naked capitalism

Having worked for Goldman (admittedly many years ago, although by all accounts the culture has not changed much) and had Citi as a client, the two firms would not have made for an easy marriage. And it’s a given that the Goldman side would assume, as when commodities giant Phibro acquired Salomon Brothers in the early 1980s, that it would wind up on top no matter what the form of the deal.

The fact that Goldman considered (in effect) selling itself to Citi when Goldman employees would have, a mere month prior, seen taking a job at Citi a big step down professionally it a testament to how desperate conditions were for Goldman and Morgan Stanley before Paulson’s latest round of interventions.

From the Financial Times:

Lloyd Blankfein, Goldman Sachs’ chief executive, called Vikram Pandit, his Citigroup counterpart, last month to discuss a merger, in a dramatic example of the secret manoeuvring that preceded the government bail-out of the financial sector.

The call, which was made at the tentative suggestion of the regulatory authorities or at least with their blessing, was made shortly after Goldman had won surprise approval to convert itself from a securities firm into a commercial bank on September 21, according to several people familiar with the events.

They added that the conversation was brief as Mr Pandit rejected the proposal at once.

A deal would have been structured as a Citi takeover of Goldman. In spite of the slide in Citi’s shares, its market value around the time of Mr Blankfein’s call was $108bn, roughly double Goldman’s capitalisation.

A merger between Citi and Goldman would have resulted in thousands of redundancies in their investment banking units and would have forced out several senior executives. Combining the two companies’ widely different cultures would also have been a challenge….

Goldman executives were not fully convinced of the merits of a deal with Citi but felt there was little downside in placing a call.

The possibility of serious merger talks between Citi and Goldman became a non-starter after this month’s decision by the US Treasury to inject $125bn of capital in the two companies and seven rivals. The move was designed to allay investors’ fears of further failures among large US financial groups.

But Mr Blankfein’s call illustrates the pressure faced by Wall Street groups to consider bold strategic moves before the government bail-out of the sector.