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Newton’s third law states that to every action there is an equal and opposite reaction. To every Citigroup action, there is merely one outcome: a drop in the bank’s share price. That, more than anything else, is pressuring the bank’s management and board, now reportedly considering all and any options, including a break-up or sale, to reverse the slide.
That all paths are being explored is unsurprising – but did not reverse the pull of gravity on the shares. Citi’s sheer size, with more than $2,000bn in assets, means a wholesale merger is unlikely. Furthermore, it would be an odd outcome for the standard-bearer for universal banking to start shedding businesses just as received wisdom moves in its favour. Any sale would leave the investment banking operation more exposed. Few buyers will want to cough up for sub-par assets – or businesses such as credit cards exposed to the ailing consumer. Selling prized possessions secures only the poorest form of survival, hence chief executive Vikram Pandit’s spirited defence to staff yesterday of the Smith Barney brokerage. Losing the custody and cash management business, similarly, would mean kissing goodbye to about a third of Citi’s deposits base.
The simple problem is that Citi, like most banks, remains leveraged to the hilt. Worse, the market’s renewed focus on banks’ assets versus their tangible common equity renders the government’s injections of preferred stock redundant. This is perhaps unfair – preference shares do help to pay the bills. Citi maintains it can, with sound fundamentals, tough out the market’s frenzy, opting for inaction over a kneejerk move. The authorities’ assuming effective control through purchases of common stock is unlikely. An engineered carve-up is less so. Either way, the government is again singled out as the only party in a position to assuage fears. If action is required, it will be theirs.
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