Hello Citi: Get down to banking basics again

February 18, 2011

A woman uses an ATM inside a Citi bank branch in New York August 12, 2009.  REUTERS/Lucas Jackson What should big banks be doing now? Should they focus on mortgages, savings and business loans? Or have they crossed the Rubicon and continue to build their international portfolios? We’re in a time of reckoning and small can still be beautiful.

Welcome to Global Financial Reform 2.0 and the dilemma faced by chief executives like Vikram Pandit, the CEO of Citigroup, whom I heard speak at the Executives’ Club of Chicago on Feb. 17.

Once the world’s largest bank, Citi was humbled by the 2008 meltdown. Like so many other institutions, it made huge, unhedged bets on real estate and mortgage securities. The bank needed a $45 billion infusion in 2008 to stay afloat. The U.S. Treasury also bought 2.4 billion Citi shares, which it sold in December for a $12 billion profit.

Still a global colossus, Citi is still a sprawling enterprise that operates in 140 countries with more than 260,000 employees. It owes a tremendous social debt to the American people for saving its bacon, although it seems unlikely that debt will be repaid anytime soon.

While Pandit gave the feel-good speech about lending to small businesses (up by one-third) and trying to reach the 2.5 billion people across the globe who don’t use banking services — the “unbanked” — his message was tired and trite: “We can’t look solely to government to solve problems.”

Now if this was a financial institution that had broken itself up and gotten out of the investment banking business altogether, I would have had some sympathy for his “how do we restore trust” theme.

But for a brief, dark moment, Citi, along with hundreds of other banks, was one of the most subsidized entities on the planet in 2008 and 2009. Hello, socialized banking, goodbye the creative destruction of Schumpeter’s capitalism. I also didn’t hear any denunciation of the sins of securitizing loans from Pandit. Maybe he’s past the contrition act and arguments of whether Citi is too big to fail (it still is).

Unbowed, Pandit didn’t sound like a Jonah coming out of the belly of the whale with a spiritual awakening guiding his future. Although he said Citi would “grow not from the balance sheet side but by value-added services,” I’m not sure if that meant a concerted return to community merchant banking, which is where the nearly 200-year-old institution started out.

Community banking, in my definition, is a bank that keeps business and mortgage loans in its portfolio. That way it retains a stake in local economies and is less focused on finding new customers in developing countries who want to bank through their cellphones. There are local boards of directors for this kind of bank who run dry cleaners, groceries and work locally.

Local economies can flourish with community bankers who make investments that spur capitalism on the neighborhood level. If Pandit is serious about implementing “the tools for the next crisis,” I suggest he read Laurence Kotlikoff’s “Jimmy Stewart is Dead,” a strong polemic on limited-purpose banking.

A Boston University economics professor, Kotlikoff argues that under limited-purpose banking, “bank runs could never arise. Every dollar deposited in a checking account would be held in cash or U.S. Treasuries, meaning banks would hold not 10 percent reserves, but 100 percent reserves against these liabilities. Banks would always have all of our money on hand, either in cold cash or short-term T-bills.”

A radical idea, sure, but not one that should be dismissed as bank regulators write the new rules of the road under Dodd-Frank and financial service companies continue to fight the new regulations.

Smaller, more localized banking can be just as effective and profitable as the global expansion model Pandit’s pursuing. Maybe the market is telling Pandit something about the lack of reform in Citi’s business plan. While Citi’s stock price languishes around $5 a share, his solid, staunch competitor Deutsche Bank is trading in the 60s, which has a third of Citi’s market capitalization and didn’t need a bailout in 2008.

As he leads Citi into the post-reform era, Pandit took away one lesson that he articulated fairly well: The financial sector is part of a huge, unwieldy network that’s prone to failure. The next time the network goes down, though, American taxpayers will not have the fiscal resources or patience to reboot it.

One comment

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Stock prices don’t always tell the story, true. But the market thinks Citi is almost penny-stock material with a $142 billion market cap vs. DB with a $60 billion market cap. Which is the better-run bank? Which needed a bailout? Which is likely to thrive in the new environment. I would not place too many bets on Citi in its present structure.
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