Citigroup Too Big to Succeed, Time To Break It Up

Today’s bailout of banking monster Citigroup seems particularly limp wristed – no resignations of senior management, an unenforceable ‘promise’ that bonuses will be scaled back, and the US government buying preferred shares paying only 8% annual dividend (which makes the Barclay’s middle east injection at 14% look like robbery).

So is that it then? Are we really prepared to let a light wrap on the knuckles stand as the sole punishment for the transgressions of a bloated, failing bank that deliberately plunged into the CDO market head on as a way to boost short term profits, and whose former CEO Charles Prince described his strategy last summer thus: “as long as the music is playing, you’ve got to get up and dance. We’re still dancing”?

Apart from the fact that current Citigroup CEO Vikram Pandit has lost $4,110,000 in the last week and a half after courageously buying 750,000 shares in his own company on November 13 as a vote of confidence/pain sharing measure, it seems there’s a fair amount more that needs to be done to make sure Citigroup is punished, and the lessons of the bank’s failure learned rather than forgotten (and then, you would presume, repeated). So what should be done?

Vernon Hill summed it up yesterday on Seeking Alpha, with this little patch of straight talking doom:

“We now see the good Citi’s size has done for investors: the company has an incoherent, unworkable business model. It is run by a senior management team that’s largely unproven, with scant experience operating a large financial institution. And the company’s risk controls (if the past few years are any evidence) are hopelessly inadequate to the task. While the conventional wisdom says Citi is too big to fail, the reality is it’s too big to manage. As a result, the company has become a publicly traded incarnation of Murphy’s Law: anything that can go wrong almost certainly will-and probably sooner rather than later. And $25 billion in TARP money isn’t going to do much to turn things around.”

I still remember traders murmering in early 2007 about the low quality of graduates Citigroup was hiring, and the exhorbitant ammount of money they were paying them. That strategy of big-spending-small-thinking-economic-incompetence seemed to be still chugging full steam ahead over the last few months with the Citigroup snapping up piles of Lehman’s rejects. One Lehman’s employee, an acquaintance of mine, was offered more money to join Citigroup following the demise of his own bank.

So the only solution, once all the dust has settled, seems to be to force through some form of de-merger for this ridiculous, irresponsible business. Hopefully the current bailout won’t help CEO Pandit to fend off calls for a breakup of the company; if it does the Fed should be ashamed of itself for supporting such a failed business model. Start sharpening your axes.

Posted by Daniel Stacey in Hot Money | November 24, 2008 10:51AM |