FT: Citi to Split Investment and Commercial Bank

The irony is rich, and a bit sad. I had Citi as a client in the 1980s, and served them in a small way in their efforts to make inroads into investment banking. It looked like a quixotic effort with commercial banks seeming likely to remain relegated to the margins: smaller clients, simpler deals. JP Morgan, which seemed better positioned than Citi back then by virtue of having deeper relationships with the very biggest corporate clients, also had a huge uphill slog. If you looked at the return on JPM’s decade long pursuit of its goal in the early 1990s, when it was finally starting to get some traction (in the plan vanilla, lowest margin products) I am sure the return on investment would have been mighty unattractive.

But never underestimate what a determined competitor can achieve if he keeps at it. Ironically, commercial banks succeeded, just as Japanese automakers did, in becoming serious players in a market where no one thought they had much of a chance. But no Japanese carmaker has come to as sad an impasse as Citi, hoist on the petard of its ambition.

Now one can say it really isn’t sad, that Citi had pursued a model of serving too many customers in too many markets. I agree with that; I’ve long been a skeptic of the universal banking model (save perhaps in small markets, like single countries). The complexity of the organization grows way beyond management’s ability to exercise proper oversight. And when you have large chunks of the empire in the hands of traders and investment bankers, whose first loyalty is to their paycheck, any deficiencies in oversight will most assuredly come back to haunt you.

But more broadly, I have said in earlier posts that a Citi tidiing itself (provided it isn’t an emergency move due to a cash hemorrhage) is a very big step forward, not just for the bank, but for the economy. The banking sector needs to be restructured, rationalized, and recapitalized. Unwieldy bank (and Citi is the biggest sinner here) posed the biggest problem. Citi moving forward to a more manageable structure is an important step forward, And even if the constituent parts of Citi are still too big to fail (the jury is out here), it is easier to clean up smaller units.

Another big plus is that moves like this may help reduce the interconnectedness of the banking system. Citi so far is a lone actor, but its moves may be emulated elsewhere (in just about every field, you see consolidation waves followed by breakups to create “pure plays” with M&A pros profiting at every turn). Richard Bookstaber has argued that our financial system has become tightly coupled, that “events” propagate quickly through the system with no firebreaks or easy ways to interrupt these processes. Having smaller, more focused players will somewhat reduce the excessive integration of the financial system, and thus lower the odds of systemic failure.

From the Financial Times:

Citigroup is to break itself up by separating a large portion of its troubled investment bank and higher-risk US consumer finance businesses from its global commercial banking operations in a dramatic attempt to ensure its survival…

Yves here, My understanding is that the institutional banking operation has its own P&L and management information system, so this split would in theory not be hugely difficult to implement from an operational standpoint. Back to the piece:

Bankers said that the unwanted parts could be eventually spun off into a wholly separate entity but, until then, it was likely to operate as an arms-length unit of Citi, in an attempt to isolate badly-performing businesses and assets.

It would also limit its reach in the US, where Citi never had the extensive branch network of rivals such as Bank of America and JPMorgan Chase. Citi has been under pressure from the US government to raise capital and streamline its diverse portfolio after being rescued with a $300bn bail-out by the authorities in November. The decision by Citi, which has suffered more than $50bn in credit-related losses and is expected to report another huge loss next week in its fourth quarter results, will have repercussions for the global financial industry

US rivals such as JPMorgan, BofA and Wells Fargo could take advantage of Citi’s exit from consumer finance businesses while banks like Goldman Sachs and Morgan Stanley could benefit from its move away from many investment banking operations.

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  1. Anonymous

    The folks over at Institutional Risk Analytics have a piece out today. Their prediction: Citi will taken over by 3Q, debt and equity
    holders wiped out, and the thing sold off in a dozen or so pieces.

    This too big to fail model has got to be put to rest. Instead of WFC taking over W, JPM taking WM and BAC taking everything else we need
    to be breaking these goliaths up into banks that both management and regulators can understand.

  2. mmckinl

    I completely agree with the first posters : Citi is done …

    The question is how much more tax payer money will be spent ?

    Where’s the Bank Holiday ?

  3. mmckinl

    Who’s Next : JPM or BAC ?

    Perhaps none more so, however, than J.P. Morgan. While its $77.2 trillion derivative exposure at the end of 2007 was down from the $91.7 trillion it held as of Sept. 30, 95.2% of which is traded over the counter, it’s a safe bet that J.P. Morgan would have suffered if Bear Stearns couldn’t fulfill its contractual obligations. After J.P. Morgan, the U.S. commercial banks with the largest derivatives exposure are Citibank, with $34 trillion, and Bank of America, with $32 trillion, according to the Office of the Comptroller of the Currency.”


    As the economy gets worse these banks go further under on their derivative bets, trillions worth …

    Where’s the bank Holiday ?

  4. wintermute

    Consider the unprecedented global market volatility starting Q4 last year. Commodities, Treasuries, currencies, equities, real estate all over the place – 70%, 80% even 90% moves common.

