Breaking Up Citi?

Felix Salmon says it’s time to find an orderly way of pulling the plug:

The other bit of good news is that Citi’s domestic retail bank is relatively small, by BofA/JPMC/Wells standards. A buyer could be found for it relatively easily; if no US bank wants to step up, there are always the Canadians, or maybe Santander.

The Smith Barney wealth-management operation is already halfway out the door; the investment bank could be sold to its own managers, much like Neuberger Berman. The credit-card operations and Banamex could be IPOed; the Polish bank could go to any number of European banks looking to expand east of Germany.

I’m sure there would be feverish bidding for the hugely valuable Citigold brand globally; once Citi’s Japanese operations were sold off, the rest of Citi’s global presence could either be absorbed into the investment bank or quietly sold off or shut down. I’m sure there are other bits and pieces I’m forgetting about here, but the point is that on a sum-of-the-parts basis, Citi’s actually got some pretty valuable assets; the problem is of course on the liability side of things.

So either the government outright nationalizes Citigroup and then sells it off, or else it provides debtor-in-possession financing within some kind of Chapter 11 proceeding.

Either way, the world would see the failure of a too-big-to-fail bank, and that would in turn be salutary for anybody still trying to make money from the moral hazard trade.

I’m a little bit skeptical that you really could sell off all that stuff in the current climate. Or, at a minimum, that you might not be able to sell off significant chunks of it. But when you talk about a Swedish-style nationalization scheme, the plan is always to sell off as much of the nationalized assets as quickly as possible. The idea is that with the government in control, it can sell enterprises that have value, recapitalize enterprises that would be saved by recapitalization, and kill off enterprises that can’t be saved through any kind of feasible injection of capital. The goal isn’t to have the government running all the banks permanently, it’s to create a situation where people know that the banks are sound. In particular, where they know that the banks that have been rescued have really been cured rather than just put on life support. At the moment, nobody knows which banks’ demise has really been avoided and which merely forestalled.