Citi to break up in latest rescue plan
It's just two months since we reported a jump in Citigroup's share price of 60% as a rescue package was unveiled. But the picture was falsely rosy and now it's time for Plan B. And it's not a pretty prospect.
CitiGroup has announced losses of USD8.3 milliard - just for Q4 2008. This, despite what is supposed to be a new air of openess in US banking, was bigger than expected. How? Why? Surely by now banks have worked out their position and their downsides and are delivering accurate information? Apparently not.
The news trounced banking shares around the world - if Citi, having already been in so much difficulty - had failed to properly warn the market, then how would the rest of the sector fair?
The answer, as we know, is badly.
For Citi, the results have led to Vikram Pandit, Citi's CEO, announcing the break-up of the giant group. Five losses in five quarters have shaken the bank to its core - and it is clear that, even now, its senior management still do not know what lurks in the more remote recesses of its operations. PAndit says it's not his - or Citi's fault: ""unprecedented dislocation in capital markets and a weak economy," is to blame, he said.
But none of that was unexpected.
The plan, as Pandit explained it, is to separate the commercial banking business from the brokerage and asset management divisions. That, astute readers will note, undoes much of what the bank has done since the passing of the Gramm Leach Bliley Act.
The big question for US banking now, then, is whether the Citi move is suggesting that complex financial institutions don't work.
But a more relevant question is this: is the Citi move just a way of saying that there are areas of business that should be allowed to be high-risk - and therefore, by definition, prepared for failure?
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