Meet the New Citigroup

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It's been half a year since Citigroup (NYSE: C  ) announced plans to split itself in two, separating good assets from those that are, by most accounts, total crap. On Friday, the bank released information showing what those two siblings -- named Citicorp (the "good" bank) and Citi Holdings (the "bad" bank) -- will look like.

Before we dive into the numbers, we need to take a step back and look at Citigroup before the split.

After the financial system erupted during the Great Depression, Congress installed the Glass-Steagall act. Glass-Steagall prevented commercial banks from teaming up with investment banks and insurance companies. The idea was that commercial banks were so important to everyday Joes that they should be banned from taking undue risks.

And it was great while it lasted
Several decades of myopic thought later, Glass-Steagall was repealed, giving birth to Citigroup in 1998. Without regulatory handcuffs, Citigroup could slap together whatever it pleased: a commercial bank, a brokerage, home insurance, currency trading, credit cards, investment banking, wealth management, whatever. If it had a dollar sign in front of it, Citigroup wanted it. And it got it, eventually becoming the largest company in the world.

But these Napoleonic visions of dominance created a company that had no direction, focus, or niche. It just wanted to be big, outcome be damned. Rather than the "financial supermarket" its creators envisioned, Citigroup turned into a drunken brute that was impossible to manage with any precision.

A good example of this is when, in 2007, Citigroup was forced to repurchase $25 billion of trashed CDOs after selling something called liquidity puts. Liquidity puts gave investors the right to sell CDOs back to Citigroup at their original price if demand dried up. Which, you know, kinda happened.

When pressed about liquidity puts, Citigroup's then-Chairman of the Executive Committee and former Treasury secretary Robert Rubin -- who was paid $115 million to watch after the bank -- admitted he didn't even know what a liquidly put was before they started wreaking havoc.

That was the problem with this monstrosity: It was so widespread that upper management had no idea what was going on below, guaranteeing a big, fat mess sooner or later.

Now for the numbers
Citigroup finally figured this out, acknowledging the need to break itself in two and move toward the Glass-Steagall days of no-nonsense banking.

According to a recent investor presentation, here's how the earnings for each separate entity break down:

Citicorp (the "good" bank):


Q1 2009




Net Interest Revenue

$8.2 billion

$34 billion

$25.6 billion

$21 billion

Non-Interest Revenue

$12.4 billion

$26.6 billion

$34.5 billion

$29.4 billion

Net Income

$7.7 billion

$6.1 billion

$14.5 billion

$12.5 billion

Citi Holdings (the "bad" bank):         


Q1 2009




Net Interest Revenue

$5.4 billion

$22.5 billion

$21.8 billion

$18.3 billion

Non-Interest Revenue

($1.9 billion)

($29.2 billion)

($2.3 billion)

$19.6 billion

Net Income

($5.3 billion)

($35.6 billion)

($8.9 billion)

$9.2 billion

There's no secret to what's going on here: Citigroup took everything that sucked and dumped it into Citi Holdings. The remnants (Citicorp) then becomes a respectable company that could compete with JPMorgan (NYSE: JPM  ) , Wells Fargo (NYSE: WFC  ) , and Goldman Sachs (NYSE: GS  ) .

Problem is, both entities still reside under one roof, and both are owned by Citigroup shareholders. So the real question is how to get rid of Citi Holdings for good.

Here, one of three scenarios is likely:

  • It's held onto by parent company Citigroup, running off and divesting assets.
  • It's spun off and taken public.
  • It's sold in its entirety to an adventurous (and likely intoxicated) buyer.

The first scenario is the most probable because banks -- especially those losing money -- need frequent replenishments of capital to survive. Citi Holdings almost certainly relies on the cash flow of Citicorp to stay above water. Thus, Citi Holdings probably can't be spun off without either a capital injection from Citicorp (which would render it not so "good" anymore), or another bailout (which, these days, isn't farfetched).

This issue isn't unique to Citigroup. GE Capital averted meltdown partly because its healthy parent, General Electric (NYSE: GE  ) , injected a $9.5 billion equity gift in February.

Conversely, bond insurer MBIA separated its hemorrhaging structured-securities arm from its healthy municipal division, but was promptly sued by business partners of the structured-securities division, including Bank of America (NYSE: BAC  ) and Morgan Stanley (NYSE: MS  ) . Without the strength of the municipal division, they claim, structured securities is toast. According to Moody's, these lawsuits might undermine MBIA's plans to revive itself altogether.

Detaching from your past mistakes isn't as cheap, or easy, as some think.

Where to now?
And thus, as it stands, the new Citigroup is really no different from the old one. Internally, the bad has been split from the good. Externally, nothing has changed. It's still a conglomeration of everything that's wrong with today's economy, stuck under one roof.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Moody's a Motley Fool Stock Advisor recommendation and a Motley Fool Inside Value selection. The Fool has a disclosure policy.

Read/Post Comments (19) | Recommend This Article (73)

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 July 14, 2009, at 11:48 AM, mfryburg wrote:

    You gotta start somewhere...... Instead of kicking C in the teeth again, do you have any better suggestions?

  • Report this Comment On July 14, 2009, at 4:46 PM, 8Breeze wrote:

    I think in time, C will emerge from this a stronger bank. Given all of the changes in senior management, the corp/holdings split, there isn't much else they can do or anyone can reasonably suggest.

  • Report this Comment On July 14, 2009, at 4:55 PM, Javaman62 wrote:

    So, how about making it clear to us how this split will affect holders of "C" (NYSE). Are we going to wind up with just shares of the bad half, or will we also own shares of the good half, or despite the split is everything still under the one symbol "C". Your article misses this important point. An explanation would be helpful.

