The great unwind of Citigroup's financial supermarket has begun. In the face of $10 billion in losses in the latest quarter, and with its stock at a 16-year low, Citi struck a deal on Tuesday to effectively sell control of its Smith Barney brokerage unit to Morgan Stanley.
A slimmed down Citi is long overdue. The rationale for a financial supermarket always stuck me as odd. Why would anyone stick all their bank/brokerage/insurance eggs in one basket?
It wasn't the repeal in 1999 of the Depression-era Glass-Steagall Act that killed Citi. It was bad management.
Citibank, founded as City Bank of New York in 1812, has been beat up before. Overextended in mostly bad real-estate loans in the downturn of 1990, losses mounted and the stock got killed, hitting the equivalent of $1 after stock splits. Wall Street was abuzz, debating if the U.S. government had a "too big to fail" doctrine. The bank didn't wait around to find out. It cut its dividend and took a $590 million investment from Saudi Arabia's billionaire Prince Alwaleed bin Talal.
Wall Street veteran Sandy Weill, once chairman of Shearson Loeb Rhoades, had long pitched financial services all under one roof. To justify the 1981 merger of his Shearson brokerage with American Express, he claimed in a Time magazine interview that "a typical consumer may have a stockbroker in California, a banker in New York, an insurance agent in Maryland and a real estate agent jetting back and forth from Chicago to Boston." It's an old Wall Street ploy -- pitch a dream and use the premium valuation to do deals.
After squabbling with Amex CEO James Robinson III, Mr. Weill left in 1985. Then independent, he got Control Data to spin off Commercial Credit to him, and with that as a platform he bought Primerica and its Smith Barney brokerage. Again pitching his supermarket vision to raise capital, he picked up Travelers insurance, bought back Shearson, and added Aetna and Salomon Brothers.
The financial groceries were growing, and by 1998 Mr. Weill consummated a $76 billion merger of Travelers with Citibank. In 2000, he ended up as sole CEO.
Were their any real synergies from Citibank's one-stop shop? I doubt it. It
failed because internal compensation incentives mainly stressed units, not the
whole, the downside of all behemoths. Plus, I don't know how many customers
bought stocks at an ATM machine, because almost simultaneous to his big merger,
the Internet disintermediated most of Mr. Weill's businesses. The best rates
and terms and service were in the Giant Supermarket on the Web, rather than
just in Sandy's shopping cart.
Each segment's profits became suspect as Fed Chairman Alan Greenspan lowered short-term rates to 1% in November 2002. While usually a boon for banks who borrow short and lend long, those pesky long-term rates stayed low, as the Chinese kept buying 10- and 30-year Treasurys. This flattish yield curve meant lower returns on investment. Mr. Weill stepped down in 2003.
Normally, when a bank sees smaller returns on investment, it stops investing, or at least slows down and lowers its equity until better returns are available. Others did. But this was Citigroup, which never sleeps, where money lives, and the bank DNA was watered down. Instead of reining in, those in charge went for it. Borrowed more. Levered up.
For Citi, the sure-thing investment du jour was subprime loans, conveniently packed into mortgage-backed securities. You could borrow at 2% and get 4%-6%-8% yields. Who could turn this down? Leverage of 20 to 1 or even 30 to 1 was used to buy this stuff. Shareholders might have balked at so much leverage. Citi, unlike other big U.S. banks, kept this borrowing off its balance sheet in so-called conduits or SIVs (structured investment vehicles). This is how Citigroup grew its earnings.
The SIVs allowed for huge borrowings. There was an unwritten or "implicit obligation" for Citigroup to take the SIVs back onto its balance sheets in the unlikely event that something went wrong. Well, it did. The SIVs collapsed when short-term financing dried up, and are now on Citi's balance sheet.
So once again, Citigroup is thought to be too big to fail. The U.S. government has agreed to backstop some $250 billion of bad loans, which perversely may have Citigroup dumping assets at any price. As shareholders anticipate further losses and equity dilution, Citi is worth under $21 billion.
