Whoever said you can never have too much money apparently never met Citigroup (NYSE: C).

After years of growing into a global powerhouse that planted its foot in everything from credit cards to investment banking, Citigroup has become too big for its britches. Following months of agonizing losses and share dilutions that made investors want to pull their hair out, CEO Vikram Pandit thinks he knows what it will take to get Citi pretty again: a $400 billion diet.

Hit the treadmill, tubby
In the latest campaign to save its ailing self, Citi plans on ditching more than $400 billion of so-called legacy assets over the next few years, eventually cutting up to $500 billion off its books. Investors are still in the dark about what specific assets will be tossed, but Citi hinted most of the slimming will take place in the consumer banking and securities divisions, as well as running off real estate assets, which the banking industry has become particularly conscious of lately.

Citigroup is currently home to around $2.2 trillion in assets, so parting ways with as much as $500 billion is a serious haircut. The slice could push Citigroup -- currently the largest bank by assets -- more in line with rivals Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM), both of which already surpass Citigroup in terms of market cap.

Less is more                                                                        
While losing another "world's largest" title might be a shot to Citi's ego, it's all for the best. Shedding assets and turning Citi into a lean, mean, financial-fighting machine is likely some of the best news investors have heard in a while.

The combination of Citicorp and Travelers Group into Citigroup back in 1998 paved the way for it to become an uber-bank of unprecedented size. Those grandiose plans might have sounded alluring from the get-go, but as Napoleon and other ego-driven titans know, global domination isn't exactly a cakewalk. Citigroup's headcount of 374,000 full-time employees -- compared to 209,000, 182,000, and 37,000 at Bank of America, JPMorgan Chase, and Goldman Sachs (NYSE: GS), respectively -- proved to be a beast to manage. Costs spiraled out of control and management couldn't tell the bank's head from its rear end. Cutting down to a manageable size might be the only way it can ensure that the latest snafu -- with a running tab of around $40 billion for Citi -- won't repeat itself.

One question yet to be answered is who on earth it plans on selling these assets to. While the two-to-three-year timeframe gives Citigroup room to let the market ease its nerves, the thought of selling nearly half a trillion dollars of assets in today's market at anything less than fire-sale prices is laughable at best.

At any rate, Citigroup will shrink, banks will continue their uphill battle, and the troubled real estate market will give the banking industry more than enough trouble to chew on in the coming years. The saga continues.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool's disclosure policy realizes it has lost its boyish figure, but still shuns most diets.