Size Matters

MARKETS-STOCKS/“Too big to fail” are four words that should fill U.S. policymakers with dread. They imply a necessity for solvency beyond an institution’s ability to make good business decisions. They’re also a badge of achievement that commands a bit more swagger on Wall Street.

So when Bank of America, with $2.7 trillion in assets and 308,000 employees, says it needs more help in the form of billions of dollars from taxpayers, which we have set aside for just this kind of mess (the Troubled Asset Relief Program), you could argue that this is both economic blackmail and reward for a job well done.

What happens when a bank becomes too big to fail? It gets shrunk down to a size more collapsible. The titans of Wall Street know a thing or two about being in hock to the people. Take a look at Citigroup. It’s all well and fine for CEO Vikram Pandit to say the sale of his brokerage business to Morgan Stanley was not mandated by the government, which has lent Citi $45 billion to stave off failure. But it’s hard not to see a wink and a nudge in there somewhere. This was not some non-core, fringe business — it’s more like an arm or a leg.

The big restructuring plan Citi is expected to announce tomorrow is seen taking Sandy Weill’s “financial supermarket” down in size by about a third. That may still be too big to fail, but it’s getting a lot less so by the quarter. And what of Morgan Stanley, the purchaser of Citi’s arm or leg or whatever. Lehman Brothers was deemed not too big to fail; how does Morgan stack up, now that it’s getting bigger?

Oddly enough, outgoing U.S. Treasury Secretary Henry Paulson – yes, the guy holding the TARP strings — is reported by The Wall Street Journal to be driving the Bank of America talks out of concern that the bank might not have the money to complete the buyout of Merrill Lynch. Almost seems like insurance we the people are taking to make sure we can keep our biggest banks too big to fail.

Morgan Stanley: Et tu, Mack?

ceasarIt’s not every day we have to dust off our Latin texts to cover Wall Street news, Morgan Stanley’s plan to acquire Citigroup’s Smith Barney brokerage over the next five years inspired eclectic Bernstein Research analyst Brad Hintz to invoke Julius Caesar: “Alea Iacta Est” “The Die is Cast!”

Hintz, in a client note, draws a parallel between the ambitious young conqueror, who uttered the above while leading his army across the Rubicon to reclaim Rome, with Morgan Stanley CEO John Mack, who with this latest move accelerates the investment bank’s expansion into retail financial services.CHINA FORUM

He argues the new strategy is not unlike the one advanced by former CEO Philip Purcell, whom Morgan’s board threw overboard in 2005 as the bank lost ground to Goldman Sachs. Purcell launched the Discover credit card and merged his middle-class Dean Witter brokerage with Morgan Stanley & Co in 1997. Over time, he frustrated the white shoe bankers with his aversion to taking investment and trading risks.

Boardroom Support

CITIGROUP/Citigroup CEO Vikram Pandit has been on the job for just over a year but talk of his ouster is already rumbling around Wall Street. Citi’s board says it backs Pandit, and with no obvious successor in sight, they may continue to stand up for the chief for some time.

If dismantling the “financial supermarket” of Sandy Weill proves to be a watershed event leading to a management reorganization, those wagging fingers at the CEO should take a look at the wealth of corporate experience surrounding him in the boardroom when considering who may have been asleep at the wheel.

Here is a handful of Citigroup directors with particularly prominent experience at other U.S. companies. The “joined board” dates reflect when they joined the board of Citi or a predecessor. Pandit became CEO on Dec. 11, 2007.

Happy Birthday, Vikram

FINANCIAL SUMMITWith the ink drying on Citi’s deal to sell Smith Barney to Morgan Stanley, the media bulls-eye is focusing on Citi CEO Vikram Pandit. “Citigroup’s board may have said it is standing behind CEO Vikram Pandit, but the general consensus on Wall Street is that he is running out of time,” CNBC’s Charlie Gasparino reported this morning. Pandit’s predecessor Chuck Prince certainly had boardroom support when the street turned against him, so tales of Pandit’s demise may not be too exaggerated, though they could not have been more callously timed. Today is Vikram Pandit’s 52nd birthday.

Of course, it’s a truism of corporate America that every CEO has the support of his board — until he doesn’t. And even if the current board is rock solid for Pandit, it’s an open question how safe the board’s own tenure is given the bank’s miserable track record — and the fact that Uncle Sam is now its top shareholder.

Citigroup, once the world’s largest bank, may announce plans on Jan. 22 to formally shed the “financial supermarket” approach once championed by former Chief Executive Sandy Weill, but which Pandit has now turned his back on.

Making a Monster Brokerage

CITIGROUP/In many ways, Citigroup has been the poster child for the kind of reform lawmakers seem to be talking about when they pump up the bullhorn and turn on the state taps. Too big to fail, losing staggering amounts of money, a product of the excesses of 10 years of low interest rates, Citi’s businesses are too numerous to recount, often competing with one another for clients.

It’s so big that plans to spin off its brokerage business into a joint venture with Morgan Stanley will create the biggest brokerage in the United States. A JV, expected to be announced this week, would have an estimated value of $16 billion to $20 billion, a source said, and would have more than 23,000 financial advisers, surpassing rivals Bank of America and Wells Fargo.

