Citi on Its Way to Breakup?

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.

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  1. Anonymous

    Ah yes, of course. Another scam trick. Enron style.

    Break ups, spread the bad assets around in those little new antities. Presto. Pump the stock time.

    When the breakup phase is done, reintegrate the little pieces.

    Who hasn’t tried this trick? Just about anybody during the bust. Enron being the biggest con story.

  2. john bougearel

    Glaring is how I would describe no mention of the more than $300 billion bailout to C in November.

    That puppy sticks out like a craw in the memory of even pot smoking stm addicts (of which I am not one)

  3. john bougearel

    by mid 2008 Pandit announced he would take over $400 billion in writedowns over the course of the next 3 years, if memory serves ( no pot smoking withstanding)

  4. yagij

    Over at CR, I’ve read comments sighting cash runs on Citi–or other kinds of panics–starting as early as Monday. However, I’m not seeing any evidence online of such a s**t storm hitting the fan.

    Anyone hearing anything similar?

  5. Yves Smith

    I haven’t, which does not mean anything in particular.

    FYI, Barry Ritholtz polices his blog very aggressively for unfounded rumors, so it does happen there. This could be 100% accurate, or someone with an axe to grind. With Citi having gotten the big backstop, I cannot see why there would be a run now. The time would have been November. There were a few rumors of withdrawals here, but isolated, bigger concerns re withdrawals in Japan. I think there was some movement out, but the risk to Citi would be from overseas depositors. The November actions should have been seen as very big sign that the US would not let Citi fail. Plus the credit markets generally are in somewhat better shape than then.

  6. Steve

    Citi, according to the WSJ recently, can no longer make strategic decisions without approval from OCC and FDIC. I suspect it would be truer to say that OCC and FDIC are steering the bank’s strategy towards reducing its systemic importance. The thing is de facto nationalized.

  7. ruetheday

    Steve – Or, alternatively, the OCC and FDIC are finally getting a detailed look at C’s real books, including off-balance sheet entities, and saying “holy shit! you guys need to sell off a ton of businesses to shore things up pronto!”

  8. Timo

    “The thing is de facto nationalized.”

    This is even worse. With nationalization there at least would be no doubt who is the new boss. It would that bearded guy with AK-47, wearing Che Guevara t-shirt and relaxing his legs on the table while eating caviar with his gun oily finger and drinking champagne straight from the bottle :-)

    This is somekind of weird mutant of seminationalization, “you guys can make some decisions but only if we say so, pending approval from our superiors pending approval from their superiors.”

    You Americans make now even jungle Nicaraguan communists look good :) “Weird shit”, Jesus would say…

  9. Anonymous

    Chris Whalen has said that most of our big banks will be nationalized so dismembering them into more easily digestible pieces does make more sense than trying to consolidate them whole.

    European banks like Commerzbank, Lloyds TSB and RBS seem to be having trouble digesting the meals they have taken on and, with half of US mortgage defaults now composed of prime mortgages, how much longer will it be before Bank America, Wells Fargo and JP Morgan complain of food poisoning from their banking dinners? Citigroup is just too rancid to be force fed to anyone else.

  10. FairEconomist

    IMO the Citi rumor looks like a bear raid. The interest on CR comes because a very credible commentator supported the rumor – but it could be his handle was being spoofed. (And yes, spoofers can drop in to claim to be the real McCoy too!) So I think some underling or hanger-on from the bear raid is just starting rumors.

    Of course, a bear raid wouldn’t work on a company like Citi if the company wasn’t in bad shape to start with. With a trillion in off-balance sheet assets and massive international exposure, Citi is extremely vulnerable. If you can get a panic started anywhere on earth down it goes and there’s no overnight breaks for the regulators to act, just the shortened weekend break.

  11. macndub

    However, it would be hard to find a worse time to be disposing of bank businesses.

    Unless it were the prelude to a good bank/bad bank approach? A guy can dream….

    It would that bearded guy with AK-47, wearing Che Guevara t-shirt and relaxing his legs on the table while eating caviar with his gun oily finger and drinking champagne straight from the bottle :-)

    Prince is gonna run Citi? That’s change I can believe it! And, Yves, I’d happily take a job running Citi, too. Since it’s insolvent anyway, I wouldn’t do any harm, and jobs for under-40 MBAs are hard to come by right now.

  12. Anonymous

    The one great principle of financial institution regulation which will emerge from the crisis is this: Too big to fail is too big period! All the big financial institutions, including insurance companies, that pose systemic financial risk by virtue of their size, will be broken up. This will be the case worldwide. The decimation of the nation of Iceland and the threat to Switzerland and Britan are just too impressive to ignore. Frankly the odds that the United States will survive this crisis intact are much lower than one would have put them even a year ago.

  13. Eric L. Prentis

    The spending of TARP funds under President-elect Obama will be no different than under President Bush. Obama’s economic team is Geithner/Summers/Bernanke, the spitting image of Bush’s team that bailed out the crooks on Wall Street. Just more of the same, the rich get richer on the taxpayer’s dime.

  14. bg

    This reminds me a bit of the pieces we started seeing last summer in WSJ and NYT, cautiously speculating on how companies were going to react to the unfolding crisis. I remember LEH (of course Einhorn), Wamu, and the monolines coming up quite a bit in ways similar to this WSJ piece.

    It does feel as though another wave of trouble is coming. The press did a reasonable job of predicting the losers on the last leg (although AIG I think was underreported). I am not sure the next wave will be as predictable.

    With the democrats desire to turn 2T in financial rescue funds into pork, we may need to see more carnage on wall street to stop things from getting worse inside the beltway.

  15. Anonymous

    “Frankly the odds that the United States will survive this crisis intact are much lower than one would have put them even a year ago.”

    What a load of crap. Are you kidding me? If the US goes under where are you gonna run and hide to? The Euro zone? They can’t even heat their homes because Russia has their yarbles in a vise. Maybe all the hot air from protesting and “Greek fire” will keep them warm at night. Pfft.

    Mark my words… the US will repay all debts in same-day air shipments of uranium, plutonium and tritium before it goes under. I see another 6B $US super carrier was launched and named after one of those evil Bushies. At that price we may as well take 10% of the TARP money and launch ten more.

    I love how everyone is ready to throw dirt on the face of a 13T $US economy. Puh-leeze. Get over yourselves.

    My word verification for this post was “handme”, as in “handme some popcorn, they’ve sent in the clowns”.

  16. Timo

    “What a load of crap. Are you kidding me? If the US goes under where are you gonna run and hide to? The Euro zone? They can’t even heat their homes because Russia has their yarbles in a vise.”

    Friggin idiot. Just continue munching that popcorn called “American Exceptionalism” while your country burns to dust. Eestern Europe is quite dependent on Russia gas but so is Russia dependent on their MONEY. Just like you are dependent on foreigners continuing financing your clown circus called US economy.

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