Citigroup decides that it was (almost) all a big mistake
John Reed, who as CEO of Citicorp merged it with Sandy Weill's Travelers Group just over a decade ago, admitted it last spring, telling the Financial Times that "the specific merger transaction clearly has to be seen to have been a mistake." Now current Citi CEO Vikram Pandit—who has been talking to Reed on a pretty regular basis—has come around as well. According to both the FT and WSJ, Citi is planning to ditch most of the remaining Travelers businesses (consumer finance and stock brokerage mainly; insurance is already long gone).
After a spectacular merger that necessitated a major change in banking law—the 1999 repeal of the Glass-Steagall Act which separated commercial from investment banking—it seems at first glance that Citi is saying "never mind." That's a slight exaggeration. Citi reportedly does want to hold on to the Salomon Brothers investment banking business (underwriting and M&A) that came from the Travelers side. But its operations would be "constrained, especially in proprietary trading and securitisation," the FT reports.
What is the meaning of all this (other than that times are really tough at Citi right now)? I have three theories:
1. It's possible that this was all just a case of mismanagement. The universal banking model that Citigroup was emulating is pretty well established in Europe, and doesn't invariably bring disaster. Maybe if Weill hadn't forced Reed and Jamie Dimon out, Citi could have turned out all right. Maybe.
2. Then there's the Dick Kovacevich Rule. The Wells Fargo chairman—a former Citicorp executive—has long argued that the transaction-oriented investment bankers and relationship-oriented commercial bankers simply don't mix. As he told me a while back:
When you have a large diversified company the only thing that holds it together is a shared culture and common vision. You can't have multiple cultures working in a large company or it is going to be dysfunctional.
It seems like this will continue to be a bit of an issue even in the pared-down Citi. Although the remaining investment bankers will be so obviously subordinate to the rest of the company that it probably won't be much of a clash for at least a few years.
3. Finally, there's the possibility that the investment banks/securities firms that have evolved over the past quarter century just aren't very good businesses. They're great businesses to work in far as remuneration goes (the working conditions aren't always so hot). But investing in them as an outsider is turning out be, on a risk-adjusted basis, something akin to stuffing cash down a garbage disposal—albeit it without the fun grinding noises.
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1
Wow. This seems to indicate that Citigroup, who had the law changed to suit the actions they had taken, is now effectively saying "change the law back (except where we want it to remain as it is)." Isn't is a wonderful country where any multi-billion dollar corporation can buy just the law it wants?
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2
Or, the government could be signaling Citi to divest of these trading arms, along with other regulatory changes coming down the pike, because one of the ways you increase employment is to break up companies. Two separate have to maintain their own overhead, which creates jobs. My guess is that Citi is simply getting ahead of the curve with regards to the direction of financial regulation we'll see under President Obama.
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3
CITIGROUP BITES THE DUST
(Another One Bites the Dust, Queen)
WilliamBanzai7Rubin, Reed, Pandit, Weil and Prince walk warily down the street,
With their brims pulled way down low
Ain't no sound but the sound of their slippery conniving feet,
Fed machine guns ready to go
Are you ready, Are you ready for this
Are you hanging on the edge of your seat
Out of the doorway the bust up bullets rip
To the sound of the bailout beat
ChorusCitigroup bites the dust
Citigroup bites the dust
Another universal bank gone, and another one gone
Citigroup bites the dust
Hey, their gonna get you too
Citigroup bites the dustHow do you think we're going to get along,
Without you, when you're gone
You took us for everything that we had,
And kicked us in the financial groinAre you happy, are you satisfied
How long can you stand the market heat
Out of the doorway the bust up bullets rip
To the sound of the bailout beat
ChorusCitigroup bites the dust
Citigroup bites the dust
Citigroup bites the dust
Citigroup bites the dust
There are plenty of ways you can screw a man
And bring his net worth to the ground
You can cheat him
You can fleece him
You can feed him toxic financial garbage and leave him
When its time to mark em down
But we're ready, yes we're ready for you
We're standing on our own two feet
Out of the doorway the bust up bullets rip
Repeating the sound of the bailout beat -
4
The universal banking model that Citigroup was emulating is pretty well established in Europe, and doesn't invariably bring disaster.
_
why is this? Was it because European bankers were more "mature" -- that they'd learned to use their freedom responsibly based on past mistakes (as opposed to US 'kid in a candy store' practices)? Because they were better regulated?
_
And if this is true, why did Europe have its own banking crisis? Was it because in order to stay competitive in a global economy they wound up adopting the "immature" practices of US financial institutions? Or because even "mature" practices were inadequate because of the cascading effects of US financial sector disaster?
_ -
5
YES WE HAVE BAILOUT BANANAS
(Yes We Have No Bananas)
WilliamBanzai7
Sing along link: http://www.youtube.com/watch?v=jT6JkceQ9FU&feature=related
There's a financial supermarket on our street
It's called CITI and its run by Pandit the geek.
And he keeps lots of dodgy things for the markets to eat
But you should hear him speak!
''When you ask him anything, he never answers "no".
He just "yes"es you to death, and as he takes Uncle Sam's bailout dough
He tells you
"Yes, we have lots of bananas
We have lots of bailout bananas for sale today.
We've got Smith Barney string beans, and securitized onions
Leveraged cabbages, and private label scallions,
And all sorts of rotten fruit and say
We have an old fashioned Traveler's insurance to-mah-to
And a Solomon po-tah-to
But yes, we have lots of bananas.
We have bailout bananas for sale today."Business got so busy for him that he wrote home today,
"Send me Reed and Prince and Rubin and Weil; I need help right away."
When he got them in the store, there was fun, you bet.
Someone asked for a "mark down" and then the whole quartet
All answered
"Yes, we have bailout bananas
We have bailout bananas for sale today.
Just try those CDS coconuts
Those Alt-A walnuts and all sorts of asset backed doughnuts
There ain't got FIG nuts like these over at AIG
We'll sell you all kinds of red herring,
Dark brown, and ball-bearing.
And yes, we have bailout bananas
We have bailout bananas for sale today.
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