losses on about $300 billion of assets such as mortgage-backed
securities.

TIAA-CREF, the big retirement fund, was negotiating a contract with GTS for investment-management
technology and services at the time. "We won't speculate about what would have happened if the
government hadn't stepped in" with the second helping of aid to Citigroup, says Dennis McDonald, head of
the investment-strategy group at TIAA-CREF. "The fact that they were supported was obviously a positive to
us."
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With some foreign governments remaining nervous about Citigroup's stability, bank executives sought
further help from federal officials. From November 2008 to spring 2009, Fed and Treasury officials
repeatedly called their non-U.S. counterparts to assure them that Citigroup was considered healthy and that
the U.S. government continued to rely on GTS, according to Citigroup and government officials.

Senior New York Fed officials told foreign governments the U.S. stood behind Citigroup and was fully aware
of its responsibility to keep the bank from collapsing. Citigroup officials say the offensive was successful:
GTS didn't lose any government clients, although some did pare back their relationships with the company.

After the bailouts, regulators demanded that Citigroup accelerate its plans to shrink the company. Early last
year, company officials announced plans to shed hundreds of billions of dollars of assets and businesses.
These are now collected in a division known as Citi Holdings, separate from core businesses.

Meanwhile, GTS kept growing, partly by snagging more business from the U.S. government.

In December 2008, the U.S. Embassy in Baghdad had picked GTS to handle payments to suppliers of food
and services to U.S. forces. Embassy officials also arranged a partnership between Citigroup and an Iraqi
lender, Al Warka Bank, that enabled GTS to make payments outside the fortified Green Zone in Baghdad.
U.S. officials hope that in the long run, Citigroup's presence will help lure international capital back to Iraq.

Last February, with Citigroup still shaky, the Treasury came to Citigroup's aid for a third time. By converting
$25 billion of its Citigroup preferred shares into common stock, the U.S. put itself more fully on the hook by
taking a large equity stake in the company. The move also let Citigroup reduce the amount it was paying the
U.S. in preferred-stock dividends.

A month after that, the Treasury picked GTS to run an aid program for auto suppliers. Then in May, an arm
of the Treasury hired GTS to design a system to let the U.S. military pay vendors in remote parts of the world
during wartime using mobile phones instead of cash, according to people familiar with the matter. The
system is expected to be tested at a South Carolina military base and then rolled out in Afghanistan.

And in July, the Department of Transportation hired GTS to oversee the "cash for clunkers" car-buying
subsidy.

When bidding for new federal contracts, some GTS executives have cited the government's stake in
Citigroup, said a person familiar with the matter. Their pitch to the government: "You own us. Isn't it in your
best interest for us to succeed?"

---

Damian Paletta contributed to this article.

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