Monday, January 12, 2009

Citigroup: Now the bank is all but extinct

Selling 51% of Smith Barney only makes sense if Citigroup is going to sell 100% of Citibank (i.e., the rest of the firm) as well.

We know, or at least think we know the following.

  • Citi isn't desperate for capital. They just got a huge chunk from us taxpayers.
  • They aren't getting much cash in this deal, reportedly less than $3 billion. A pittance in the scheme of Citigroup.
  • This doesn't unload any troubled assets.
  • Smith Barney is a reliable earnings producer.

Selling Smith Barney doesn't solve any of their problems. It neither raises any capital to speak of, nor does it unload bad assets. And why sell now? Supposedly they are going to book some $10 billion in gains on the sale, but so what? No one is fooled into thinking that's real capital right? Valuation on the brokerage unit is got to be at all-time lows!

In fact, by selling Smith Barney, Citi is giving away deposits. Many Smith Barney clients use Citibank deposit accounts as a sweep vehicle. I haven't seen numbers on this, but a friend of mine who works confirms this is very common.

Citigroup isn't doing this to focus on its classic banking division, because Citi has been more of a investment and commercial bank than a retail bank for at least 15 years. This would be reversing a generation's worth of "progress" toward transforming Citibank. Citi doesn't have the branch network to suddenly become a serious competitor with Bank of America or Wells Fargo.

But it all starts to make sense if you assume that the rest of Citi is also for sale. Say the buyer is Goldman Sachs, who doesn't want Smith Barney's 14,000 brokers or their back office or their compliance headaches, etc. Goldman just wants the big fat bank and its deposit base to give them secure funding. To me I'd rather see Goldman buy up smaller banks with less baggage, but maybe Goldman expects some government help?

I just have the feeling there is more going on here than just Smith Barney.


Unknown said...

What if Citi is going to be the "bad bank" that Bernanke spoke about today?

Would kinda bug my friends who just went to work there...

Alex Morrow said...

From WSJ;

BUSINESSJANUARY 13, 2009, 3:18 P.M. ET
Citi Preparing Major Overhaul


Citigroup Inc., under pressure to rapidly downsize, is preparing to unveil a major reorganization that will mark a further step toward dismantling the financial conglomerate, according to people familiar with the matter.

In addition to spinning off the New York company's Smith Barney retail brokerage unit into a joint venture with Morgan Stanley, Citigroup is preparing to narrow its overall mission to two areas, these people said. The company plans to focus on wholesale banking for large corporate clients and retail banking for customers in selected markets around the world, people with knowledge of the discussions said Tuesday.

An agreement on the Smith Barney joint venture, which represents the first step in that process, is expected to be announced after the close of U.S. stock-market trading Tuesday.

The planned moves essentially undo large pieces of the financial supermarket created when Citicorp and Travelers Group merged in 1998 to form Citigroup. The shakeup is intended to slice about a third of the assets from Citigroup's balance sheet, now roughly $2 trillion in size, according to a person familiar with the company's plans.

Other businesses likely to be shed include Citigroup's consumer-finance operation, such as Primerica Financial Services and CitiFinancial, private-label credit cards and many of Citigroup's consumer-related businesses in Japan. Citigroup also plans to substantially trim its proprietary-trading activity, which had been consuming significant amounts of scarce capital.

The strategic shift is expected to be announced when Citigroup reports fourth-quarter results Jan. 22. A Citigroup spokeswoman declined to comment Tuesday.

Until recently, Citigroup Chief Executive Vikram Pandit had repeatedly backed the company's "universal bank" model. But with directors and executives now bracing for a fourth-quarter operating loss of at least $10 billion and federal officials worried about previous turnaround efforts, Citigroup has decided that more dramatic action is needed, according to people familiar with the matter.

Shrinking Citigroup won't be quick or easy. The company is assigning management teams to handle the gradual disposal of units and other assets, but a person familiar with the matter emphasized that Citigroup doesn't plan to engage in a "fire sale." Efforts to find buyers also will be complicated by rocky market conditions and the recession.

Citigroup already has pursued some pieces of its downsizing push. For example, executives have been trying for months to reduce its exposure to Japan, where rising defaults are hurting profits. Citigroup also has been searching for about a year to find a buyer for Primerica, which sells mutual funds, insurance and other financial products.

That auction hasn't resulted in a sale because of a scarcity of buyers willing to pay what Citigroup regards as a reasonable price, according to people familiar with the matter.

As part of the new plan, Citigroup executives are considering the possibility of creating what is known as a "good bank-bad bank" structure, these people said. Under that structure, Citigroup would create a new corporate entity to house what it regards as its core businesses. The entity would face accounting-related complications, and Citigroup hasn't settled on the approach, people familiar with the discussions said.

In recent New York Stock Exchange composite trading Tuesday, Citigroup shares were up 1.6% at $5.69.

Accrued Interest said...

Clearly a bad bank is a possibility. I also think there's been pressure from the government to do SOMETHING already.

Isn't it funny to remember that Citi wanted to buy Wachovia? As a tax payer, I'm glad WFC wound up winning that deal.

Alex Morrow said...

Sometimes even taxpayers catch a break

Rachel C Miller said...

Citigropu is one of the worst banks to work with. The government is as much responsible for allowing to be legal loan sharks. None of this has happened overnight, there has ben erosion to our economy since the 1970's. They don't hesitate to throw families in the street, turn off power evict people who have paid on mortgages for over 30 years, but they want to continue to use middle class tax revenue to bail them out. How Ironic!!! or not. As our goverment keeps printing money what are they setting our country up for? We are already in a vulnerable state. Lets just give them another 45 billion dollars, hey its only paper, that is write our dollar is only paper!
shares are less than 2.00, it's been said history repeats itself. The fact is you beat down the middle class you have eroded the system.