The amazing shrinking Citigroup

Oops! Can we have a do-over on that whole decade of mega-banking mergers?


Andrew Leonard
January 14, 2009 2:23AM (UTC)

Felix Salmon, the ace financial blogger at Portfolio Magazine, hasn't had much that's good to say about the travails of Citigroup over the past year. He's been especially unkind to CEO Vikram Pandit, who may have inherited an impossible job when he took over the superbank in December 2007, but hasn't done much to distinguish himself since then.

On Monday, after Citigroup's stock price closed at 5.60, the lowest point since late November, when the Bush administration bailed out the company with another cool $20 billion, Salmon speculated on the probability of whether "Barack Obama's first major act as POTUS will be the nationalization of Citigroup." (BTW, if anyone can explain to me in plain English exactly what "p=.3" means in terms of the statistical likelihood of something actually happening, I'd appreciate it.) (UPDATE: My original post mis-stated Salmon as having written "p=.03." And thanks for all the explanations!)

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But while it is tempting to wonder exactly what an Obama-administration brokered nationalization and consequent breakup would look like compared to the examples provided for us so recently by Hank Paulson and company, it looks as if we are not going to get the chance. Just before the close of trading on Tuesday, the Wall Street Journal reported that Citigroup is poised for a major reorganization. Not only is the company set to announce that a majority stake in its Smith-Barney unit has been sold to Morgan Stanley, but it will also, reports the Journal's David Enrich, jettison elements of its "consumer-finance operation, such as Primerica Financial Services and CitiFinancial, private-label credit cards and many of Citigroup's consumer-related businesses in Japan."

The company plans to focus on wholesale banking for large corporate clients and retail banking for customers in selected markets around the world, people with knowledge of the discussions said Tuesday...

The planned moves essentially undo large pieces of the financial supermarket created when Citicorp and Travelers Group merged in 1998 to form Citigroup. The shakeup is intended to slice about a third of the assets from Citigroup's balance sheet, now roughly $2 trillion in size, according to a person familiar with the company's plans.

So... what's really going on here is that Citigroup is splitting up its commercial and investment banking operations. This would be amusing to followers of the debate over whether the 1998 repeal of Glass-Steagal contributed to the blow-up of Wall Street, if we weren't all so terrified at the spectacle of Wall Street disarray that continues to play out before us. But I cannot resist pointing out, again that Citigroup's woes blow a big hole in the theory that giant integrated superbanks combining commercial and investment banking activities are inherently more likely to survive in troubled economic times than entities which focus on providing more specialized services. Citigroup, the poster-child for banking merger mania, is now asking for a big do over. Will Bank of America be next?


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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