Citi May Not Be Banking Giant For Much Longer

Citigroup, which agreed Tuesday to shed its Smith Barney brokerage unit, is expected to continue selling assets in the coming weeks in what some predict will be a wholesale dismantling of the banking giant.

Citigroup signaled the end of a decade-long experiment to create one-stop shopping for financial services—known as a "financial supermarket"—with Tuesday's announcement that it was merging its Smith Barney brokerage into a joint venture with Morgan Stanley .

The deal, which will give Citigroup $2.7 billion in badly needed cash as it gives up control of Smith Barney, comes as the company still struggles in the aftermath of the mortgage and credit crisis.

Citigroup's stock plunged below the critical $5 level on Wednesday as investors and analysts worried  whether the bank can be profitable and function effectively as it unravels its business model.

The bank also announced that it will release its fourth-quarter financial results this Friday—nearly a week ahead of schedule—where it is expected to post its fifth straight quarterly loss. JPMorgan Chase reports earnings on Thursday, also nearly a week ahead of schedule.

Citigroup CEO Vikram Pandit, who for months supported the financial supermarket model, is expected to take further steps to simplify and streamline the company.

Pandit's future at the bank may depend on it. Wall Street executives say board members are growing impatient with Pandit and will be pressuring him for results. 

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Many people on Wall Street believe Citigroup could be headed for a larger-scale dismantling if the federal government—which now has a stake in Citi thanks to its recent bailout—has its way.

"I think within 12 months, Citigroup no longer exists," said William Smith at Smith Asset Management, who owns Citigroup shares. He has been calling for a breakup of Citigroup for years, and believes the government will force that fate in piecemeal fashion over the coming year.

Citigroup is planning to adopt the equivalent of a "good bank, bad bank'' structure, in which it would slim down to a business model recalling the former Citicorp, a person familiar with the plan said.

The plan envisions focusing on corporate, investment and retail banking and keeping a slimmer trading business, while moving unwanted assets and businesses such as complex debt to a separate structure, the person said on condition of anonymity.

Citigroup's "bad bank'' would have about $600 billion of assets, close to one-third of Citigroup's balance sheet, which could eventually be sold or spun off, the person said.

Assets that could be sold include its Primerica unit, which sells life insurance, mutual funds and other financial products.

Segregating bad assets has a history of success, said Mike Holland, a money manager at Holland in New York. "It worked in the savings and loan crisis (in the 1980s). I'm getting a sense of deja vu, in a good way.''

Citigroup declined to comment on its longer-term plans.

Citigroup was the quintessential financial supermarket, cobbled together over decades by Sandy Weill—the former CEO who is both lauded for bringing Citigroup its biggest profits ever and criticized for creating an unsustainably massive, impossible-to-manage conglomerate.

The idea behind the supermarket is that the average person can do all his saving, borrowing and investing with one company.

Citigroup had it all, the retail and business banking operations, the investment banking business, the brokerage, even Travelers insurance.

Whether that one company does it better than a number of specialized companies does, though, has been the big question facing shareholders since the deregulation of the banking industry in the 1990s.

And Citi's announcement Tuesday further undermines the idea that one company can handle such diverse businesses at once.

To be sure, JPMorgan Chase's model is essentially a supermarket, too, but it does not have as large an international presence as Citigroup has had.

Bank of America has many disparate businesses, too—including the recent government-brokered acquisition of Merrill Lynch, the world's largest brokerage —but it maintains a strong focus on its U.S. operations.

Perhaps more importantly, analysts argue that these banking giants were managed and integrated much better over the years than Citigroup was.

"The problem with Citi is the model, the execution, the management," Smith said. "How do you go a decade without integrating?"

Bank of America and JPMorgan Chase also took fewer risks than Citi took when it came to the now-failed investments in mortgage-backed securities, and so their losses were much less than the big financial supermarket suffered.

Weill, helped by the force of his personality, made the concept work during his years at the helm, although he presided over the spinoff and sale of the Travelers businesses starting in 2002.

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The company, whose stock price is now only about a tenth of what it was just two years ago, has struggled since Weill retired in 2006.

In late November, Pandit called the financial supermarket "the right model," and that Citigroup's strategy is "to be the world's truly global universal bank."

Days later, the government lent the embattled bank $45 billion—more than other big banks have received—and agreed to absorb the losses on a huge pool of mortgages and other assets.

Citigroup and Morgan Stanley  plan to combine Citi's brokerage, Smith Barney, with Morgan Stanley's wealth management business. The deal was announced after the close of stock trading.

The capital from the Morgan Stanley deal, however, is likely not enough to make up for upcoming losses. And if the government decides it does not want to continue propping up banks like Citigroup, its dismantling could accelerate.

The new administration could "come to the realization that the whole economy does not hinge on the banks," said Octavio Marenzi, head of financial consultancy Celent. "Banking is important. The banks themselves are not."

—AP and Reuters contributed to this report.

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