There are reasons for optimism that the making of a mega-broker could mark the beginning of a huge round of long-sought consolidation in the financial sector. It would certainly mark a huge divestment for Citi’s embattled CEO, Vikram Pandit. And it also comes as signs of more asset sales poke up through the quagmire of recession. South African billionaire Johann Rupert’s investment vehicle is looking at buying Lehman Brothers’ merchant banking business.

What’s in Citi’s Wallet?

Citigroup may be too big to fail, but is it big enough to close a deal? Soon after losing its bid for Wachovia to Wells Fargo, Citi turned it sights on Chevy Chase Bank, which while not as mighty as Wachovia, was at least closer to its east coast power base. This morning, Capital One Finance said it had agreed to buy the mid-Atlantic lender, right out from under Citi’s nose.
JP Morgan Chase had also been interested in Chevy Chase, a smallish, unlisted lender. The deal announced by Capital One was for $520 million – hardly the kind of blockbuster that makes or breaks a battered Wall Street monolith. 
It will be interesting to see if Citi, brimming over with TARP funds that the Treasury has all but begged it and others to spend on lending, stays on the prowl. Bank of America took its TARP money and boosted its stake in a Chinese lender, so there is some precedent for Citi to spend the funds on a deal.
But with Citi’s wallet stuffed with taxpayer cash, the impetus for growth may be less imperative. If it decides against bidding for the deposits of another regional bank, Citi will find itself with only financial assets to sell — in a seller’s market.
It agreed to sell its German retail business, which it put on the block over the summer with a price tag of around $8 billion, and at the end of November reports emerged it would try to sell its trust bank unit in Japan for more than $400 million. 
Deals of the day:

* Goldman Sachs said it has rejected an offer from Panasonic to buy its shares in Sanyo Electric because it believes the offer price is too low.

* Rio Tinto is in talks to sell its half of a Chinese aluminium joint venture to its partner, which is consolidating its assets to prepare for a takeover by another state-owned company, sources in the two Chinese companies said.

BCE’s stock benefits from Citi saga

One beneficiary of Citi’s massive bailout was BCE Inc, the massive telecoms company that is being bought in one of the last remaining leveraged buyouts to close.
Citigroup, alongside TD Securities, a unit of TD Bank Deutsche Bank and Royal Bank of Scotland, is financing the deal and the market has been nervous about the buyout cratering for months — evidenced by significant arbitrage spread.

One of the biggest worries for traders is the C$34.8 billion deal closing amid the turbulence in the financing markets.

But they gave the firmer footing for Citi a thumbs up and shares in BCE shot up 3.4 percent after the U.S. government agreed a bailout package for the bank.

Happy Thanksgiving, Citigroup

Thanksgiving has come early for embattled Citigroup. The second-largest U.S. bank by assets received a pardon of sorts from the government late on Sunday, getting a $20 billion lifeline – the biggest bank bailout yet.

The bank had been widely thought to be too big to fail because of its global reach. Chief Executive Vikram Pandit and other top management will keep their jobs, but the government will have the final say on executive pay packages.

Citigroup’s shares lost 20 percent of their value on Friday, closing at $3.77, down 60 percent for the week and reaching their lowest level since December 1992. The group’s market value fell to $20.5 billion. That’s a far cry from the good old days of late 2006 when the bank’s market value topped $270 billion.

Reality Cheque

This week’s frantic selling of Citi has that panicky feel to it. At least one bond market analyst has switched from warnings of recession to uttering the D word, and the whole financial sector is sliding in Citi’s wake. With only a couple months left in his term as Treasury secretary, and having just been grilled on Capitol Hill, it wouldn’t have been a surprise for Hank Paulson to get all fiery and combative about where the U.S. economy is headed and what he is going to do about it.

Speaking at the Ronald Reagan Library, Paulson looked backward, defending the decision to let Lehman Bros fail. He said it “naive” for critics to argue that letting Lehman fail paved the way for AIG and Washington Mutual to falter. In the case of Citi, which is widely considered too big to fail, he was mum, except to say that nobody should be so big.

“The steps that we’ve taken have been pretty strong … we understand how important the stability of our financial system is, and stability is our top priority here,” the chief of the Treasury said in response to a question about Citigroup. But he added: “I can’t comment on any one institution.”

Just Walk Away

wachoviaexit.jpgCitigroup investors welcomed news the bank had abandoned its brief but acrimonious battle with Wells Fargo over Wachovia Corp, driving its shares up 15 percent in after-hours trade. 

When Citi announced last week that it was buying Wachovia’s banking operations, investors sent Citi’s shares higher, hoping the purchase would allow the bank to raise much-needed capital while expanding its branch network. But this week, investors cheered that Citigroup was walking away from a deal that could have proven more toxic than either Citi or Wachovia had thought. 

By this morning, the euphoria that followed the deal’s collapse had faded. Citi shares had lost all of those gains of yesternight and were trading back near 12-year lows. Dodging a bullet doesn’t seem to have done anything about the quicksand. 
Deals of the day: 
* Mitsubishi UFJ Financial Group, Japan’s largest bank, said it has no plans to pull out of a planned $9 billion investment in Morgan Stanley, even as shares of the U.S. bank continue to tumble.