Citigroup-Chase Merger: An Idiotic Idea

Thursday's Wall Street Journal carried a short piece about this idiotic notion in its 'breakingviews' column. Article authors Rob Cox and Robery Cyran float the absurd notion that two of the countries three largest banks could easily merge, and, further, there would not be regulatory and Congressional outcry.

Apparently, according to Messrs. Cox and Cyran, the mere fact that Citi currently lacks a CEO, and Chase does not, is worthy of advancing the idea of this merger. Further, they are obviously enamored of Dimon, Chase's CEO, writing,

"Not only did Mr. Dimon spend more than a decade carrying Sandy Weill's bags on the shopping spree that build Citigroup, he also has made the financial-supermarket model work for his current investors. Citi shares are down 31% in the past four years, J.P. Morgan's are up 24%."

As I wrote in this post in late October,

"What I believe has occurred at Chase is an initial reduction of discretionary and, then, core expenses by Dimon soon after his arrival at the bank. This temporarily swelled operating margins, as revenue growth crested against a lower expense base. As revenue growth has been affected by the cost-cutting, it has slowed.

Personally, I doubt that Dimon knows much that he did not learn from Weill. His signal achievement since being tossed out of Citigroup consisted of giving BancOne the "Weill treatment." It is not yet clear he's done anything more at Chase, nor that he is capable of more, either.

It would take at least four years of consistently strong revenue growth at Chase, with corresponding NIAT growth, before I would believe that Dimon is capable of leading a financial services conglomerate to consistently superior performance, either fundamentally or technically."

Dimon has in no way yet proved he can grow Chase and deliver sustained, consistently superior total returns for his shareholders. To say he carried bags for Sandy Weill is no compliment, given the fate of Weill's spawn, Citigroup.

In this recent post, I noted, using this same chart as appears nearby,

"Even Chase's price curve indicates that the basis of its current five-year outperformance of the market is due largely to a few months in mid-2003. Which was prior to Dimon's arrival at Chase as CEO. Since then, it's performance has been somewhat flat, and not materially better than the index's, overall, with a significant period of falling returns, from early 2004 to late 2005."

But, beyond Dimon and Chase, the chronic underperformance of the S&P500 Index by our nation's money center banks is widespread. As I wrote in that prior post,j

"Commercial banking, in general, among the remaining money centers, isn't a good bet to beat the S&P500 anyway. It's not just Citi's problem.As the nearby, Yahoo-sourced price chart for Citi, Chase, BofA, Wachovia and the S&P500 for the past two years shows, none of the banks has outperformed the index. Citi is the worst, by far, Chase the best of the mediocre lot."

As my old boss and Chase Manhattan Bank Chief Planning Officer used to say,

'All you get by merging two or more mediocre money center banks is one great big mediocre money center bank.'

And probably even less than that. If you think Citi's been a mess so far, try doubling its asset size via a merger with Chase and see what happens. It'll be an unmitigated disaster.

The putative savings Cox and Cyrman ascribe to such a merger, 15% of noninterest expenses, or some $93B, is rather similar to those static models that the CBO runs when analyzing the effects of tax cuts. They assume ceteris paribus, when that won't be true.

My guess is that the the 15% estimate comes from mergers of much smaller, simpler banking unions. Chase and Citi have, between them, a wide variety of businesses, many of them the backbone transactions and clearing functions which have made money center banks so special over time.

To even suggest that Dimon, whose banking background is actually quite limited, compared to his extensive time at Weill's feet during the wire house rollups, could even come near pulling off such an integration is simply laughable.

And then, honestly, who is stupid enough to think the Fed and other regulators would simply let two of the nation's largest five commercial banks, in the same city, merge?

This piece was about the wackiest I think I've seen in the Journal in ages. Don't they have better uses for their space?