    Any bank which has *tens* of $trillions of derivatives on its books simply HAS to have stretched valuation models to breaking point and beyond. Some of it HAS to be marked to fantasy.

    The leverage of impossible-to-value derivatives to unimpaired capital must be 100:1

  5. Anonymous

    Congress is on the move to shovel the remaining $350 Billion to the banksters without going through Congressional hearings or debate.

    Give me a break. Please contact your Congressman and ask them to vote no tomorrow. Not without the light of day shining on this POS.

  6. pkk

    all these credit derivatives that have so tightly interwoven the financial system is why everyone is to big to fail. you almost wish that they could just void all those cds contracts in one fell swoop, but of course that would have massive unintended consequences. we were promised an cds exchange by the new year and mum is the word on it. I think cme is rethinking the idea because they determined that there is a fair chance they’d be wiped out if they provided a market for cds’s. moreover, if they actually put up an exchange for cds and let traders see the massive bets on each institution it’d probably freak everyone out ;o

  7. dd

    cds on cdos/cmos and private issue mbs can not be exchange traded. The contracts are on very specific tranches, designed to support the SIV debt ratings, and have no reserves. An exchange would by definition require reserves. That wipes out all the “profit” and limits the leveraging ability. An exchange would also provide pricing transparency that would also end the charade.

  8. williambanzai7

    (Another One Bites the Dust, Queen)

    Rubin, Pandit, Weil and Prince walk warily down the street,
    With their brims pulled way down low
    Ain’t no sound but the sound of their slippery conniving feet,
    Fed machine guns ready to go
    Are you ready, Are you ready for this
    Are you hanging on the edge of your seat
    Out of the doorway the bust up bullets rip
    To the sound of the bailout beat

    Citigroup bites the dust
    Citigroup bites the dust
    Another universal bank gone, and another one gone
    Citigroup bites the dust
    Hey, their gonna get you too
    Citigroup bites the dust

    How do you think we’re going to get along,
    Without you, when you’re gone
    You took us for everything that we had,
    And kicked us in the financial groin

    Are you happy, are you satisfied
    How long can you stand the market heat
    Out of the doorway the bust up bullets rip
    To the sound of the bailout beat

    Citigroup bites the dust
    Citigroup bites the dust
    Citigroup bites the dust
    Citigroup bites the dust
    There are plenty of ways you can screw a man
    And bring his net worth to the ground
    You can cheat him
    You can fleece him
    You can feed him toxic financial garbage and leave him
    When its time to mark em down
    But we’re ready, yes we’re ready for you
    We’re standing on our own two feet
    Out of the doorway the bust up bullets rip
    Repeating the sound of the bailout beat

  9. MC Shalom

    Chairman Ben S. Bernanke, We Are Opting Out of Credit.

    All of Our Economic Problems Find They Root in the Existence of Credit.

    Out of the $5,000,000,000,000 given out to the banks, that is $1,000 for every inhabitant of this planet, what is it exactly that WE, The People, got?

    A Credit Free, Free Market Economy Is Possible.

    Both Dynamic on the Short Run & Stable on the Long Run.

    I Propose, Hence, to Lead for You an Exit Out of Credit:

    Let me outline for you my proposed strategy:

    Preserve Your Belongings.

    The Property Title: Opt Out of Credit.

    The Credit Free Money: The Dinar-Shekel AKA The DaSh, Symbol: .

    Asset Transfer: The Right Grant Operation.

    A Specific Application of Employment Interest and Money.
    [A Tract Intended For my Fellows Economists].

    If Risk Free Interest Rates Are at 0.00% Doesn’t That Mean That Credit is Worthless?

    Since credit based currencies are managed by setting interest rates, on which all control has been lost, are they managed anymore?

    We Need, Hence, Cancel All Interest Bearing Debt and Abolish Interest Bearing Credit.

    In This Age of Turbulence The People Wants an Exit Out of Credit: An Adventure in a New World Economic Order.

    The other option would be to wait till most of the productive assets of the economy get physically destroyed either by war or by rust.

    It will be either awfully deadly or dramatically long.

    A price none of us can afford to pay.

    “The current crisis can be overcome only by developing a sense of common purpose. The alternative to a new international order is chaos.”

    – Henry A. Kissinger

    Let me provide you with a link to my press release for my open letter to you:

    Chairman Ben S. Bernanke, Quantitative [Ooops! I Meant Credit] Easing Can’t Work!

    I am, Mr Chairman, Yours Sincerely,

    Shalom P. Hamou AKA ‘MC Shalom’
    Chief Economist – Master Conductor
    1 7 7 6 – Annuit Cœptis
    Tel: +972 54 441-7640

  10. Jason Tyler

    The financial world is changing so fast and it is scary to watch this unfold. I have been doing business with Primerica, which has been under the Citi umbrella for some time. They have always in my opinion, been doing right by their clients. My rep is always sending me tips on how to save money.


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