We’ve heard the phrase Citigroup is “too big to fail” a lot in the last few days. The proper phrase should be Citigroup is “failing because it’s too big.”
Somehow the analysis applied to automakers has been absent from banks. No one is able to watch the far-flung operations of myriad subsidiaries in 100 countries and adequately assess the risk.
Now that the federal government has made us all owners of Citibank and several other behemoths, the Treasury Dept.’s first goal should be to spin off the subsidiaries of Citibank and several other banks which will topple behind it as initial public offerings. That will recapitalize the constituent parts, revive the markets and keep the customers of the relatively profitable subsidiaries.
Eventually this would have the impact of restoring the firewall between risky investment houses and consumer banking, which Citigroup first burst through in the 1990s. They should likewise be the first patient to take the medicine for relieving this illness.
Here are some of the parts:
Citicard, the nation’s largest credit card issuer with 100 million accounts.
Primerica, one of the nation’s largest insurers with 100,000 agents
Smith Barney brokerage
Citi Private Bank
If it was shorn of all that, there would still be one of the largest banks in the country left. But even that is too big. Citibank should be divided into regional divisions and also spun off.
Those transactions could likely yield $300 to $400 billion, while giving current shareholders a basket of valuable stocks to replace their worthless Citi shares and even enough to cover the “toxic” collateralized debt obligations.
The premise behind the growth of Citigroup has been recognized as bankrupt since the 1960s when Gulf & Western demonstrated that megamergers rarely gave shareholder value. AOL Time Warner reinforced the point in the 1990s.
For banks, the Federal Reserve has documented that the larger banks become, the less they lend to small businesses and consumers. So giving $125 billion to nine of the biggest banks in order to promote more lending was a fraud to the American taxpayers. Paulsen and Bernanke have been exposed as economic quacks, at best.
The silver, maybe even gold plated lining, is that perhaps there will be the awareness at some point in this or the next administration that these companies should fail, while the constituent parts continue to provide service to their customers.
The taxpayers win, the shareholders win, the employees win and the foreign banks underwriting it all have the best chance to get their money back.
We should never let any bank become “too big to fail” again.