The End of Citigroup

Citigroup shares closed today at $5.60 apiece. Only twice in recent memory have they closed lower: on November 20 and 21. Back then, the parlous state of Citigroup's equity caused Treasury to implement an emergency bailout package. Today, the b-word isn't bailout, but rather breakup: the Marketwatch headline says that "Citi may be broken up, under government influence". As Roger Ehrenberg says,

We are now seeing the sequel to the original Citigroup drama, As the Stomach Turns.

We know that Rubin and Bischoff are toast; it's pretty clear that Pandit is toast, too. But Ehrenberg makes it clear that Citi itself is toast, or should be:

It needs to fail. Just not in the haphazard, destructive way that Lehman failed. It can be done much, much better.
Someone needs to take Citigroup out behind the barn and shoot it. Because if we don't, it just may kill us in the process.

The good news is that if Citi can stagger on for another week, we'll have a new administration in place which isn't as ideologically opposed to outright nationalization as the current lot. Citi could easily go the way of RBS, and there's no reason why it shouldn't.

But that's not the only option. 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.

Of course, the trick is to do the break-up in a slow and orderly fashion, and in this environment it's not clear that that's really possible. But something much more than a management shake-up is clearly needed: the problems at Citigroup are much too big and pressing for any executive team to solve, especially since there's no sign the company has a coherent succession plan in place for Pandit's departure. I'd say p=0.3 right now that Barack Obama's first major act as POTUS will be the nationalization of Citigroup. Yikes.