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Citigroup (NYSE: C  ) is headed back to square one. Apparently, mulligans are allowed on Wall Street.

For starters, the beleaguered bank sealed the deal on a joint venture with Morgan Stanley (NYSE: MS  ) to divest its Smith Barney asset-management unit. We've known that for a few days now, of course. That real groundbreaking news is that beyond Smith Barney, Citi's taking a hatchet to many other chunks of its more than $2 trillion medley of assets.

According to The Wall Street Journal, Citi will unveil a complete overhaul of the supermarket bank structure pushed over the past decade, shifting its focus to "wholesale banking for large corporate clients and retail banking for customers in selected markets around the world." Translation: More responsible lending, less financial sorcery.

The new structure might be something akin to JPMorgan Chase (NYSE: JPM  ) or Bank of America (NYSE: BAC  ) -- primarily old-fashioned commercial banks, with a smidgen of other products on the side. Sleeker. More organized. More focused. Less bumbling. 

Good news? It's better than the "cross your fingers, close your eyes, and hope for the best" strategy Citi had been pursuing. Why the company took more than $20 billion in losses, $45 billion in government handouts, and far more than a year to realize that its business model was defunct is anyone's guess.

And maybe that's the point. Citi's going to start shedding bad assets smack in the middle of the worst recession in decades. There are two ways to do this: Sell assets to other companies/investors, or spin off units as independent bodies.

The first strategy, to be frank, doesn't stand a snowflake's chance in hell. After the Smith Barney deal is completed, Citi will have two major divisions it could sell off: global consumer banking, and markets and investment banking.  Here's how those two look in terms of net profits after tax:


Most Recent Quarter

Trailing 12 Months




Global Consumer

($1.1 billion)

($92 million)

$7.9 billion

$12.1 billion

$10.9 billion

Markets & Banking

($2.0 billion)

($10.1 billion)

($5.3 billion)

$7.1 billion

$6.9 billion

Both are complete and utter disasters, and neither has any light at the end of the tunnel. Trying to sell bad assets in a bad economy is like trying to sell broken jetskis to the Inuit -- there's no market for them, even if they weren't junk to begin with.

The second option, spinning off divisions, could create a "good bank, bad bank" structure, forming a dumping ground for bad assets and giving more promising assets a place to recover without the burden of toxic siblings. However, the "bad bank" could conceivably become so "bad" that the only organization strong enough to ingest its woes -- the U.S. government -- might have to swallow the entire entity. Two bailouts and nearly $300 billion in guarantees later, I doubt Citi could pull that off without a hitch.                      

So is all hope lost? For Citigroup, perhaps, but I'm more optimistic on what this Great Unraveling means for the finance industry as a whole.

Back to Day 1
Citigroup was formed in October 1998 after merging with Travelers Insurance -- thumbing its nose at the depression-era Glass-Steagall Act that prohibited commercial banks and securities firms from joining forces. By November 1999, Glass-Steagall was toast, paving the way for banks to stick their fingers in just about anything that could be monetized.

Not only did the repeal of Glass-Steagall let the finance world run amok, but it also allowed firms like Citigroup to grow naively and dangerously large, paving the way for 2008's favorite phrase, "too big to fail."

What's encouraging about Citi's unwinding is that it's the first time since the credit crisis began that a major firm has downsized and simplified itself in a meaningful way. Save for the bank-holding-company scramble that turned Goldman Sachs (NYSE: GS  ) , American Express (NYSE: AXP  ) , and the finance arm of General Motors (NYSE: GM  ) into "banks" (and really made them more complex), Citigroup's reformation is the first indication that Wall Street may finally realize the old way of doing business does not work, and serious changes are in order -- the kind of changes that may include throwing up your hands, admitting defeat, and salvaging what's left of a broken business.

Ironically enough, after pulling strings and fighting politicians to repeal Glass-Steagall a decade ago, Citigroup is essentially reinstating the rules by dismantling itself. Let's hope that's a sign of things to come.

Further fiscal Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor selections. American Express is a Motley Fool Inside Value pick. The Fool owns shares of American Express. The Motley Fool is investors writing for investors.

Read/Post Comments (19) | Recommend This Article (105)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 14, 2009, at 12:24 PM, kamuirei wrote:
  • Report this Comment On January 14, 2009, at 5:21 PM, Rasbold wrote:

    Looks like old Hongkong-Shanghai may be next. You know them...there the guys who bought every possible ARM mortgage that was indexed on the 6 month LIBOR (including mine). Now that rate is so low, payments are actually going down! When a bank like HSBC says they may need 30Bln to cover, the whole system is in trouble.

