Citigroup- too big to succeed

Citigroup has received a government bail-out, so it lives to fight another day. This has been described as a $306 bn bail-out but that is not entirely accurate. The terms of the rescue are:

• The US government is essentially providing insurance on $306 bn of troubled assets with teh first $29 bn of losses being borne by Citigroup. This is conceptually not very different from any medical or car insurance contract where the first level of losses is borne by the customer.
• In return for this insurance, Citigroup will issue the government $7 bn in preferred shares carrying a dividend of 8%- this is the premium it pays on the insurance the government provides plus $2.7 bn of warrants
• The government will inject another $20 bn in preferred shares (not commn equity) into the financial group.
  

So, the government or the tax payer stand to lose only if Citigroup's bad assets decline more than 10% in value. If the markets recover- and this is a big if- the government is okay and the bail-out is fine. If not, there will be huge costs to the tax payer. Citigroup has $2 trillion in assets and it could under for reasons other than the identified $306 bn in troubled assets.

Citigroup may survive but can it really deliver in its present form? This is a bank with a long history of problems. Ddeveloping country loans, internet bubble, telecom bust- you name it, the bank has been in the thick of every problem in the past couple of decades.

The trouble with firms such as Citigroup, quite simply, is not just that they are too big to fail, they are too big to succeed. It's impossible to sustain good earnings growth on this kind of asset base. Managing $2 trillion in assets is crazy- no CEO or set of executives is equal to the challenge. The complexity is simply too overwhelming.

That's why we had Chuck Prince (the CEO, whom Vikram Pandit replaced) asking his CFO whether everything was ok, only to be told it was- and this when the bank had over $40 bn in toxic assets.The board's great idea was to replace Prince with Pandit, an ex-Morgan Stanley guy with no banking experience. We read that they were on the verge of replacing Pandit too until a Saudi prince affirmed his faith in him. How about replacing the board first?

Banks need to decide what is an optimal size for them. More than $100-200 bn seems to be extravagant. I have also never bought the stuff about universal banking- I once wrote an article deriding the idea as 'universal bunkum'. The idea that one entity can manage everything under the sun- banking, investment banking, insurance, etc - and that it can do a great job of this through cross-selling products is plain stupid. Citigroup never quite managed it. It goes against the idea of 'core competence'.

This is also why I have steadfastly been sceptical about the idea of bank consolidation in India. My contention is simple: if you can't deliver performance at your present size, forget about doing it when things get bigger and more complex.