Make no mistake: Citigroup Inc. is not breaking itself up. It has merely drawn up a blueprint for becoming a more manageable, responsible and potentially profitable financial institution. Much more work must be done to satisfy investors and regulators that its decades-long string of failures has come to an end.
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The central flaw in chief executive Vikram Pandit’s plan is a steely determination to keep Citi’s wholesale bank welded to its far-flung consumer-lending operations. The company’s arguments for doing so sound sensible. But so did its reasons for creating a financial supermarket in the first place—until they were proven wrong.
The good news is that creating Citi Holdings should allow the bank, over time, to dispose of a host of ancillary businesses and run down other unwanted assets without overly singeing shareholders. Overall, Citi Holdings will contain $850 billion (Rs41.3 trillion) of assets, including a $305 billion loan portfolio partly backstopped by the US government.
Taking these pieces from the core—which also removes the final vestige of Sandy Weill’s imprint by reviving the Citicorp name—is the right step forward. By appointing a separate chief to conduct the sell-off, Pandit and his executive team can refocus on the bread-and-butter retail and wholesale banks.
The latter caused the bulk of Citi’s $60 billion or more of write-downs and losses. But Pandit has already chastened it somewhat. He’s all but banning proprietary trading to focus instead on being a middleman for clients. And he is capping the size of the unit to $700 billion in assets. That shrinks further once commercial banking products that can be funded with deposits, such as loans, are excluded, leaving just under $400 billion for the rest of the Wall Street operations—less than both Goldman Sachs Group, Inc. and Morgan Stanley have at their disposal. For the moment, though, Citi executives say they have no plan to split the remaining rump in two, arguing there are synergies in tying them together. To nab institutional business in many countries around the world, they say, Citi must often have local retail deposits as funding.
Perhaps. But it is impossible to judge whether that is the case, or whether the profitability of this business outweighs the risks of managing such a massive institution. What is certain is that Citi has a long track record of promising synergies that never appear. There’s no reason as yet to believe this time it’s different.
Until Pandit can prove these activities belong together by extracting the operational leverage that has eluded his predecessors, investors should not take the notion of a full-on break-up of the consumer and institutional businesses off the table.