A little known unit with Citigroup, Inc. (C) is illustrating that the “too-big-to-fail” bank may not be too big when its primary client is the U.S. Government.
The Wall St. Journal reports that Citigroup’s Global Transaction Services unit (GTS), sends more than $3 trillion around the world each day for hundreds of corporations and dozens of governments and agencies, including the Federal Reserve.
In 2005, Citigroup won the job of processing passport applications for the State Department. That contract helped open doors around the world. Today, Citigroup cites 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.
Then in August 2008, the Treasury Department tapped GTS to design and run a government-wide system for collecting and processing payments businesses and individuals make to virtually any federal agency. Then in September, the Treasury hired GTS to process checks and money orders federal agencies receive in the mail.
And, even as the political winds blow stiffly against it, the key role that GTS plays in world commerce shows how complicated shrinking Citigroup might be.
“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 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,” says Otih.
Because the GTS unit is deeply intertwined with the rest of Citigroup, splitting the unit off would leave some governments and companies in the lurch.
This point was made clear to officials at the Treasury Department and the Fed in November 2008, when the company was on the ropes.
TIAA-CREF was negotiating a contract with GTS for investment-management technology and services in November 2008. “We won’t speculate about what would have happened if the government hadn’t stepped in,” said Dennis McDonald, head of the investment strategy group. “The fact that they were supported was obviously a positive to us.”
Some foreign governments also expressed anxiety about Citigroup’s stability, prompting senior New York Fed officials to convey to foreign officials that the U.S. stood behind Citigroup and was fully aware of its responsibility to keep the bank from collapsing.
This prompted the “too-big-to-fail” label to be placed on Citigroup. Since then, they have received $45 billion in bailout funds. And the government has further vested itself in Citigroup’s success by taking a large equity stake in the company.
Since being bailed out, Citigroup has been pressured by regulators to accelerate their plans to shrink the company.
To be sure, the financial giant has managed to shed nearly $100 billion in assets in the last 12 months.
However, GTS continues to grow largely due to growing business with the U.S. government.
In December 2008, the U.S. Embassy in Baghdad picked GTS to handle payments to suppliers of food and services to U.S. forces. U.S. officials hope that Citigroup’s presence will help lure international capital back to Iraq.
Most recently, the Department of Transportation hired GTS to oversee the “Cash for Clunkers” car-buying subsidy.
