The US government appears to have saved Citigroup Inc. from going under. But the latest bailout doesn’t address the beleaguered megabank’s longer-term challenges.
Click here for breakingviews.com
First, further losses remain a concern. Citi is on the hook for the first $29 billion (Rs1.45 trillion) of losses, in addition to any reserves already set aside, on the $300 billion portfolio the government is cushioning. But that just addresses residential and commercial real estate assets. Citi’s $2 trillion balance sheet is exposed to corporate and retail debt in markets around the globe that could suffer if economic conditions worsen.
Citi can point to pretty stable underlying revenues so far this year, despite the losses it has suffered on troubled assets. And if the economy recovers sooner rather than later, the bank could catch a lucky break and avoid further trouble. But even that won’t necessarily deal with continuing concerns about the bank’s management and manageability. Also, leadership is a tricky issue. CEO Vikram Pandit hasn’t done a terrible job. He has cut staff and other costs, and is shedding unwanted assets and businesses.
So, for Citi to oust Pandit without concrete reasons and a perfect replacement on hand, would be close to an admission that the unwieldy giant is, in fact, unmanageable.
Bulking up big banks seems to be the order of the day for US regulators. But looking ahead, policymakers need to consider whether they want to discourage institutions that are too big to fail. Sure, breaking up Citi now isn’t practical— only the most stable and valuable businesses would sell and, in the current environment, that could prove destabilizing for Citi.
But if Pandit’s reforms don’t start bearing fruit, especially once markets turn up, a break-up could be back on the table, along with questions over his leadership.