By Rob Cox
The author is a Breakingviews columnist. The opinions expressed are his own.
Nine years ago, Breakingviews proposed an “extreme idea” to Citigroup’s then-leader Charles Prince. The $240 billion New York bank’s market capitalization was lower than the worth of its parts valued separately. By splitting into three separate units, the idea was, Prince could hand shareholders an extra $50 billion or so, the equivalent of one entire U.S. Bancorp at the time.
As it turned out, Citi had bigger concerns ahead. The housing crash exposed spectacular losses, wiping out capital and necessitating a government bailout. Prince was sent dancing onto the golf course. With the crisis now fairly distant in the rear-view mirror, however, it’s time for current Chief Executive Michael Corbat to revisit the case for a breakup.
Now cleaned up and well capitalized, Citi’s market cap today is about $160 billion – though any loyal shareholders are still nearly 90 percent worse off than in 2005. Despite the revamp, the bank is still prone to the stumbles that have proved characteristic since Sandy Weill, Prince’s predecessor, stitched the behemoth together.
This year, for example, Citi revealed an embarrassing fraud at its big Mexican subsidiary, Banamex. While not material to Citi’s capital, the $400 million swindle rekindled concerns that sprawl makes it too complex to manage. That’s one reason the Federal Reserve subsequently thwarted Citi’s plans to increase its dividend.
Slicing Citi into more manageable pieces would be one way to soothe regulators at home and abroad, not to mention U.S. taxpayers fearful of being on the hook for another bailout in the future. For any voluntary breakup to gain support, though, it would need to reward shareholders well beyond breaking the dividend logjam. Some arithmetic on Citi’s component parts suggests that’s possible.