CitiGroup Becomes Our First (or Third?) US National(ized) Bank

Last week's events concerning Citigroup and Bank of America are surely historic and momentous.


Let's consider Citigroup's situation first. Citi was the first of the large banks to be given the sweetheart deal of US government investment beyond the initial TARP funds, with the government taking losses above some maximum level.

Friday's Wall Street Journal reported that,

"The rescue didn't shake Mr. Pandit's confidence in his strategy. He framed the chaotic week as a reflection of the overall financial industry, not Citigroup. "He had a spring in his step," said a Wall Street veteran who met with Mr. Pandit on Nov. 25. "You could not tell that he is a CEO that's under pressure." "

Maybe he wasn't. Pandit never seemed to really, seriously embrace the reality of the crippled institution he had been allowed to lead.


Yet, only a few months later, we see Citi dismantling itself with a rapidity only those like me and other observers of the long-ailing bank for years, have previously advocated.


Pandit, the bank's CEO of only a little more than a year, has suddenly reversed course on the subject of preserving Sandy Weill's treasured financial supermarket, both by shedding the brokerage unit via a joint venture with Morgan Stanley, and the creation of a 'bad bank,' to free what's left to become, again, Citibank.


What caused the sudden change of mind? Vik's newest, large governmental shareholder used some muscle, indicating that the cookie jar of bailout money was closed until and unless Citi finally did something to resolve its mess of an operating structure and business mix.


According to the Journal article,


"By mid-December, Mr. Pandit and his team realized the company was heading for a big fourth-quarter loss, according to people familiar with the matter. Over the course of a week of meetings, it dawned on them that they needed to at least symbolically break with Mr. Pandit's past insistence on preserving Citigroup's business model, these people said."


Indeed.


But let's be clear about what has transpired. After years of flattened returns under Rubin, Weill and Prince, nobody thought to actually fix Citigroup by undoing Weill's tangled business conglomeration.

No, instead of letting market forces, via its mediocre total return performance, push it into either divestiture, or a merger with a healthier bank, the federal government first bought preferred equity in it. Then gave it even more money, and backstopped some of its potential losses.

Then the Feds began to exert the sort of influence that they promised only last fall that they would not, in fact, use.

If you had any doubts about Citigroup, or the other large commercial banks effectively being nationalized, this should dismiss them. Taxpayers, via the Treasury, now own the real market value of Citigroup. It's basically our bank.

So our government is now calling the shots. How long before my various posts on the evolving nationalization of our commercial banking sector are realized?


The Journal article ends with the incredible observation,


"As word of the looming fourth-quarter loss surfaced earlier this month, Citigroup's shares tumbled to their November lows. Colleagues said Mr. Pandit remained in high spirits, pressing his lieutenants to remain focused on their work."


Maybe Vik should change his name to Chance Gardener, the equally-clueless and improbable protagonist of Jerry Kozinski's "Being There."