Breaking Up Citi?
Felix Salmon says it’s time to find an orderly way of pulling the plug:
The other bit of good news is that Citi’s domestic retail bank is relatively small, by BofA/JPMC/Wells standards. A buyer could be found for it relatively easily; if no US bank wants to step up, there are always the Canadians, or maybe Santander.
The Smith Barney wealth-management operation is already halfway out the door; the investment bank could be sold to its own managers, much like Neuberger Berman. The credit-card operations and Banamex could be IPOed; the Polish bank could go to any number of European banks looking to expand east of Germany.
I’m sure there would be feverish bidding for the hugely valuable Citigold brand globally; once Citi’s Japanese operations were sold off, the rest of Citi’s global presence could either be absorbed into the investment bank or quietly sold off or shut down. I’m sure there are other bits and pieces I’m forgetting about here, but the point is that on a sum-of-the-parts basis, Citi’s actually got some pretty valuable assets; the problem is of course on the liability side of things.
So either the government outright nationalizes Citigroup and then sells it off, or else it provides debtor-in-possession financing within some kind of Chapter 11 proceeding.
Either way, the world would see the failure of a too-big-to-fail bank, and that would in turn be salutary for anybody still trying to make money from the moral hazard trade.
I’m a little bit skeptical that you really could sell off all that stuff in the current climate. Or, at a minimum, that you might not be able to sell off significant chunks of it. But when you talk about a Swedish-style nationalization scheme, the plan is always to sell off as much of the nationalized assets as quickly as possible. The idea is that with the government in control, it can sell enterprises that have value, recapitalize enterprises that would be saved by recapitalization, and kill off enterprises that can’t be saved through any kind of feasible injection of capital. The goal isn’t to have the government running all the banks permanently, it’s to create a situation where people know that the banks are sound. In particular, where they know that the banks that have been rescued have really been cured rather than just put on life support. At the moment, nobody knows which banks’ demise has really been avoided and which merely forestalled.
13 Responses to “Breaking Up Citi?”
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January 13th, 2009 at 9:42 am
The real question is do they net enough from these sales to recoup the $$ the government loaned them?
The real danger is we are left with a Citi that is the right size to fail, and they default on the outstanding $45,000,000,000 that they owe the government, and all of their valuable assets are no longer there for the government to cash in on.
Its sort of like this, I work very profitable business we make widgets and gadgets. The gadget business isn’t so hot and it is losing a ton of $$ so the government has to come in and bail out the whole company to the tune of $10 B. The company applies that debt to the gadget side of the business and the widget side is still in great shape. Well companies stock has no value at the moment so the stockholders decide to sell off the widget business to the guys working there (who are most likely stockholders) for a nominal sum. That leaves the unprofitable gadget business on the hook for the governments $10B, well they can’t pay so they default. Meanwhile the widget guys are creaming themselves because they got a valuable asset for next to nothing and escaped the risk of the government loan. How is that not stealing $10B from the government?
January 13th, 2009 at 10:22 am
I’m sure there are other bits and pieces I’m forgetting about here, but the point is that on a sum-of-the-parts basis, Citi’s actually got some pretty valuable assets; the problem is of course on the liability side of things.
Yes, that is indeed the problem and that realization makes the rest of the passage inane.
January 13th, 2009 at 1:47 pm
The sooner “too big to fail” exits our lexicon the better.
No business should EVER be allowed to grow so large that it’s “too big to fail”
We need a justice department that knows how to wield the anti-trust cudgel.
Citi, Chase, BoA, Wells all need to be broken up.
AIG should be chopped up into multiple pieces and sold back off.
Chopping Citi up and selling it off is a good idea, provided that none of the pieces go to another “too big to fail” institution.
When we have companies that are too big to fail, it means we’re allowing oligopolies and cartels to run the show, and that’s not healthy for any economy.
While Justice is at it, it’s time to break up the big oil companies as well.
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