Is Citigroup Too Big to Manage?

The S&P 500 is getting the second quarter off to a positive start, up 0.60% as of 10:15 a.m. EDT, while the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  )  was up 0.59%.

Former Citigroup  (NYSE: C  ) CEO John Reed has provided investors with some context on last week's unexpected rebuff of the bank by the Federal Reserve.

The Fed refused to sanction Citi's capital return program on "qualitative concerns," leaving it the only major U.S. bank not allowed to update its dividend and stock repurchase plans. As such, Citigroup is forced to continue paying a token $0.01 quarterly dividend, while rival Bank of America  (NYSE: BAC  )  was allowed to raise its dividend from $0.01 to $0.05 (not to mention getting the OK for a spanking new $4 billion stock repurchase authorization). Citigroup was banking on implementing a $6.4 billion share repurchase program by the first quarter of 2015 and a dividend hike to $0.05. Shares of Citigroup fell 5.4% on the day following the central bank's announcement.

Speaking yesterday at a conference in Boston, Reed said that "having three or four CEOs in the last decade hasn't helped" Citigroup, and that the bank has been "unable to create what the Fed is looking for and when you're talking about an institution that is large in size, diverse in activities, and has gone through a certain amount of managerial turmoil, you can well imagine that it was very difficult for them to respond to the request that they got."

The comments point to a question -- which remains unanswered -- of whether megabanks are simply too big to manage. (We know they're too big to fail, or at least that markets continue to perceive them that way, as another analysis from the Fed showed recently.) Despite significant efforts by Citigroup to focus on its core activities, it still has attracted regulators' attention at its Mexican Banamex unit, over compliance with the Bank Secrecy Act and anti-money laundering controls, for example.

I made the case last week that, at a discount of roughly 10% to their tangible book value, Citigroup shares are an attractive risk-reward proposition -- particularly in a somewhat overheated market. I continue to believe that, but Reed's comments are a reminder that investing in a financial organization of this complexity is not without risk.

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