Contrary to the reregulation crowd, it wasn't the repeal in 1999 of the Depression-era Glass-Steagall Act (which had separated commercial and investment banking) that killed Citi. It was bad management. J.P. Morgan and Bank of America and Wells Fargo didn't have SIVs -- and while they too were caught in the credit crunch, these institutions have emerged as net acquirers of broken banks.
At the end of the day, Citi will either be a smaller stand-alone bank or a subsidiary of, say, Goldman Sachs. For now, like Bear Stearns last March and Lehman last September, Citigroup is selling everything not nailed down to survive. There is collateral damage to other banks like Bank of America, which is asking for more federal funds. The bottom comes when the last bad loans, and banks, are priced for doomsday. It smells like we're getting closer.
wow.... VERY WELL PUT and I CAN'T WAIT.....
Though it may take a liitle longer for CITIFINANCIAL to FALL since their new found UNETHICAL behavior focuses on UN-OWED, UN-EARNED, GARNISHED WAGES from people with LACK OF KNOWLEDGE who are SCARED TO DISPUTE, OR who try to DISPUT to me KNOCKED DOWN from lawyers, JUDGES, NEWS REPORTERS, etc.. i mean, MAN this list goes ON!!!! but this article was indeed a lttle encouraging for me - finally!
For those that wonder why more and more people are filing chapter 7 and 13, losing their homes, cars etc. demolishing their credit.. It is bc company's like CITIFINANCIAL(LOAN SHARKS). Ohhhh.. but CITIFINANCIAL don't care about you filing bankruptcy, infact it prabaly is advantage to them since they are focused on the BAILOUT programs intent to HELP - NOT HARM!
CITIFINANCIAL does not deserve to be bailed out for this will only allow them to keep VICTOMIZING good people LIKE ME and OUR ECONOMY!!!!
example: they are so hard up for money right now, they will sue a good paying customer(ME)for being ONLY four days late. YES... they will lie under oath and win a JUDGEMENT. This is,because you will have a slim chance in finding legal council to represent your case when they learn its against CITI, no matter how deep/supporting your evidence will be...They will turn AWAY. (perhaps maybe that is why CITI IS TO BIG TO FALL) Does corruption ring a bell? Is it possible?
I have paid $300.00 in consultiation fees for two diff. attorneys. in which along with all of the other internet options and countless calls to local attorneys in my area i am adviced over and over and over and over that my best option is to file Bankruptcy...(not fight for consumer justice) SINCE "I" do not feel that it is fair to myself, my children, my other CREDITORS but MAINLY because i did owe CITI money and want to give "what I owe " .......BK is not for ME.....
It has been so HARD FOR ME...... so HARD.... but I am not giving up... I filed an appeal and I will continue to dispute this debt in the amt owed until SOMEONE will actually listen and acknowledges the DOCUMENTS that SUPPORT what I have actually paid. (I'll set aside the "UNFAIR TRADE PRACTICE" and FTC ACT' complaint for now along with the proof of unethical,immorral wrongful acts committed by a local branch.)I will focus on resolving my debt first and foremost. This is my GOAL. I can afford to pay.
THE MAGISTRATE JUDGE ordered me to pay what CITI says I owe without prior review of my case since I was placed on the COURT CALENDAR at roll call.
Yeah Bankruptcy may be an the easy way out but I am a FIGHTER not a QUITER...
Either way I have full intent on paying CITIFINANCIAL.. whether it is what I owe or what they say I owe...and then focus on my CONSUMER RIGHTS....
I LOVED THIS ARTICLE....why i haven't found it yet after HOURS of browsing is puzzeling but finally some relief.
Posted by: A concerned CONSUMER'S explanation of why it may take longer for CITI to fall. | March 07, 2009 at 06:40 AM
I was doing a debt re organization plan.Citi didn't
like the arrangement,won their judgement against me.
No choice,but declare bankrupcy.Now they have an attorney calling my number.Hours cut,off one week a
month.What do you do?
Posted by: Randall | August 08, 2009 at 03:11 PM