naked capitalism

The Wall Street Journal tonight says, “Citigroup Takes First Step Toward Breakup.” But what does that mean, exactly? Or had the Journal gone a bit far with the notion that the bank is doing some way, way overdue housecleaning?

The eye-popping bit is that the asset dispositions are reportedly at the instigation of the Federal government. Perhaps the fact that Elizabeth Warren, the TARP overseer, has made it clear that she is no shrinking violet, has upped the ante. Treasury may realize belatedly that TARP fund should only be supporting a narrow set of banking franchises, and certain operations, such as retail brokerage, are not deserving of indirect support. It will be curious to see what logic is driving this change in course.

However, it would be hard to find a worse time to be disposing of bank businesses. Most of of the other big players are badly impaired; the ones that are less so (BofA, JP Morgan, Sandater) already have deals they are digesting and no doubt get feelers all the time. The big Japanese banks could possibly have been buyers, but with the Nikkei at its current level strains their capitalization ratios (Japanese banks still hold large stakes in industrial companies, and are permitted to count 50% of market value as equity. A depressed Nikkei means near-distressed banks). Sovereign wealth funds were burned badly on early forays and per Brad Setser, have taken big portfolio hits, so they are in no mood to assume more risk. Private equity firms historically have not bought banks. TPG’s $7 billion stake in WaMu turned to dust in record time. The credit, Treasury and trading risks that banks take on in the course of business have no analogue in the sort of bricks and mortar companies that PE firms regularly buy. And there is not a wealth of bank turnaround manager around to help them make assessments and fix bust banks.

But that discussion assumes that Citi is a viable business in its current form. If one takes the alternate view, that Citi is on government life support, then the Feds ought to be taking prudent measures to limit their exposures. But this seems a particularly badly timed move. Does that mean that Citi has been resisting and has finally knuckled under? The Journal isn’t clear on this point. The story suggests that Pandit’s desire to keep the bank together was questioned internally; the external heat seems a newer development.

Ironically, the world Citi was built for has arrived, but the bank has been found wanting. Walter Wriston anticipated that finance would become far more internationalized, boundaries between types of institutions would fall, and the biggest players would develop tremendous scope, serving retail and institutional customers across a broad range of financial needs. That world arrived, yet the firms themselves were not up to the task of managing such a wide range of operations.

The Wall Street Journal supplies further details:

Citigroup Inc., under pressure from the federal government, took a big step toward breaking up the financial supermarket, entering discussions to spin-off its Smith Barney brokerage unit into a joint venture with rival Morgan Stanley…

With Mr. Rubin leaving and Smith Barney likely to be hived off, Citigroup Chief Executive Vikram Pandit, his top lieutenants and directors are weighing other possibilities that could result in a radical reshaping of one the world’s largest financial-services firms.

Citigroup has also considered the sale of Grupo Financiero Banamex SA, its Mexican banking business, but that option has been shelved, according to people familiar with the situation. Citigroup officials also are mulling the creation of a new entity that would hold loans and other troubled assets, those people said. That would improve the appearance of Citigroup’s balance sheet, and possibly make it easier to sell the bad assets….

Yves here. Um, Citi also has over a trillion of off balance sheet assets. I’d be curious to learn how they fit into this picture. Maybe all this asset-shuffling is in part to distract attention to whatever happens to them? Back to the story:

Behind the dramatic moves at Citigroup is mounting pressure from the federal government, which has pumped at least $45 billion into the company since last September…

Yves here. Funny how there is no mention of the government guarantee of $300 billion of assets made in November. Back to the article:
… by early 2008, Mr. Pandit had started informing senior executives that he planned to keep the financial giant intact, and that his strategy revolved around improving teamwork and execution, not drastic structural changes…Since Citigroup’s shares entered a tailspin in mid-November, pressure has been mounting on Mr. Pandit to take drastic actions to stabilize the company…Mr. Pandit was reluctant to take such steps, which he believed should only be used if all other options had been exhausted. At the time, Mr. Pandit explicitly denied that he would ditch the retail brokerage…

Within Citigroup, senior executives increasingly felt that Mr. Pandit’s commitment to Citigroup’s existing model was obsolete. Some key executives recently have concluded that some of the supposed “synergies” associated with Citigroup’s current structure, such as the ability to “cross-sell” financial products to customers of different units of the company, are overstated. That made a sale of a major unit increasingly attractive….<.blockquote>
Yves here. “Retail supermarket” “universal bank” and other fantasies of selling more products have persuaded plenty of firms over the last twenty-five years to make acquisitions that have proven sorely disappointing. The best work I have seen on retail cross selling suggests it can be done very successfully with new customers. But cross-selling existing customers is another matter entirely (the costs of effective programs are too high relative to the incremental profits). Back to the article:

The recent activity appears intended, at least in part, to defuse mounting pressure on Mr. Pandit, who turns 52 years old next week. Although he inherited a giant mess when he became Citigroup’s CEO, an increasingly vocal group of shareholders and Citigroup insiders contends he didn’t act quickly enough to prepare Citigroup for the brewing financial trouble.

Yves again. Yes, if Teflon Bob was getting pilloried, Pandit had to know he was in hot water. Oh, and as for Rubin:

Mr. Rubin, 70, decided last month that he was ready to leave the company, according to a person familiar with the matter. That conclusion was driven by the overwhelming amount of time that his role at Citigroup was requiring…

Yves here. So Rubin didn’t like the idea that he might have to break a sweat to earn $15 million? Back to the piece:

Although speculation has been swirling for months about Mr. Pandit’s future, the pool of potential replacements is relatively small. It is the same issue that Citigroup’s board grappled with in 2007, following Mr. Prince’s departure. In some ways, the job of replacing Mr. Pandit may be even tougher, now that the government owns a significant stake in Citigroup and is keeping a tight rein on its executive compensation, expenses and other activities.

Yves here. Translation: If Pandit is highly cooperative and doesn’t make any obvious mistakes, he will get to keep his job, because it’s pretty obvious no one with an operating brain cell would want it.