Citigroup’s negotiations to merge its Smith Barney brokerage unit with Morgan Stanley’s stockbroker force looks like the first step in what will be a well-deserved break-up of the financial conglomerate. The proposed deal would have Citi sell a majority stake in the business to Morgan Stanley, which would combine it with its own brokerage force and chip in $2.5 billion. Over time, Morgan Stanley would have an option to buy out Citi’s stake altogether.
That deal may be only the beginning. Citi is reportedly weighing the sale of its consumer finance division, its private label credit card business and much of its proprietary trading operations.
This is a turnaround from a couple of months ago, when Citi CEO Vikram Pandit said he “loved” Smith Barney’s business and saw no reason to break up the bank. But Citi has since taken $45 billion in taxpayer cash and secured a $249 billion taxpayer guarantee for lousy assets on its balance sheet. The bank is due to report fourth quarter results next week, and the latest losses could total $10 billion, so Pandit no longer has the luxury of indulging Citi’s old ambitions if he wants to keep his job.
To be fair, Pandit has not been at Citi, or at the bank’s helm, long enough to bear the blame for the bank’s woes. By contrast, the Friday exit of director and senior counsellor Robert Rubin was overdue, as is that of chairman Win Bischoff, who could be shown the door soon.
The larger issue is whether Citigroup in its current form deserves to survive at all. This is no longer merely a matter of business judgement but of public policy. Even before the current panic, Citibank was the model of a bank that was “too big to fail”, though it sure has tried. Citi was propped up amid the sovereign debt crisis of the 1980s. It stumbled again in the 1990s, the last time the real estate market went south. Earlier this decade, regulators barred it from major acquisitions until it got its internal controls under control. So much for that hope. Today, the bank has the distinction of having been bailed out twice by the Treasury’s Troubled Asset Relief Programme.
A bank that consistently has to be rescued by taxpayers lest it take down the entire financial system is too big to succeed. The only way to protect taxpayers is to reduce the size and scope of the bank so that it no longer poses a systemic risk. The planned asset sales reported on Tuesday are a step in the right direction. Citibank was born as a financial roll-up of sorts, and there’s nothing wrong in principle with growth by acquisition. But Citi’s repeated brushes with death prove that its management has never figured out how to run the business.
When we first suggested that Citi was one of the banks most exposed to the housing debacle, in October 2007, we received an angry demand for a retraction. Citi, we were told, had a mere “$70 million in indirect exposure to subprime assets”. Not long after, Citi took the first of its multibillion-dollar write-downs. A year and billions more in write-downs later, we suggested the feds might have tried to orchestrate the ill-fated Citi-Wachovia merger as much to save Citi as to rescue Wachovia. Citi officials again protested that we were unfair and that the bank needed no public help. Six weeks later, the government backstopped Citi’s securities portfolio.
We have no reason to doubt that the officials sent to upbraid us were well-intentioned, and perhaps they simply didn’t know the bank’s true situation. But that merely proves our point. Once the government has to rescue an institution that is “too big to fail”, the bank loses the presumption of innocence.
In return for saving Citibank, US taxpayers need to see some discipline imposed on the officials who created the mess and that the bank is reduced to a manageable business.
THE WALL STREET JOURNAL