The knee-jerk reaction to the shambles at Citigroup is to call for a break-up. The bank has become too big to manage, the argument goes, and the investment bank should be spun off. It would better manage its risks and might have avoided the huge mortgage losses that have caused such pain. Does that really make sense in today’s credit-crunched world?
No. The the implosion of Bear Stearns showed how vulnerable to a loss of confidence highly geared securities firms are (and how they are hardly perfect risk managers). When Bear unravelled, it had one place to turn: JPMorgan Chase, a well-capitalised universal bank partly funded by boring old deposit holders. Perhaps the death of Bear and heart-stopping gyrations of Lehman’s shares point to more securities firms seeking sanctuary in the arms of better-capitalised commercial banks before the cycle is over.