    May your Dow never Jones - whatwouldwarrendo dot com!

  • Report this Comment On January 14, 2009, at 8:29 PM, russblatt wrote:

    Back in 98-99 there were few people not trumpeting Sandy Weill's strategy as the new model for financial services. I wonder how the Fool treated the new Citigroup back then?

    Also, JP Morgan Chase and Bank of America are now more like Citigroup than Citigroup with their takeovers of Bear Stearns and Merrill Lynch, respectively. Citigroup long ago bailed out of both the P&C Insurance and the Life Insurance markets, so the one-stop shop ideal had been exploded prior to the recent downturn.

    Many regional and sub-regional banks continue to aspire to the Citigroup model, although with insurance brokerage versus insurance underwriting in the mix. Proper management can make this work. Citigroup lacked that and the controls necessary to backstop customers and shareholders. The most telling example is that the risk management team didn't include a real estate downturn in their models.


  • Report this Comment On January 15, 2009, at 12:30 AM, TMFDiogenes wrote:

    Morgan, if it were possible to rec this article 8 times i would.

  • Report this Comment On January 15, 2009, at 9:59 AM, TDevils13 wrote:

    So is it time to sell off C before it goes to $0?

  • Report this Comment On January 15, 2009, at 10:40 PM, madhavshivpuri wrote:


    I see very little future for Citi. Forget the shareholders, even the employees should run for cover. Its Armageddon for Citi. The CEO's over the years have cobbled together a giant company that does not make sense to even the management. When one unit makes profits, another is suffering from a loss. When one region is performing well, other is losing money.

    Now they are going to severe the ailing parts to make sense. In the process the management will be selling of money making divisions because to focus on their core competency of retail banking etc. Will the share price stay the same or improve? What do you reckon?

    See my blog on the CEO's making money in good times and bad, while the investors always have a lose-lose situation:

  • Report this Comment On January 16, 2009, at 4:32 AM, PauvrePapillon wrote:

    From Jim Cramer (30 November 2008):

    “I’m not a fan of Tim Geithner, the Treasury secretary-designate, in part because he was a key Wall Street regulator as head of the New York Fed, an oxymoron given the totally unchecked recklessness of Bear, Merrill, Lehman, Citigroup, and just about everyone else in his purview. But he’s got the respect of Wall Street and the ear of Obama. After several miserable attempts by the Bush team to revive the banking industry, Geithner’s recent Citigroup bailout seems to have created a template that creates instead of destroys value.”

    Oh really?

  • Report this Comment On January 16, 2009, at 2:43 PM, JetsNeedVick wrote:

    "The second option, spinning off divisions..... I doubt Citi could pull that off without a hitch"

    I'm new to the site so I don't know if you update articles like this when new information arrives. I'm sure we would all like to see, now that the doubtful has happened, what you think the hitches will be.

    Also, does anyone know what happens to my Citigroup stock? Do I get equal shares in toxic and less-toxic new organizations?

  • Report this Comment On January 16, 2009, at 3:04 PM, cmfhousel wrote:


    Thanks for your comments. I certainly don't see the doubtful as happened. You left out a key portion of the quoted section:

    "However, the "bad bank" could conceivably become so "bad" that the only organization strong enough to ingest its woes -- the U.S. government -- might have to swallow the entire entity."

    I still see this as a strong possibility, especially that Citi's break up does indeed look like a "good bank, bad bank" structure.



  • Report this Comment On January 16, 2009, at 3:17 PM, pethier wrote:

    My Citibank is worth so little now it's not worth the trouble of selling it. I'm going to gamble the pittence I have in Citibank just to see what happens. If it goes to zero it would be a tenth of a percent of my portfolio loss.

  • Report this Comment On January 16, 2009, at 5:32 PM, JetsNeedVick wrote:

    Thank you for your response Morgan. I just read Neel Kashkari's "Review of the Financial Market Crisis and the Troubled Assets Relief Program" on the treasury website and he pointed to dropping real estate values as the main problem here, not the derivitive holdings that can't really be valued properly.

    So what I'm confused on is that only a fraction of these troubled mortgages have been foreclosed, and on those that are, the houses are selling for 80% of the mortgage value. Reports today said that 1 out of 10 mortgages are behind in payments or worse.

    So to my inexperienced way of thinking, losing 20% of the value on 10% of the mortgages is not as devistating as the market reflects.

    GAAP may require writedowns for now, but in the end it seems to me there is a lot of valuable collateral that will go back on the books down the road.

