Citibank announced today that it is selling OneMain to Springleaf Finanial for $4.25 billion. Citi has been trying to sell OneMain for years. It all began when Vikram Pandit was CEO (after the financial crisis), and he created a bad bank (called Citi Holdings). At the time, no one wanted to buy OneMain because it was a subprime lending company that was capital market funded. In fact, the head of Citi Holdings at the time was Mike Corbat (who is now CEO), and he was ready to accept as little as $1.0 billion for the unit. No one would write a check that big.
A lot has changed in 5 years. In a world of 0% interest rates, investors are hungry for the yield that subprime assets can potentially offer. OneMain, which historically took less risk than other subprime lenders, weathered the storm well and was generating hundreds of millions of earnings. And Springleaf, which rose from the ashes of American General (which was owned by AIG) is looking to continue its growth. As a combined entity, OneMain and Springleaf will be the largest stand-alone subprime lender in the United States, with over $14 billion in assets and more than 2,000 offices.
This is the end of an era for Citigroup, and represents the divestment of the last big part of the old Travlers Group. In fact, Citigroup would never have existed had it not been for OneMain and its roots in Baltimore.
Remember Sandy Weill?
Sandy Weill and Jamie Dimon (now the CEO of JP Morgan Chase) got their start together with a sleepy consumer finance company in Baltimore called Commercial Credit, which would later be renamed CitiFinancial and ultimately OneMain. (The name Commercial Credit is misleading: they did not make any commercial loans). Together, they turned around Commercial Credit and used it as a platform for further acquisitions. They swallowed the larger Primerica Fiancial Services. Then they bought Smith Barney. And then they bought Travelers Insurance, creating TravelersGroup.
Ultimately, in 1998, Citibank and TravelersGroup merged to create Citigroup. The combined business continued to grow and generate incredible earnings. Unfortunately for Citi shareholders, a fight between Sandy Weill and Jamie Dimon led to Jamie’s departure. Sandy then passed over Bob Willumstad for the CEO role and instead appointed Chuck Prince, who spent 4 years dramatically increasing the risk exposure of the bank. He is famous for telling shareholders that “as long as the music is playing, you’ve got to get up and dance.” And dance he did. As late as 2007, he bought a mortgage company (Ameriquest). At the time of the ill-fated acquisition, Citigroup stated that “it’s going to be a nonconforming shop, and we are going to originate along the continuum, from jumbo loans, to Alt-A to subprime.”
As Citi piled on subprime assets at the worst possible time, Jamie Dimon was avoiding subprime mortgages completely at JP Morgan Chase. Citi would ultimately require $45 billion of taxpayer money to stay afloat. Vikram Pandit embarked on a plan to return Citigroup to the old Citicorp, and in the process he would shed most of the TravelersGroup businesses.
Travelers Insurance and Primerica are now both stand-alone, public companies. Smith Barney was sold to Morgan Stanley, and with OneMain’s sale to Springleaf, Citibank today looks a lot like the Citicorp of yesterday.
Big questions remain for Citibank. In the US, they still have a very small retail bank. And they were slow to compete in the credit card space, losing significant market share to Chase. They are now trying to buy market share, as the Costco deal indicates. However, they will likely be paying a significant premium to steal the business. Just as OneMain starts to generate significant earnings, they swap out those assets for lower margin products targeting more affluent customers. It will be interesting to see how Citi grows within its strategy through the recovery.
And, as for OneMain, it is truly the end of an era. The business that was the first chapter in Citigroup and, to a large extent JP Morgan, is now in the hands of Springleaf.