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Several decades of myopic thought later, Glass-Steagall was repealed, giving birth to Citigroup in 1998.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):
|
Metric |
Q1 2009 |
2008 |
2007 |
2006 |
|---|---|---|---|---|
|
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):
|
Metric |
Q1 2009 |
2008 |
2007 |
2006 |
|---|---|---|---|---|
|
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.
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