WSJ Runs Dubious Argument for Keeping Citi Intact

Normally, I would not have paid much attention to the Wall Street Journal article today on Citigroup’s GTS, or Global Transactions Services, unit. But what was disturbing was that the normally-astute Columbia Journalism Review’s blog was taken in by a pretty questionable argument that was presented as fact in the piece.

GTS is a big cash management/information service. It is also a bread and butter earner for Citi. Per the Journal:

Otis Otih, the treasurer of candy maker Mars Inc., uses GTS to handle most payments to employees and vendors of Mars operations in 68 countries. “Citibank is the only truly, truly global company for us — I don’t see any alternative,” he says.

As an example of what the unit allows multinationals to do, an Asian subsidiary of a European company can deposit funds with Citigroup locally and the money will instantly show up on the ledger of the parent a continent away. The system makes it easier for corporate treasurers to manage their finances, and many corporate and government clients outsource a wide range of other finance work to GTS….

Executives told officials with the Treasury Department and the Fed that GTS’s technology and presence in more than 100 countries made it too dangerous for the U.S. to let Citigroup collapse. The Treasury gave the bank a second big helping of $20 billion just six weeks after an initial $25 billion infusion from the Troubled Asset Relief Program, partly in recognition of GTS’s importance to the financial system, according to government and company officials….

While Citigroup is primarily known for its retail banking and credit-card businesses, the GTS unit is increasingly integral to the parent company’s functioning. Clients that move funds through GTS leave a lot of cash on deposit at the unit, which funnels the money to other parts of Citigroup for lending or other uses. GTS’s deposit-gathering muscle has grown more important since the financial crisis began, now providing about 40% of Citigroup’s $800 billion of deposits.

Yves here. GTS is a big piece of what makes Citi a difficult to disarm bomb. One of the swords of Damocles that the big bank had over the officialdom is that, prior to the crisis, it had $500 billion of uninsured foreign deposits. If Citi looked wobbly, sensible depositors would withdraw funds, and that could quickly morph into a run. Moreover, the any other international bank with meaningful cross border deposits could come under scrutiny (although it is odd more of this has not happened in the wake of the implosion of Iceland, which left a number of UK borrowers high and dry until concerted pressure on Iceland produced some restitution).

The Journal argues that GTS is essential to Citi. This is rubbish. GTS is a sophisticated payments system and a source of low-cost deposits. It may provide a foot in the door, and help deepen some relationships, but let us face it, cash management and payments systems are at best assistant treasurer relationships at big companies. Proof of the pudding: it is a no-brainer that companies like Goldman, Morgan Stanley, Barclays, and UBS are doing complex, high margin transactions at companies that are also using GTS.

We cannot afford to have critical, socially valuable, core banking services be used to fund high-risk activities that then put the provision of the core services at risk. So we have two choices. One option is to regulate the banks so as to severely restrict their risk-taking (which is possible but no one has the will to do it right now), and various bank activities would be defined so that it you engaged in them, you’d be required to be licensed and subject to the same rules. The other route is to make the TBTF bank less big and complex, so that resolving one would not be impossible. I’m skeptical of that approach, because the capital markets firms are still deeply enmeshed, so one going down runs the risk of taking down the entire grid.

But whichever way you come out on this question, Citi is too bloody big and complicated. Even though Citigroup is already in the process of scaling itself back to something resembling the old Citibank, even that is still a dangerously large operation. And now with Citi carrying a very large portion of its assets in Treasuries and liquid securities, it actually could afford to spin off GTS, since the bank is not funding as many illiquid positions as it once did (admittedly it would be operationally complicated, and Citi might need an transitional funding arrangement with GTS, but remember, we split up AT&T). That would have the salutary effect of improving the equity ratios of the rest of the bank (the money raised by the IPO would likely exceed, by a large margin, the value at which the unit is carried on Citi’s balance sheet now), and of eliminating the use of cheap foreign deposits to fund riskier activities which then are backstopped by the US taxpayer.

But as long as we have outlets like the Journal running scare stories on why we have to leave banks be, it’s unlikely we’ll see anyone in the officialdom explore radical enough actions to actually make a difference.