The Citi Franchise

Jeff Matthews has a post today urging the nationalization of Citigroup, entitle "Zombies Must Die". One of his points is that there's very little "franchise value" in Citi:

In light of the persistent drain of both goodwill and cash, will Citigroup's so-called "franchise value" prove any more enduring than the "franchise value" of Washington Mutual, or Wachovia, or Lehman Brothers proved to be?

There's an answer in this morning's WSJ article:

Mr. Pandit last month told senior executives that the first quarter is essentially do-or-die: Citigroup needs to turn a profit to persuade the government and investors that it's viable.

My guess is that unless there's a spectacular market rally next month, Citi will lose money in Q1 -- especially if you first strip out any "profits" it makes from marking down the market value of its liabilities. And both the government and investors will conclude -- if they haven't concluded already -- that Citigroup is not a viable franchise.

Part of the problem is that economies of scale are a curious thing, in banking. Yes, a bank with $10 billion in assets has economies of scale over a bank with $100 million in assets. But once you get into the realm of what the Fed considers "big banks" -- anything with over $100 billion of assets -- you generally start seeing diseconomies of scale. And when assets reach $1 trillion or thereabouts, banks start to become positively unmanageable -- it's simply not possible to effectively police risk in a financial institution of that kind of magnitude.

Very large corporations love megabanks, because they can borrow billions of dollars at a time. But counterparties and regulators don't love megabanks at all, because they're so opaque. And right now the fate of megabanks like Citi is in the hands of their counterparties (who are marking down the megabanks' liabilities) and their regulators (who are moving steadily, if slowly, down the path marked "nationalization").

As for consumers, this summer I found it impossible to deposit a dollar-denominated Citibank check into my US dollar Citibank checking account at a bank called "Citibank" in Berlin. Simply couldn't be done. The brand value of the Citibank name is non-negligible among the global upper-middle class, which has historically loved Citigold and all it stands for. But among retail domestic banks, Wachovia, for one, has a much stronger brand -- which is one reason why Citi wanted to move its retail operations to Charlotte when it thought it was buying Wachovia.

And this bit of the WSJ article made me giggle:

Following his meeting with Mr. Summers last week, Mr. Pandit flew to Mexico City, trying to calm Banamex employees who were convinced that the U.S. government would force Citigroup to sell the business.

Banamex employees would love Citigroup to sell the business; many of them are even interested in buying it themselves, if they can somehow raise the funds. Banamex is the one part of the Citi empire to keep its own name rather than be rebranded as Citibank. There's a reason for that: when it comes to brands, bigger does not necessarily mean more valuable.