Industry Observers: Shouldn't Something Finally Change at Citigroup?

This week, I started working with AOL Money & Finance writing on two of their sites – DailyFinance and BloggingStocks. I’m looking forward to working with the talented and enthusiastic team there to produce great content, and to take advantage of the opportunities that the backing of a large platform offers.

A recent article on the increasing public pressure on Citigroup (C) CEO Vikram Pandit grew out of a conversation I had with Tom Brown, whom I’m greatly indebted to for the perspectives he has given me across a number of areas. Pandit, he said, would be the only large bank CEO replaced this year – this was shortly before the news broke about how heavily the Fed and Treasury leaned on Bank of America’s (BAC) Ken Lewis to save Merrill Lynch. In a small bit of irony, I found an article written by Tom Brown in 2005 urging the break-up of Citigroup via a note in BusinessWeek Online written by Amey Stone; Amey is now my boss.

After talking with Tom, I ended up speaking with Vernon W. Hill, who founded Commerce Bancorp – a bank I’m very familiar with, as it’s based just miles away from my home in southern New Jersey. Hill built Commerce into a bank with more than 400 branches, and the company was eventually purchased by TD Bank (TD) for $8.5 billion (by comparison, Citi’s current market cap is $19.2 billion). He has been a long-time critic of Citigroup’s management, although he was encouraged by four outsiders with substantial banking experience being added to the company’s board. One other thing that Vernon Hill said stuck in my mind, though:

Normally when you fail, things change… Every time there’s an economic problem in the world, going back to the third-world debt crisis, Citibank is on the verge of going broke.

That same day, Jim Grant of Grant’s Interest Rate Observer was on CNBC, lending some desperately needed deep thought to the typical banter. Grant brought up Citigroup and said almost exactly the same thing.

The Fed is undercapitalized in the way that Citicorp is undercapitalized… Citibank is a rogue bank. It has been on the verge [of failure] in every credit cycle going back at least to 1988… Oh, by the way, it goes back to the LDC crisis of the 70’s.

Brown, Hill, and Grant are extremely knowledgeable voices about the financial business; their sentiments align with an editorial entitled “Making Failure an Option” in the Wall Street Journal, which noted:

Citi has proven itself unmanageable by having already failed three times since the 1980s, requiring government bailouts in one form or another during the sovereign debt crisis in the ’80s, the 1990s real-estate bust and again, twice, during the panic of 2008. Its turnaround plan has also been less than impressively executed.

The definition of insanity, it is often said, is doing the same thing over and over and expecting different results. Perversely, however, Citi has actually used the repeated hand up (or hand out, depending on your perspective) from the government to become larger and more complex over time.

Credibility is the currency of a financial institution, and right now I don’t see how Citi has any. That is not meant as a condemnation, but a simple observation – people more intelligent than I am feel that the company is adhering to a broken business model. More importantly, however, there seems to be no indication that things are set to change. I’ll stop here and put this back to Citigroup: if you can communicate some idea of how you create additional value in your present form, please, do so. People are listening, and right now what they’re not hearing much to help your case.

Disclosure: None.

Comments

[ldavis:]

the former ceo of USBank was added to citi's board. He is no nosense and will simplify and deleverage citi. He will sell all non core businesses and perhaps sell their non US branches. Cut, cut, cut. In the world of banking, a smaller citi will be a potentially profitable citi

Jun 15 10:38 AM

[TraderRob:]

Smaller would be better... broken up and sold off completely would be best. Without one of the TARP banks failing, the shell game played by passing REO's (real estate owned property post foreclosure auction held by banks at unrealistic valuations due to FASB accounting revisions) between banks will tread on and maintain the price floor in real-estate which is above the fair market value for those properties. If the consumer doesn't bite and start buying homes, the bulge of assets will bloat banks and cause the weakest to fail or raise more money due to lower than necessary capital requirements failing to hold up.


On Jun 15 10:38 AM ldavis wrote:

> the former ceo of USBank was added to citi's board. He is no nosense
> and will simplify and deleverage citi. He will sell all non core
> businesses and perhaps sell their non US branches. Cut, cut, cut.
> In the world of banking, a smaller citi will be a potentially profitable
> citi

Jun 15 03:05 PM

[Long Islander:]

While well written, your piece adds nothing of value James. You simple repeat what Brown and Hill have been saying for months. Hill happens to say it on Brown's website so one need only visit one source to get the double-dose of negative Citi ramblings. Please don't write unless you have something new to say. You don't see that Citi has any credibility? Why? Because Tom Brown and Vernon Hill told you so?

Jun 15 10:25 PM

[James Cullen:]

Long Islander,
This is an observation from a number of people I've talked with; Tom Brown and Vernon Hill were the most recent and were willing to go on the record.
I saw Vikram Pandit was talking about the need to overhaul and simplify the world economy; what about his own company? Put differently, who thinks Citi has credibility -- many will say no, who says yes?

Jun 16 10:04 AM

[think befor...:]

You should write an article about how much you like JPM, that would be equally obvious to those who merely parrot what everyone else writes.

Jun 17 09:25 AM