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State and local governments have long relied on muni market heavyweight

When bankrupt Jefferson County, Ala., needed to find buyers for a new bond sale, Citigroup was there. When Detroit tiptoed back to market after haircutting bondholders, Citi C 0.80%increase; green up pointing triangle was there. When the board overseeing Puerto Rico’s debt restructuring wanted advice, Citi was there.

Now municipalities will need to look elsewhere in good times and bad. Citi is exiting the $4 trillion market early this year after a quarter-century as a top trader of U.S. state and local government debt.

Citi is amid an overhaul, and munis are one of the businesses on the chopping block. Other changes include eliminating 20,000 jobs, curtailing overseas consumer business and exiting the market for distressed debt. The bank is trying to put its money to work in places where it has an edge and can get the best returns, said Howard Mason, an analyst with Renaissance Macro Research. “It wasn’t as if they were picking on the muni market.”

But Citi’s retreat from munis shows how the bank’s restructuring might have ripple effects far beyond Wall Street. States and cities are having to find new partners to underwrite planned road, school and sewer projects. They’ll also have one buyer fewer among a fairly limited network of banks and funds.

“People were shocked,” said Emily Brock, who runs the Washington, D.C., office of the Government Finance Officers Association, a trade group. “They had deals in the market.”

Citi’s departure is unwelcome news for investors, too. Muni prices can plummet in times of market turmoil, when scared retail bondholders yank billions from muni mutual and exchange-traded funds. That price drop, in turn, can drive down funds’ share values and payouts. What stops the bleeding is when firms with buying power step in to take advantage of deals.

“They’ve been a big player. Somebody that you always counted on to be in the mix is no longer in the mix,” said John Mousseau, CEO and director of fixed income at Cumberland Advisors. “Where you will really notice the lack of Citi being in the market is at the first sign of indigestion.”

Muni desks across Wall Street have weathered a brutal stretch, crushed by rising rates and depressed borrowing. But at Citi, executives also made a series of strategic decisions dating back to 2018 that wound up reducing the bank’s footprint in the market, according to people familiar with the matter. The bank has been trying to increase profitability and revive its languishing stock price, which has forced it to clamp down on costs and jettison businesses that aren’t earning enough. Munis, despite the institutional pride, ultimately didn’t make the cut.

A Citi spokesperson declined to comment for this article.

“We have taken hard, consequential, tough decisions here. They are not going to be universally popular within our bank,” Chief Executive Jane Fraser said about her broader restructuring in September. “It’s going to make some of our people very uncomfortable. I am absolutely fine with that.”

Municipal bonds, elsewhere derided as unwieldy and unsexy, had long occupied a place of honor at Citi. For years, the municipal securities division, with its teams of underwriters, traders and salespeople, operated separately from other fixed-income products groups, and the division maintained a direct relationship with top Citi executives. Employees rarely left for other jobs.

Many were alumni of Salomon Brothers and Smith Barney, firms that had joined Citi through a series of mergers. The deals gave a powerhouse team even more cash to dominate their market. Traders had liberal access to bank capital and outposts in major cities. By the dawn of the new millennium, Citigroup was the largest financial-services company in the world.

Longtime municipal-securities division head Ward Marsh encouraged his staffers to work as a team, protected the group from wider bank pressures and supported them in taking risks, former employers said. Citi built a thriving business in high-yield municipal bonds.

Marsh embraced technology, and Citi participated in an early form of electronic muni trading. One former trader recalled the time when, at an off-site in the early 2000s, the division head played a recording of Bob Dylan’s “The Times They Are a-Changin’” to encourage employees to welcome innovation. Citi was the only bank to rank among the top three underwriters of muni debt every year from 2000 through 2021, according to LSEG data.

The first big blow came in the wake of the financial crisis with the sale of Smith Barney— Citi’s retail brokerage—which prevented the muni desk from easily selling its bonds to the masses. Postcrisis regulations also made holding bonds more burdensome, cutting into profits. But the crisis created opportunities, too. Low rates left household investors clamoring for yield, and municipalities needed help managing their debt.