    What am I missing here? Maybe someone just needs to point me to some educational material on this.

  • Report this Comment On January 17, 2009, at 10:59 AM, ws6tester wrote:

    So if govt takes over Citigroup, will the treasury collect my card balances each month? If I'm late with payment will the relentless IRS be their strongarm collections agency? Good times. I say the government needs to take some notes from our doctor's and pharmacists. Our country has an infection. The doctor (bernanke or whoever else will be there) evaluates the symptoms and prescribes an antibiotic (regulation, legislation, rates, logic, etc). Then the pharmacist (congress) receives the prescription and administers the antibiotic. The antibiotic distributes throughout the body killing off infectious cells (risky lender practices) as it can. Soon the number of infectious cells are reduced and the body can then fight back and heal itself. I'm no doctor and probably oversimplified the treatment, but I can't do any worse than our current system has. But who could afford to pay insurance for the doctor to treat you? We may need an ER.

  • Report this Comment On January 17, 2009, at 11:03 AM, ws6tester wrote:

    I think right now we have good grounds for a malpractice suit.

  • Report this Comment On January 19, 2009, at 2:02 PM, BlackBlueBerry wrote:

    Great analysis of CITI's woes by Fool Morgan Housel. BUT . . . I was scanning and misread read his line "By November 1999, Glass-Steagall was toast, paving the way for banks to stick their fingers in just about anything that could be monetized.:

    I thought he said that Citi's dirty old men were busy sticking "their fingers in just about anything that could be MOLESTED." (Funny, but maybe my error really told the story.)

    Wonder how often -- thanks to an error -- we so-called serious investors put our money into the wrong stock at the wrong time because we misread a ticker symbol or a price move or an earnings projection?

    Anyone out there in the Foolosphere ever made real money from an embarrassing error?


  • Report this Comment On January 19, 2009, at 8:10 PM, LukeVaxhacker wrote:

    It's always funny how the analysts (and you guys) forget about a certain part of Citigroup, namely:

    (Warning - I'm pretty sure that headquarters has been editing this entry)

    The people who *don't* forget them are the ones with the sales contracts.

    I hope this doesn't look too much like an ad to the regulators (although to the peanut gallery, it probably does... :) ).

  • Report this Comment On January 20, 2009, at 9:55 PM, GigMaster wrote:

    Citi Bank must be nationalized, dismembered and sold. Same with Fannie & Freddie and BAC. The sooner the Govies get to it, the better off we'll be.

    After they nationalize them, the Government can put all the toxic assets into receivership and deal with them one at a time.

    Shareholder equity would evaporate. Bond holders will be paid from sale proceeds, and life would go on.

    As for these glorious executives: Take 'em down and throw them out!

  • Report this Comment On February 23, 2009, at 7:21 PM, FoolishLane wrote:

    Morgan and others,

    I am a Citibank customer and own a CD account with them. Do you suggest that I cancel and withdraw my funds from them? I could get a penalty on the CD. Is it worth it?


  • Report this Comment On February 23, 2009, at 9:26 PM, jesse2159 wrote:

    Citi has always been a bank on the edge. In the 1950's and 60's it often financed military governments in South America and almost as often lost billions when the governments failed and the new dictators refused to pay off the debts.

    Simply put, this time it stepped on it's dick and no amount of US bailout funds will make it whole. I worked for them from 1963 to 1967. It was a cold ruthless bank then, and is still a cold ruthless bank now. Don't nationalize it. Don't buy it's bad debts. Don't convert bailout funds to common shares. Let it go bankrupt.

  • Report this Comment On May 20, 2009, at 2:17 AM, AiyanaG wrote:

    Financial assistance like credit cards have been in demand since lots of people are now in need of money that would help them in times of emergency situation. But there are some lending companies that are luring their consumers into debt trap. It’s a good thing that the CRL takes a stance with what resembles a common sense approach; a call to action regarding something to do with the problem. (Now we have to deal with the horsemen, the rain of fire, and the end of days.) The CRL, or Center for Responsible Lending, has taken aim at credit cards by sponsoring HR 627, or the Credit Card Accountability Responsibility and Disclosure Act of 2009. The Credit CARD Act, as it's called, could ensure more fairness in how card companies deal with customers, and limit things like hidden fees and retroactive interest rate increases. President Obama is on board. The CRL not going after <a rev="Vote for" title="Center For Responsible Lending Attacks Credit Card Cos." href=" loans</a> and targeting an actual predatory lender – it's about time.

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