  • Report this Comment On July 14, 2009, at 5:32 PM, AllenBoyce wrote:

    We (the holders of "C") will be left holding the bag, fer sure.

  • Report this Comment On July 14, 2009, at 5:44 PM, paultaut wrote:

    AllenB, you got it.

    The Ball is on the floor, but no one wants to pick it up.

  • Report this Comment On July 14, 2009, at 6:51 PM, jarrett1953 wrote:

    So, how is it the actions taken by Citi are differentiated from those of Goldman Sachs? Looks like GS took money from the govt to survive, made it thru that window, paid the $$ back, now are back to old habits of making lots of $$ (at least temporarily), getting lots of positive feedback from the Street, paying their employees big bonuses and jerking the US taxpayer around.

  • Report this Comment On July 14, 2009, at 9:38 PM, RuffChaz wrote:

    The only reason Citi has been able to put off its inevitable implosion is because it is able to borrow money from the Fed via the Discount Window @ 0.5% and through the Fed Term Auction Facility (84 day credit) @ 0.25 %. It then uses this “cheap money” to ream its credit card holders, with 19% or greater rates. This happens with the infamous “Notice of Change in Terms and Right to Opt Out from Citibank” whereby unless you “opt out” they increase the rate on your outstanding balance. Great business model. And why would the US Government be a willing and able participant in this fleecing of the public? The answer is simple: in order for We The People to not only bail out The Big C with our tax money but to provide them with artificially high credit card profits derived from the spread between near 0% Fed dollars and usury rates.

    Once the cheap money dries up, look out below. If you think 2008 was ugly get ready for fugly in 2010-2011.

  • Report this Comment On July 15, 2009, at 10:07 AM, plange01 wrote:

    its showtime . citi is no longer to big to either comes up with some positive earning on friday or its game over...

  • Report this Comment On July 15, 2009, at 10:22 AM, optionm wrote:

    I really have a problem with the following sentence from the article. "That was the problem with this monstrosity: It was so widespread that upper management had no idea what was going on below, guaranteeing a big, fat mess sooner or later." Let's not be the sheeple we have been. Let's call it what it really was, horrible mismanagement by the board of directors, CEO, CFO and many others. It is their JOB to know and control what is going on. That is why they are there and why they get a paycheck but apparently were more concerned with how to increase their paychecks [read that as screw the stockholders out of more money] with ridiculous salaries. You, by minimizing this info contribute to the problem we need to correct.

  • Report this Comment On July 15, 2009, at 1:26 PM, wuff3t wrote:

    "It's sold in its entirety to an adventurous (and likely intoxicated) buyer...."

    Lol. But as many of the CEOs of the world's bigger companies have been behaving as though drunk for most of this century so far, maybe it's not so far-fetched...?

  • Report this Comment On July 17, 2009, at 3:27 PM, CMFPeterB wrote:

    "•It's sold in its entirety to an adventurous (and likely intoxicated) buyer"

    Ya think the Federal Government is really going to buy them?

  • Report this Comment On July 17, 2009, at 3:44 PM, nin4086 wrote:

    @bwita: Well said. Shame on the author Morgan Housel..what you wrote is most unfoolish!

    Separating the good from the bad is of no use without going through bankruptcy and getting rid of the obligations of the bad part. Without that the bad part will suck all goodness (money) out of the good part. This is just another game of "financial engineering".

  • Report this Comment On July 17, 2009, at 4:01 PM, Fitzharrisl wrote:

    I have been watching my stock sit around $3 for some time now and wonder if that is better than nothing. Like some of the other readers, what are the likely paths this stock will take.

  • Report this Comment On July 17, 2009, at 4:51 PM, cslutes wrote:

    I own 200 shares of Citi Preferred stock, bought in 2004 at $25/share. Am being offered a deal by "Citigroup" to swap preferred for common, at a rate of 7.3 common for 1 preferred. Common was $3.25 on June 15, I'm told, which makes a preferred share cash out at 7.3 times $3.25, or $23.725 on that day. Don't know how long you have to hold common before selling. Wonder "which half" of Citi this is???? My broker said "Citigroup." I am leery of ANY transaction with this company but am thinking I had better take the deal. In a few weeks they said they would stop paying interest on the preferred stock. Don't really know what other options, if any, there are. It seems to me that IF I could sell the common immediately, it might be an OK thing to do. . .I don't trust the company, though. Advice please??

  • Report this Comment On July 17, 2009, at 4:53 PM, JIM44 wrote:

    It looks to me like nothing has changed. Owners of C own both the good and the bad.

  • Report this Comment On July 17, 2009, at 9:02 PM, dangsd wrote:

    I worked for Citi for 2 1/2 years.....after 2 months I too could have written this article almost to the letter. If this copany ever wants to succeed it needs to hire a financial controller to go in and analyze these 30 different businesses at the first level all the way to the top on processes, best practices, etc. Mostly wasted payroll dollars on people working on projects that never go into wouldn't even believe it...They keep putting the CEO's head on the chopping block but the truth be known the people making the restructuring decisions can't see through the weeds...

  • Report this Comment On July 18, 2009, at 4:30 PM, grantrick wrote:

    What I like about this is that I don't have to read the article.... just read the can learn as much or more... Yes, what the eff to do with the current shares...;-)

  • Report this Comment On July 19, 2009, at 2:51 PM, gilligan2 wrote:

    This message is useless. The message gives no indication of the bennifit of an inventment in the "stocks" or advice to sell the "stocks" Where is a good buy in point and a probable return for ownership.

  • Report this Comment On July 20, 2009, at 11:46 AM, plange01 wrote:

    meet the new citigroup.same as the old citigroup....

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