Citi stepped up, playing roles in the biggest municipal bankruptcy filings including Jefferson County in 2011, Detroit in 2013 and Puerto Rico in 2017.

“In the restructuring world, there’s only one firm that has the issuer-side experience and scope of work,” said veteran restructuring lawyer Susheel Kirpalani, who represented creditors in all three cases. “They filled a niche that other municipal investment banks haven’t stepped into.”

Indeed, Citi’s advisory role in Puerto Rico has involved so much time on the island that lead banker David Brownstein undertook a side project rescuing local dogs. Brownstein is still advising on the workout of debt from Puerto Rico’s power authority. A spokesperson for the board overseeing the restructuring said the board is “working with its team of financial advisers on a transition to ensure continuity.”

Public officials turned to Citi in good times, too. Year in and year out, muni division staffers endured endless public hearings, burdensome disclosure requirements and changing voter priorities to finance projects ranging from the construction of small-town schools and sewers to the overhaul of LaGuardia Airport’s Terminal B.

Muni bonds can go years without trading. The market’s 36,000 borrowers include everything from property tax-backed highways to risky nursing homes. The ordinary investors who hold the most munis often flee the market at signs of trouble. Traders can profit from those idiosyncrasies, but doing so takes time and ties up capital.

As recently as 2017, it wasn’t unusual for Citi’s balance sheet to hold more than $2 billion in munis, according to people familiar with the matter. For 2011 through 2019, Citi was the muni dealer most frequently used by U.S. institutional investors every year, according to interviews conducted during that period by analytics firm Coalition Greenwich.

But Citi’s muni division started to change beginning in 2018. The bank had set fresh goals on profitability and was facing pressure to boost trading revenues in particular. Among the changes, Citi lumped its muni division in with other fixed-income assets such as corporate securities and mortgage bonds. The following year, the fixed-income group was reshuffled further, breaking up the formerly close-knit team and grouping muni salespeople with other sales staff and bankers with other bankers.

Across the bank, capital became a precious commodity. Traders no longer felt they had the same kind of license to take risks or spend money without prior clearance, according to people familiar with the matter. A wave of departures followed. Marsh retired, and veteran traders and salespeople left for other firms.

Then, the market delivered a series of blows to state and local debt investments just as Fraser was deciding where to cut. When munis first joined the larger fixed-income group in 2018, their increasing revenues helped offset decreases from other products, according to Citi’s annual report. But over the past couple of years, the numbers looked bleaker.

Some of Citi’s own decisions also caused trouble. After a 2018 school shooting in Parkland, Fla., Citigroup took a stance on gun control, issuing a policy to stop providing banking services to retailers who sell guns to anyone under 21. Executives knew it would possibly create trouble in the muni business, but the company pushed ahead anyway.

Texas struck back in 2021, initiating a law against contracting with companies that discriminate against the gun industry. Citi started losing school and road deals in the U.S. state that is adding the most new residents.

Meanwhile, experienced executives continued to leave the muni division. Citi’s rank among underwriters slipped from second in 2021 to sixth in 2023.

The muni trading desk was suffering, too. Bond dealers typically protect against losses from rising rates by using derivatives to make side bets against their portfolios. But the tax exemption on muni-bond interest means those types of derivatives are difficult to craft and generally unavailable for state and local government debt. That made the past two years particularly ugly for Citi’s muni division, even compared with its new fixed-income peers.

Citi shut down its in-house trading desk and offered executives buyouts. The sales team, which had numbered around two dozen in 2018, was half that size by 2023, according to people familiar with the matter.

Muni prices finally got a boost in November and December. But at Citi, the wheels were already in motion. A week and a half before Christmas, the bank’s top banking and markets executives wrote to employees saying that Citi was pulling out of the muni market. “The economics of these activities are no longer viable,” the note said.

Not everyone on Wall Street sees it that way. By early January, 13 former Citi muni bankers had already landed on their feet at Jefferies, a smaller rival.