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By Don Miller
Citigroup Inc. (C) Friday succumbed to the reality of its dwindling capital base and plunging stock price, announcing it is splitting into two separate companies in what amounts to a death knell for the "financial supermarket" model.
Chief Executive Officer Vikram Pandit's move will wipe out the legacy of former chief Sanford "Sandy" Weill, by creating "Citicorp" to house the New York-based company's global bank, and "Citi Holdings" for its "non-core" and toxic assets backed by the U.S. government.
"The financial supermarket was buried today," Bill Smith, founder Smith Asset Management Inc. in New York, told MSNBC. Smith, whose company owns shares of Citi, is one of many critics that have repeatedly called for a breakup.
Citigroup launched what some see as a desperation move to stanch the bleeding, after posting a fourth-quarter net loss of $8.29 billion. Citi has now racked up losses for the past five quarters and the company's stock has tumbled 43% in just the first two weeks of 2009. For all of 2008, Citi suffered a net loss of $18.72 billion, or $3.88 per share.
A diminished capital cushion and the reduced stock price forced Pandit to abandon Citigroup's 10 year-old strategy of providing investment advice and insurance alongside branch banking, stock underwriting and corporate lending. Now, he's jettisoning assets to free up capital and keep the bank out of bankruptcy.
The new Citicorp will include the retail bank, the corporate and investment bank, private banking for wealthy individuals, and global transaction services.
Citi Holdings will include Citi's asset management and consumer finance business, including CitiMortgage and CitiFinancial. It will also control Citi's 49% stake in the joint brokerage with Morgan Stanley (MS).
The move puts it in position to sell or spin off Citi Holdings' toxic assets to raise cash. The separation also will allow Citicorp to focus on standard banking practices like gathering deposits and lending.
"They are going to try to home in on what's worth something, and try and sell the pieces that they really can't value," Todd Colvin, vice president of MF Global Inc., said in a Bloomberg TV interview.
The company's new structure represents a step back in time to 1998, when banking giant Citicorp merged with financial services conglomerate Travelers Group. Travelers Group then consisted of an insurance business, an asset management business, retail brokerage Smith Barney, and the investment bank and bond trader Salomon Brothers.
The 1998 combination was Weill's brainchild, and was made possible by the partial repeal of the Glass-Steagall Act of 1933, which prohibited banks from dabbling in investing and finance.
As Shah Gilani reported on the disastrous consequences of banking deregulation in Money Morning last Tuesday, Congress passed the Gramm-Leach-Bliley bill in 1999, "at once doing away with Glass-Steagall and the 1956 BHC Act, and crowning Citigroup as the new 'King of the Hill.'"
The deregulation in the banking industry led, at least partially, to the current financial crisis, which so far has forced Bear Stearns and Lehman Bros. out of business. It has also marginalized the businesses of Citi and other investment banks and brokerages, including Merrill Lynch and Morgan Stanley.
But even the radical split Citi has undertaken leaves some analysts with severe doubts about the viability of its business going forward.
"It will likely be difficult for Citi to effectively dispose of assets and businesses in the current environment," Sanford C. Bernstein & Co. analyst John McDonald wrote in a Jan. 14 report. "Any new solution is likely to need an incremental infusion of common equity, either from the government, private investors or the public markets, any of which is likely to be dilutive to existing Citi shareholders."
News and Related Story Links:
- Money Morning:
How Deregulation Eviscerated the Banking Sector Safety Net and Spawned the U.S. Financial Crisis
- Money Morning:
Citigroup Lands Government Rescue Plan