Connecting the Dots: Is Citi Going Down?

Citigroup, whose ticker symbol is a memorable and simple C, is the classic “Too Big To Fail” financial institution.  If you are unfortunate enough to be a shareholder, though, you probably do not feel like you’ve been rescued.  Two years ago, your shares were valued north of $50.  Now they are struggling to stay above $5.

This plunge took place despite (some would say because of) extraordinary efforts by the Treasury and the Federal Reserve to keep Citi alive over the last few months.  Will Citi disappear like Bear Stearns and Lehman Brothers?  Probably not, but my guess is it will not survive in its current form.  The process may already be underway.

Today Citi confirmed it is in talks to sell its Smith Barney brokerage unit to Morgan Stanley (MS).  The price that is being thrown around is $10 billion, to be paid over a period of several years.  (I tried but could not confirm reports that the combined firm will be called the “Citi Morg.”)

This is probably a good move.  The “financial supermarket” concept is clearly dead, so there is no reason for Citigroup to distract itself with Smith Barney any longer.  Business will be much better if the bankers focus on being good bankers and the brokers focus on being good brokers.  The bigger question is whether we will get a chance to find out.  The $10 billion proceeds from this sale are a drop in the bucket next to the trillions in liabilities that will remain on Citi’s books.

Conspiracy-minded bloggers are speculating that President-Elect Obama’s desire to have the remaining $350 billion in TARP money available to him as soon as he takes office is related to an impending catastrophe that has not been publicly revealed.  A Citigroup failure would certainly qualify.  Under this theory, Citi is being pushed by the authorities to shed extraneous assets like Smith Barney in order to prepare for a more dramatic restructuring.  Another clue: the sudden departure of Robert Rubin from his perch on Citi’s board.

I personally would not cry if Citicorp went down in flames, but I greatly doubt such a thing will be allowed to happen.  Instead it will be chopped up into little pieces under federal stewardship and emerge from the crisis as a mere shell of its former self.  Not exactly capitalism at its best – but better than some of the alternatives.

Disclosure: no position