Is Citigroup Too Big?

Sandy Weill thinks that Citigroup should be big, and gave this quote to Bloomberg:

Being large and having a strong balance sheet enables a company to withstand the financial turmoil that happens every now and then in global markets.

The quote did not go down well with Tom Brown, who responded vitriolically:

What he means is exactly what we've been saying here for months: Citi has gotten so big, and lumbering, and broadly diversified that it simply can't generate meaningful organic growth anymore. The law of large numbers won't allow it. Great, Sandy! If all I wanted from my investment was an instrument that would "withstand financial turmoil" I'd simply buy Treasury bills and be done with it. Presumably Citigroup's shareholders want something more than that.

They're both wrong.

Weill is quite right that if a bank has a strong balance sheet, that will allow it to withstand financial turmoil. That's what a strong balance sheet is. Being large, however, protects you only in the moral hazard sense that regulators are likely to consider you "too big to fail". Which will come as no consolation to shareholders, who get wiped out in any bailout situation.

I think that what Weill means is that Citi is so enormous it is necessarily well diversified. It can't be brought to its knees by a property crash, say, or by a series of Latin American sovereign debt defaults, because it has its eggs in too many baskets. This is a fair point – but the same thing could be said of many much smaller banks.

What Weill does not mean is what Brown says he means, which is that Citi can't grow organically. Indeed, at this point, Citi is so enormous that it has very little choice in the matter: it's so big that it can spend $8.5 billion on 69% of Japan's Nikko Cordial, for instance, and no one so much as blinks. In retail banking, Citi is not as aggressive as its faster-growing rivals, and the solution to that problem is not to start buying those rivals, and it's not to spin off Citi's retail arm. Rather, it's simply for Citi to get more aggressive.

And Brown would do well to look at what the Law of Large Numbers actually says before he cites it. It's a law in probability theory, and it really isn't applicable to Citigroup at all.

As for the relative merit of Citigroup stock and Treasury bonds in a time of financial turmoil, on that question reasonable people can vary. Certainly the former has done much better than the latter of late.

The question isn't whether Citigroup is too big to grow – if the parts can grow on their own, then the sum of the parts can grow just as much. The real question is whether Citigroup is too big to manage, and whether it's possible to steer a ship that big and complex. But if HSBC isn't too big to manage, Citigroup shouldn't be impossible to control: they're not that far apart in size.

The difference is that HSBC has a corporate culture, while Citigroup still feels like a set of very disparate parts. If a strong leader could communicate a simple and effective vision for the company, the calls for its breakup would soon cease. But such people are hard to find.